Impairments, judgement and estimates are the lead concerns in financial reporting, according to the UK’s financial disclosure watchdog, which warned that they reflect “the ongoing economic uncertainties”.
A report from the Financial Reporting Council (FRC), on its work reviewing 263 sets of accounts over the year, showed flawed cash flow statements also emerging as a concern.
Of all the accounts reviewed, 112 prompted further questions, 25 companies had to restate aspects of their financials and seven of those were prompted by cash flow concerns.
The FRC says it has also taken action to have companies clarify the targets underlying their executive pay arrangements.
When the regulator looked at climate reporting it found that companies are at “very different stages of maturity”.
Sarah Rapson, executive director of supervision at the FRC, says that, although overall reporting is “consistent”, companies should take on board the FRC’s findings.
“During periods of economic uncertainty, it is especially vital that companies provide users of annual reports and accounts with decision-useful information.”
Other observers drew attention to the FRC’s cash flow findings. Mike Suffield, director of policy and insights at ACCA, says high inflation, rising costs and high interest rates “provide stern challenges to management and boards (and, indeed, auditors) in providing clear, transparent and decision-useful information to their stakeholders”.
Fundamental concerns
Concerns about impairments, judgement and estimates were therefore not surprising. However, Suffield said it was a “concern to see some companies struggling with fundamental parts of the financial statements, such as cash flow statements.”
The FRC says many companies have a “consistency” issue: cash flow statements fail to match statements made elsewhere in financial reporting.
In the heart of the FRC’s report is a warning about the impact of trading in a high inflation environment and against a background of geopolitical uncertainty.
The FRC says narrative reporting should explain the risks and “their impact on the company’s position, performance and prospects”.
It also warns companies to consider the impact of inflation on assets and liabilities, and the assumptions made to underpin judgements and estimates in accounts.
The FRC says that companies reporting against the UK Corporate Governance Code disclose “non-compliance” with at least one provision in the code.
But the watchdog adds that explanations “continue to lack detail specific to companies’ circumstances”.
In responses to a recent consultation on a revised code, many observers asked for the FRC to emphasise that the code’s foundational principle—“comply or explain”—meant that companies did not have to comply with every element of the code.
The economic uncertainty is only set to continue. Financial reporting is likely to remain a sensitive issue.