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FRC publishes Corporate Reporting Review Annual Report 2013

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17 Oct 2013

The Financial Reporting Council (FRC) has today published the Corporate Reporting Review Annual Report 2013 (“the report”) covering reviews conducted by the Conduct Committee into the current state of corporate reporting in the UK. The report covers reviews carried out in the year to 31 March 2013. It highlights that corporate reporting is "good" among large public companies but less so for smaller listed and AIM quoted companies whose level of corporate reporting suffers from a lack of resources.

Under the Companies Act 2006 ("the Act"), the Conduct Committee of the FRC reviews the reports and accounts of public and large private companies to determine whether they comply with the Act and other reporting requirements. Where it appears that those requirements have not been complied with, the Conduct Committee investigates the position and determines the action to be taken to address any non-compliance. 

The Conduct Committee reviewed the reports and accounts of 264 companies split across different market categories.  Following the initial review, 91 companies were asked to provide further information and explanations.  The report identifies seven common areas that were challenged: 

  • Business reviews.  The Conduct Committee challenged where the Business reviews included inconsistent narrative when compared to what was reported in the accounts and those which only reported “good news”.
  • Revenue.  The Conduct Committee challenged, among other things, generic revenue descriptions which were inconsistent with those described in the Business review.
  • Cash flow statements.  The Conduct Committee challenged “inconsistencies” between information reported in the cash flow statements and that reported elsewhere in the report or accounts.
  • Alternative performance measures/financial KPIs.  The Conduct Committee challenged where alternative performance measures/KPIs were not clearly defined or explained and where their use “detracts from the IFRS information provided”.
  • Investment property valuations.  The Conduct Committee challenged where there was insufficient disclosure around the significant assumptions used and methodology applied.
  • Business combinations.  The Conduct Committee challenged a number of areas of accounting for business combinations including “where it was unclear whether the Board had identified all separately acquired intangible assets”.
  • Impairment.  The Conduct Committee challenged certain areas such as the key assumptions used and lack of sensitivity disclosures.   

The key messages from the report are: 

  • There is continued “good quality corporate reporting” by large public companies especially those in the FTSE 350.
  • Corporate reporting by smaller listed and AIM quoted companies is impacted by lack of “sufficient or appropriate resource to recognise of address accounting questions”.  The report notes that with these types of companies there are usually “straightforward areas of non-compliance” rather than non-compliance in a particularly complex area.  The Conduct Committee asks that the Boards of smaller listed and AIM quoted companies “consider whether they have access to the level of technical resource and expertise needed to prepare corporate reports and accounts to an acceptable standard”.
  • The majority of Boards had not performed a review of their accounts to ensure that only key messages were displayed supported by relevant and concise disclosures.  A number of accounts had not removed the “clutter” within their annual reports and the Conduct Committee note that performing this review and cutting clutter will make accounts “more readily understandable by investors and other users” and will also support the “fair, balanced and understandable” statement required by the UK Corporate Governance Code.
  • There has been an improvement in companies’ reporting of principal risks and uncertainties in the Business review.
  • A number of companies still continue to misclassify cash flow or report non-cash movements as cash flows. 

The report also highlights a number of areas of focus for the next financial reporting period.  Those areas identified are:

  • Compliance with accounting standards.  The report highlights that, where IFRSs allow the use of judgement, the Conduct Committee “expects judgement to be exercised in good faith” and “will challenge where the exercise of judgement appears to have resulted in aggressive accounting”.  They also note that they will challenge non-compliance with specific requirements of the standards and they “will monitor the application” of new standards such as IFRS 13 Fair Value Measurement”.
  • Compliance with the new strategic report requirements.
  • Reporting by smaller listed and AIM quoted companies.  The FRC will consider how improvements can be made in this area and will incorporate this into its 2014/15 Plan and Budget. 

Further information on the findings is provided in a more detailed technical presentation. 

The FRC will be presenting the findings of the report at the December 2013 Institute of Chartered Accountants in England and Wales (ICAEW) Financial Reporting Discussion Group (FRDG).

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