Every year, the FRC's Conduct Committee ("the Committee") reviews the reports and accounts of a sample of public and large private companies to determine whether they comply with the Companies Act 2006 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.  Since FTSE 350 companies represent the major part of investment in UK listed companies, the Committee reviews their reports on a regular basis, with FTSE 100 companies reviewed every three years and FTSE 250 companies every four years.

This year, the Committee reviewed 271 sets of reports and accounts, with 100 of these reviews resulting in the opening of correspondence with the company. The committee also closed four long-standing Review Groups set up in 2013, three involving interests held by pension funds in Scottish Limited Partnerships and on in relation to revenue recognition.

Key messages

The key messages from this year's report are as follows:

• Overall the level of corporate reporting by large public companies, particularly FTSE 350 companies, has been good, with the issues raised by the Committee usually involving unusual or complex transactions rather than straightforward issues.
• A higher number of poorer quality accounts continue to be produced by smaller listed and AIM companies. In response to this the FRC has set up a project aimed at improving the quality of these companies.
• In the light of the FRC's 'Clear & Concise' initiative, the Committee emphasises that their letters of enquiry discourage boards from including immaterial matters in their reports and explain that only disclosures that are material or relevant should be included. The Financial Reporting Lab's report 'Towards Clear & Concise Reporting' provides information on the practical steps that companies can take to make their reports clearer and more concise.

The report includes some advice for companies on how they should respond to communication from the Committee, with a number of good practices that they believe tend to result in earlier closure of the matters under review.

Emerging issues

The report identifies four emerging issues, prompted either by recent changes to legislation or accounting standards or where the Committee has had an early indication that they will be particularly relevant in the near future. These are:

• Pensions - this is an area of change, with the introduction of the revised IAS 19 and the requirement for disclosures in relation to the governance of pension plans and the impact of the applicable regulatory framework, such as the level of any minimum funding requirement. The Committee has not yet identified any substantive issues with the application of revised accounting policies in this area, however they have seen variable practice regarding disclosures around minimum funding requirements.
• De facto control of subsidiaries - with the majority of UK companies applying IFRS 10 for the first time in 2014, companies must now consider whether they exert 'de facto control' over an entity and, if so, include it in their consolidated results. As this is a substantive change from the previous standard, the Committee encourages boards to consider this area carefully.
• Acquired intangibles - with an improving economic outlook in the UK, the Committee expects to see more merger and acquisition activity. They would expect most business combinations to result in the recognition of some separate intangible assets and will look to challenge companies where business combinations result in the recognition of material goodwill but few or no intangible assets.
• Other legislation or regulation - although the Committee does not have a statutory remit to monitor compliance with legislation or regulations beyond the financial reporting requirements of the Companies Act, they will draw failures to comply with other regulations to the attention of companies. An example of this is the requirements of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 in relation to disparities between the remuneration of senior executives and other employees of a company.

Common areas of challenge in 2013/14

The report identifies 10 areas that were commonly raised with companies during the year:

• Business reviews / Strategic Reports - particularly where this focussed only on good news or where non-recurring items were not adequately explained;
• Pensions - in particular where there was a lack of clarity around whether a pension fund surplus results in a recognisable asset, whether a company should recognise a liability for its minimum funding requirements and where pension schemes were structured to achieve a particular accounting effect;
• Exceptional and other similar items - in particular the use of additional columns or lines on the face of the income statement, poor description or inconsistent application of policies for identifying exceptional items, identification of recurring items as exceptional, lack of symmetry in the treatment of debits and credits and lack of comparative information;
• Critical judgements - where the precise nature of the judgement was insufficiently clear, for example where it simply repeated the relevant accounting policy, and where disclosures did not sufficiently differentiate between critical judgements and areas of estimation uncertainty;
• Clear & Concise (Cutting Clutter) - for example inclusion of immaterial accounting policies, presentation of income statement lines that were nil or clearly trivial, unnecessary repetition of disclosures and unnecessary detail about new accounting standards that would not have a significant impact on the company;
• Principal risks and uncertainties - in particular where companies present a voluminous list of possible risks without emphasising those they believe are most important;
• Accounting policies (particularly revenue) - where these are 'boiler plate' and not tailored to the facts and circumstances of the company's business. This is something that the Financial Reporting Lab produced a report on in July 2014.
• Impairment - where disclosures were of poor quality or apparently inconsistent with other areas of the report, or where the assumptions supporting a lack of impairment appeared to be overly aggressive;
• Taxation - including failure to recognise deferred tax on business combinations, failure to disclose the basis for recoverability of deferred tax assets and unclear tax reconciliations; and
• Cash flow statements - although these continue to improve, the Committee nevertheless still identified misclassified cash flows, inappropriately netted cash flows and non-cash movements reported as cash flows.

The FRC has also published a slide deck of technical findings (see link below) from the Conduct Committee's Financial Reporting Review Panel during the year, which gives more detail on the areas challenged by the Panel.

We have produced a need to know publication discussing the report and technical findings. In addition, the following resources can be found on the FRC's website:

• The FRC's press release on this topic
• The Corporate Reporting Review Annual Report 2014