Under the Companies Act 2006 ("the Act"), the Conduct Committee of the FRC reviews the directors’ 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 252 companies.  Following the initial review, 76 companies were asked to provide further information and explanations. 

The key messages from the report are:

• There was a “good level of corporate reporting” by larger public companies, particularly the FTSE 350. 
• Boards “generally responded well” to the strategic reporting requirements.
• There was some examples of “good reporting” by smaller listed and AIM quoted companies.  However, there were also instances of “straightforward errors” in the application of IFRSs by them.  It was also found that “inadequate” explanations of their results and also descriptions of principal risks in their strategic reports was also “more likely” from the Boards of smaller companies.  The FRC will continue to focus on the quality of reporting by smaller listed and AIM quoted companies and in June issued a consultation paper to support a step change in how they report.
• Boards should not use materiality assessments to “conceal errors or achieve a particular presentation”.
• Boards need to “explain judgements around pension assets or excess deficit funding liabilities” and “disclose the amount of deficit funding obligations”.

The report identifies ten areas of corporate reporting that were most frequently raised with companies:

• Strategic reports.  The Conduct Committee challenged companies where undue prominence given to alternative performance measures meant that the review was not sufficiently balanced.  The Conduct Committee encouraged Boards to focus on disclosures that are relevant to investors and not include extra unnecessary information in line with the FRC’s Clear and Concise initiative.  Additionally the Conduct Committee challenged companies where unusual or non-recurring items were inadequately explained and questioned the disclosure of key performance indicators where these could not be reconciled to the relevant amounts or where trends were not explained.  It was found that there was “poorer quality” reporting in this area by private, small listed and AIM-quoted companies.
• Accounting policies.  The Conduct Committee “reminded companies of the requirement to include accounting policies for all material transactions, particularly where they were unusual or non-recurring”.  Challenge was also raised where companies had general accounting policies “but it appeared that they should have had more specific policies for certain significant transactions”. 
• Critical judgements.   The Conduct Committee wrote to companies where there was an opportunity to match narrative of critical judgements in the accounts with those disclosed in Audit Committee reports.
• Clear and Concise reporting.  The Conduct Committee challenged companies that included “irrelevant material” in their reports and accounts.  The Conduct Committee comments that “while an increasing number of companies have initiated Clear and Concise reviews, we continue to see reports and accounts that would benefit from this approach”.
• Business combinations.  A specific area of focus was whether companies had identified all separate intangible assets arising from business combinations.  The Conduct Committee “looked for consistency between discussions in a company’s press notices and strategic report and the intangible assets identified in the company’s accounts”.
• Exceptional and similar items.  The Conduct Committee monitored companies’ presentation of exceptional and similar items and considered how companies had reflected principles set out in its December 2013 press notice.
• Revenue.  The Conduct Committee challenged boilerplate accounting policy disclosures and those that were “insufficiently tailored to all material revenue streams implied by the company’s business model”.  A key challenge was how Boards had estimated the stage of completion of long-term contracts.
• Pensions.  The Conduct Committee wrote to companies that did not provide sufficient disclosures under IAS 19 Employee Benefits within their accounts.  Companies were also reminded that they should “give sensitivity analyses for all significant actuarial assumptions”.
• Taxation.  The Conduct Committee raised questions where it could not understand the nature or amounts of reconciling items between a company’s notional and effective tax rate.  The Conduct Committee also focused on explanations supporting the recognition of deferred tax assets.
• Cash flow statements.  The Conduct Committee “continued to challenge companies on their classification of cash flows as operating, financing or investing”.  

Additionally, the report highlights that in 2015/16 the Conduct Committee will consider:

• the effect on asset valuations of volatility in commodity prices and in equity and bond markets; and
• disclosures of tax risks, accounting policies, judgements and estimates following increased uncertainties due to challenges by global and European institutions and governments. 

Alongside the Corporate Reporting Review Annual Report 2015, 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. 

Click for (all links to FRC website):

•  Press release
• Corporate Reporting Review: Annual Report 2015
• Technical findings of the Conduct Committee’s Financial Reporting Review Panel: 2014-15
• Our Governance in brief publication on the Corporate Reporting Review Annual Report 2015