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FRC publishes findings on the quality of corporate reporting in 2019/2020

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21 Oct 2020

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2019/2020, which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team. The report sets out the FRC’s expectations of areas of corporate reporting that require improvement and what it expects companies to focus on in the coming reporting season. The FRC expects companies to consider its findings during the financial reporting process.

The FRC comments that “overall the quality of reporting by UK companies has remained consistent in recent years”. It notes that although there has been improvements in certain areas such as fewer inconsistencies between the disclosure of significant judgements and estimates and other related disclosures elsewhere in the annual report and accounts and within alternative performance measure (APM) disclosure there is “still room for improvement in other areas”. These areas include better explanation of judgements and estimates, disclosures of impairment testing and impairment losses and better disclosure of revenue recognition especially variable consideration and performance obligations.

The findings follow a review of 216 annual reports and accounts with 67% of those reviews in the FTSE 350. The FRC notes that the topics most frequently raised as a result of the reviews have remained similar to previous years. It stresses that as well as meeting the detailed disclosure requirements of the standards “companies need to meet the overarching objective of accounting standards”. The FRC highlights that a number of the disclosure issues could have been avoided had the disclosure objectives of the relevant accounting standards and legislation been more carefully considered when appraising the quality of reports and the needs of investors.

The FRC indicates that “the statement of cash flows remains the most common source of identified material errors”. The report highlights that these errors were considered “basic in nature” which “could have been spotted by carefully considering the appropriateness of various line items appearing on the face of the cash flow statement”. It identifies the ten most frequently raised topics where improvements to reporting quality are needed are:

  • Judgement and estimates
  • Impairment of assets
  • Revenue
  • Financial instruments
  • Alternative Performance Measures
  • Strategic Report
  • Statement of Cash Flows
  • Provisions and Contingencies
  • Fair value measurement
  • Business Combinations

Each of these topics is analysed in detail in the report with key findings and significant issues encountered from the reviews. Example disclosures that would meet the FRC’s expectations are also provided.

Whilst not in the ‘top ten’ list of areas noted above, the FRC also draws attention to issues it has encountered with respect to earnings per share and illegal dividends. It flags that most of the earnings per share findings arose as a result of a corporate restructuring not being correctly reflected in the calculation. With respect to unlawful distributions the most common issue was failure to file an interim set of accounts prior to the payment of a proposed distribution where the distribution was not supported by the latest set of PLC accounts circulated to members.

Although COVID-19 has had a significant impact on financial reporting, the FRC flags that the key considerations for companies when preparing their reports and accounts such as clarity, consistency, relevance and transparency remain. It indicates that better disclosures are specific to the entity and explain clearly how COVID-19 has affected the company’s reported position and performance, and how it may affect future prospects.

The report highlights the FRC’s key disclosure expectations for 2020/21 which reflect the impact of COVID-19 on users’ needs and priorities. It expects to see:

  • disclosure of forward-looking information that is specific to the entity and which provides insights into the board’s assessment of the business’s prospects and the methods and assumptions underlying that assessment.
  • a clear explanation of any material changes in the business model. The FRC will also assess whether a changed business model is appropriately reflected in the financial statement disclosures of, for example, operating segments, or the allocation and impairment testing of goodwill.
  • going concern disclosures that explain the basis of any significant judgements, including whether there are any associated material uncertainties, and the matters considered when confirming the preparation of the financial statements on a going concern basis.
  • consistency between the business model, going concern disclosures, the viability statement and financial statement assumptions and estimates, notably for impairment testing at group and parent company level.
  • disclosures about significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made, that enable users to understand management’s exercise of judgement and views about the future.
  • appropriate disclosure of information relevant to understanding the company’s financial risk management, particularly the potential impact of debt covenants on liquidity and the use of factoring and reverse factoring in working capital financing.
  • adjusted for Covid-19’ alternative performance measures only in exceptional circumstances. The FRC highlights that “allocation of items such as impairment charges between Covid-19 and non-Covid-19 are likely to be highly subjective and therefore generally unreliable”.

Going forward, the FRC has indicated that its 2021 priorities will focus on the following areas:

  • Disclosures addressing risk;
  • Judgement and uncertainty in the face of the ongoing economic and social impact of COVID-19;
  • The potential consequences of geopolitical tensions and the UK’s exit from the European Union; and
  • Climate-related risks.

A press release, summary report and full report are available on the FRC website.

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