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FRC publishes findings on the quality of corporate reporting in 2020/2021

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27 Oct 2021

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2020/2021. The report sets out the FRC’s expectations of areas of corporate reporting that require improvement and highlights the ten most frequently raised topics where improvements to reporting quality are needed.

The FRC indicates that, despite the continuing challenges of Covid-19, its detailed monitoring work did not identify a decline in the quality of corporate reporting. It notes that although there have been improvements in certain areas such as better APM disclosures (definitions, reconciliations and labelling), some improvements in judgements and estimates disclosures and incremental improvements in aspects of narrative reporting (with respect to the quality of information and linkage to the financial statements) there are still “opportunities for further improvement”.

These include better disclosures with respect to IFRS 15 Revenue from contracts with customers, IFRS 16 Leases and financial instruments (IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures), improvements in cash flow statement disclosures (where the FRC continues to be concerned” by the number of queries raised) and improvements in climate-related disclosures. On the latter, whilst the FRC has identified some improvements, for example, better explanations of net zero commitments and scenarios, it highlights that “there is considerable scope for further enhancements in this area”.

The findings follow a review of 246 annual reports and accounts with 72% of those reviews in the FTSE 350. The FRC stresses that as well as meeting the detailed disclosure requirements of the standards companies need to consider the overall objectives of financial reporting as “providing only the specifically required disclosures may not always be sufficient to comply with the overall objectives”.

The report identifies that the ten most frequently raised topics where improvements to reporting quality are needed are:

  • Judgement and estimates
  • Revenue
  • Statement of Cash Flows
  • Impairment of assets
  • Alternative Performance Measures
  • Financial instruments
  • Strategic Report and Companies Act
  • Provisions and Contingencies
  • Leases
  • Income Taxes
  • 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 presentation of primary financial statements (for example classification of assets and liabilities as current or non-current and instances of inappropriate offsetting) as well as other disclosure areas such as not providing an accounting policy for material transactions.

Going forwards the FRC has signalled its intention to focus its attention on:

  • disclosures with respect to judgements and estimation uncertainty in light of the continuing impacts of Covid-19 especially with respect to going concern and viability; and
  • how companies have disclosed climate-related risks including how they have disclosed their compliance with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations on a comply-or-explain basis. It expects material climate-change policies, risks and uncertainties to be included in narrative reporting and appropriately considered and reflected in the financial statements. Attention will also be focused on compliance with Streamlined Energy and Carbon Reporting (SECR) disclosure requirements.

The report highlights the FRC’s key disclosure expectations for 2021/22. It expects:

  • clear explanations of the significant judgements made by management, including those used in their assessment of going concern, with sufficient detail to understand the specific judgements made and their financial reporting effects.
  • clear descriptions of key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of amounts recognised in the financial statements to changes in assumptions.
  • information in the financial statements to be consistent with that reported in the rest of the annual report and accounts.
  • material climate change policies, risks and uncertainties to be discussed in narrative reporting and appropriately considered and disclosed in the financial statements, particularly where investors may reasonably expect a significant effect on the expected life or fair value of an asset or liability.
  • the nature and extent of material risks arising from financial instruments and related risk management to be adequately addressed, including: the use of factoring and reverse factoring in working capital financing; the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
  • APMs not to be given greater prominence or authority than amounts stemming from the financial statements and the basis for classifying amounts as adjusting, ‘non-underlying’ or ‘non-core’ to be explained.
  • information that meets the disclosure objectives of the relevant accounting standards, as well as the specific disclosure requirements.
  • material information that is not obscured by immaterial items.

Alongside the report the FRC has also issued a Bulletin aimed at CEOs, CFOs and Audit Committee Chairs which complements the messages in the review and provides key focus areas for the coming reporting season. The bulletin covers key messages from:

A press releasesummary report and full report and the Bulletin are available on the FRC website.  Our related Governance in brief publication is available here.

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