Closing Out 2022

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10 Jan, 2023

Welcome to our one-stop guide covering the issues relevant to the preparation of December 2022 annual reports.

Uncertainty remains a key factor for companies to deal with when preparing their 2022 annual reports. Companies face a wide range of challenges due to the ongoing impacts of the pandemic, climate change, rising commodity prices and inflation, currency fluctuations, global supply chain disruption and labour shortages, with many issues exacerbated by the conflict between Russia and Ukraine. For those companies directly impacted by the conflict, uncertainty remains over future operations in and trade with affected and neighbouring regions and the impact of sanctions. And the world has changed as a result of the pandemic, with ongoing effects on the way businesses operate and the expectations of stakeholders.    

Whilst companies will be more familiar with reporting in times of uncertainty, timely and high-quality reporting that reflects the ongoing uncertainties companies face and their response to those uncertainties remains as important to investors, creditors, and other stakeholders as ever. Transparent narrative reporting that clearly articulates the impact of risks arising from the uncertain economic environment on areas such as strategy, business model, viability and going concern assessments and in the recognition and measurement of assets and liabilities is imperative. Investors expect consistent disclosures across the annual report and accounts.

The FRC’s Annual Review of Corporate Reporting 2021/22 and ESMA’s Common Enforcement Priorities provide guidance on appropriate reporting and meeting investor expectations and highlight areas of regulatory scrutiny that reporters of all sizes should focus on in the coming reporting season. Messages contained within recent FRC thematic reviews on TCFD and climate, judgements and estimates, discount rates, business combinations, deferred tax assets and EPS should also be considered when preparing forthcoming annual reports.

The FRC indicates that, despite the challenging reporting environment, there has not been a decline in the quality of corporate reporting by FTSE 350 companies. It notes that although there have been improvements in the reporting of alternative performance measures (APMs), judgements and estimates, revenue and impairment of non-financial assets, there is scope for improvement in other areas. These include financial instruments, where expected credit loss provisioning remains an area of focus, cash flow statements, and recognition of deferred tax assets. Companies’ narrative reporting disclosures can also expect to be challenged with improvements expected in Streamlined Energy and Carbon Reporting (SECR) and Section 172 reporting. Recurring issues have also been identified with respect to IAS 37 Provisions, Contingent Liabilities and Contingent AssetsIFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases. 

Although companies have ‘generally risen to the challenge of mandatory TCFD reporting’, the FRC highlights that this is an area where companies should focus to improve the quality of their reporting. Whilst premium-listed commercial companies will already be familiar with mandatory ‘comply or explain’ TCFD reporting, for accounting periods beginning on or after 1 January 2022, those disclosure requirements are extended to standard listed companies, asset managers, life insurers and FCA-regulated pension providers. Companies should also be aware of changes to the TCFD guidance that will apply for the first time. Both the FRC and FCA set out their increasing expectations for the coming reporting season in their recent thematic reviews including better linkage between climate-related risks discussed in the narrative reporting and their impact on the financial statements. 

Whilst amendments to both UK GAAP and IFRS Accounting Standards have been relatively minor, companies are reminded that, for periods commencing on or after 1 January 2022, the remaining requirements of the European Single Electronic Format (ESEF) come into effect. The FRC Lab has published a report highlighting required improvements to data quality and usability.  

Looking forwards, the FRC’s upcoming monitoring of annual reports in 2022/23 will focus on disclosures that address risks and uncertainty in the challenging economic environment, including those relating to rising inflation, slowing economic growth, increasing interest rates, stresses in supply chains, constraints in the labour market, changing consumer behaviour and climate change.

Our Closing Out 2022 publication covers all these topics and more, providing an invaluable guide to the issues affecting today’s corporate reporting landscape.

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