The FRC indicates that despite the challenging reporting environment that companies find themselves within, there has not been a decline in the quality of corporate reporting by FTSE 350 companies.  It highlights that there has been a ‘gradual fall’ in issues related to revenue, leasing and financial instruments with improvements in the reporting of alternative performance measures, which fall outside of its ‘top-ten’ issues for the first time in a number of years.

Impairment and judgements and estimates continue to be areas where the FRC raises challenges.  Cash flow statement errors continue to persist which has resulted in a number of companies having to restate their results.  These issues will remain areas of focus for the FRC’s Corporate Reporting Review team this coming reporting season.

Regarding climate-related disclosures, the FRC indicates that companies are at very different stages of maturity in their reporting.  This coming reporting season, as reporting becomes more established, the FRC is likely to enter into substantive correspondence with companies where their disclosures do not meet its expectations.

Against the backdrop of heightened uncertainty from higher inflation, slowing economic growth, higher interest rates, stresses in supply chains, constraints in the labour market, changing consumer behaviour and climate change, the FRC expects companies to clearly articulate the impact of these risks on their strategy, business model, principal risks and uncertainties, viability and going concern assessments and in the recognition and measurement of assets and liabilities, ensuring consistency across the annual report and accounts. 

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

• Impairment of assets
• Judgements and estimates
• Cash flow statements
• Strategic report and other Companies Act 2006 matters
• Financial instruments
• Income taxes
• Revenue
• Provisions and contingencies
• Presentation of financial statements
• Fair value measurement

For each of these topics, the report includes the key findings and significant issues encountered from the reviews.  The FRC has also highlighted points, including specific considerations relating to inflation and interest rates (where applicable), for companies to consider when preparing their forthcoming annual report and accounts.

The report also highlights the FRC’s key disclosure expectations for 2023/24. It expects companies to:

• ensure disclosures about uncertainty are sufficient to meet the relevant requirements and for users to understand the positions taken in the financial statements. In particular:
  • The values of key assumptions and sensitivities or a range of reasonably possible outcomes, must be provided, where required for impairment tests and major sources of estimation uncertainty.
  • Significant accounting judgements must be described.
  • Disclosures should be re-assessed each year to ensure they remain relevant and assumptions, and the range of outcomes used for sensitivity disclosures, remain appropriate.
  • Better disclosure helps users understand the linkage between narrative reporting on uncertainties such as inflation and climate change, and the assumptions made in the financial statements.
• give a clear description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, cross-referenced to relevant detail in the reports and accounts.
• provide transparent disclosure of the nature and extent of material risks arising from financial instruments, including changes in investing, financing and hedging arrangements; 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).
• provide a clear statement of consistency with Task Force on Climate-related Financial Disclosures (TCFD) which explains, unambiguously, whether management considers they have given sufficient information to comply with the framework in the current year. The FRC may challenge companies which have not disclosed information the Financial Conduct Authority (FCA) ‘particularly expects’ to be provided.  Companies must, also comply with the new mandatory Climate-related Financial Disclosure (CFD) Regulations.
• perform sufficient critical review of the annual report and accounts, including;
  • taking a step back to consider whether the report as a whole is clear, concise and understandable, omits immaterial information and whether additional information, beyond the requirements of specific standards, is required to understand particular transactions, events or circumstances.
  • a robust pre-issuance review to consider issues the FRC commonly challenges including: internal consistency; whether accounting policies address all significant transactions; and presentational matters, such as cash flow and current/non-current classification.

A press release and the full report are available on the FRC website.  The FRC will also be holding a webinar on 1 November to discuss the report in more detail.