At a glance
The FRC has issued its annual review of corporate reporting for 2021/22. The review contains a summary of the FRC’s areas of focus, and its expectations for company disclosures going forward.
What is the issue?
While the FRC was pleased that despite the challenging environment the quality of corporate reporting has been maintained, it has continued to find areas for improvement in some areas of financial reporting and is disappointed that the number of restatements prompted by its reviews has nearly doubled since last year. The FRC is of the view that many of the errors could have been identified through robust pre-issuance reviews.
In particular the FRC found scope for improvement in the reporting around cash flow statements, financial instruments, and deferred tax. The FRC also looked at climate-related reporting and encouraged preparers to progress the quality of their reporting in this area.
  • Cash flow statements - with regards to cash flow statements in particular, the FRC stated that “companies and their auditors can, and must do better”, and noted a number of classification and other disclosure errors amongst the population it reviewed. The FRC recommended that companies consider the guidance issued in the FRC’s Cash Flow and Liquidity Disclosures thematic for more detailed analysis of the issues raised with regards to cash flow statements.
  • Financial instruments - the FRC asked more questions about financial instruments this year than it had done last year, and noted that in many cases the questions could have been avoided if companies had clearer accounting policies and disclosures. Specifically, the FRC continues to raise questions about ECL provision disclosures in non-banking companies, and about liquidity risk disclosures.
  • Deferred Taxes - the FRC noted a number of cases where only “boilerplate” disclosures were given by companies with recent losses with regard to the evidence supporting recognition of deferred tax assets. The FRC published a thematic review this year on Deferred Tax Assets which contains additional information about the FRC’s review findings in this area.
The review contains specifics of the FRC’s findings in these and other areas, and preparers and auditors are encouraged to read the details of the report.
Themes which emerge across the FRC’s recommendations include:
  • Companies should clearly articulate the effect of economic risks and other uncertainties facing the business in their strategic report or equivalent narrative reporting, and should ensure that material risks associated with rising inflation and interest rates are considered in forward looking assessments in the financial statements. In particular the FRC reiterated that inputs used in calculations need to be consistent in incorporating the effect of inflation (i.e. nominal cash flows should be discounted at a nominal rate, real cash flows should be discounted at a real rate)
  • Significant accounting judgements and sources of estimation uncertainty should be disclosed, with sensitivity disclosures provided in a way that is meaningful to the reader.
  • Disclosures need to be company-specific, and additional disclosures should be given where necessary to meet the overall disclosure objective of a standard rather than simply fulfilling the disclosure requirements. Material information should not be obscured by immaterial disclosures.
Key Disclosure Expectations
The annual review contains the following summary of the FRC’s key disclosure expectations for 2022/23.
  • Unambiguous description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, and cross-referenced to relevant detail elsewhere in the reports and accounts.
  • Specific, balanced and well-integrated information about the impact of climate change on the company in narrative reporting, and appropriate reflection of material climate-related commitments, risks and uncertainties in the financial statements; clarity about the relationship between assumptions and sensitivities considered in any TCFD scenarios (including any Paris-aligned scenarios) and those applied in the financial statements.
  • Impairment disclosures that assign values to, and explain how, the key assumptions used have been determined, with reference to future expectations regarding external conditions and the company’s own strategy.
  • Clear disclosure of significant management judgements and key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of reported amounts to changes in assumptions.
  • 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 and the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
  • Company-specific information that meets the disclosure objectives of the relevant accounting standards and not just the specific disclosure requirements. Additional information (beyond the standards’ requirements) should be included where needed to understand the impact of particular transactions, events or circumstances.
  • Clear explanation of the nature of significant inflationary features in revenue, supply, leasing and other financing contracts, and their effect on the financial statements.
  • Clear, concise and understandable disclosure that omits immaterial information.
Where do I get more details?
The full report, which includes a number of good practice examples, can be accessed here.
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