Corporate reporting quality maintained but improvement needed
Nov 3, 2022
Despite continued economic uncertainty, the FRC has not detected a decline in reporting quality. However, improvements in key areas are still needed.
The FRC has published its Annual Review of Corporate Reporting: 2021/22, which summarises the results from its corporate reporting monitoring activities.
As part of its 2021/22 review cycle, the FRC reviewed 252 annual reports and queried the reporting of 103 companies, 27 of which were required to restate their accounts.
Overall, the quality of reporting had not declined. Although still listed as areas of concern, the reporting of judgements and estimates, impairment of non-financial assets, revenue, and alternative performance measures (APMs) had improved from the previous year.
Significant progress in climate-related reporting was also observed due to the new requirement for listed companies to provide climate-related reporting consistent with TCFD recommendations on a comply-or-explain basis. However, the FRC still calls for more entity-specific disclosure and for clearer identification of climate-related impacts on the financial statements.
Cash-flow statements took top place in the FRC’s ‘top-10’ list of reporting improvements. As in previous years, the FRC identified a high number of errors. Companies often made classification errors or failed to ensure that reported cash flows are consistent with amounts reported elsewhere in the annual report. The regulator insists that companies and auditors must do better and emphasises the importance of a robust pre-issuance review.
Financial instruments and income tax disclosures were also identified as topics of concern. The need for high quality reporting in these areas during times of economic uncertainty is emphasised by the FRC. Companies should ensure that the nature and extent of material risk from financial instruments, including inflation and rising interest rates, are sufficiently disclosed. Preparers should also be alert to changes in tax regimes and ensure that adequate explanation is given to support the recoverability of deferred assets recognised by loss-making entities.
“A high level of economic uncertainty only increases the need for quality reporting in both the front and back half of the annual report,” says Kate Beeston, Technical Manager in ICAEW’s Financial Reporting Faculty. “Companies must ensure they have considered the impact of high inflation and rising interest rates on their financial reporting and that any changes to principal risks and uncertainties are clearly explained.”
The FRC has also published Key matters for 2022/23 reports and accounts, which sets out its expectations for the upcoming reporting season based on the findings from its corporate reporting review activities.