FRC publishes 2022 Annual Review of Corporate Reporting
Each year, the Financial Reporting Council ("FRC") publishes an Annual Review of Corporate Reporting, describing the activities and findings of its Corporate Reporting Review function for the 12-month period to March. On 27 October 2022, FRC published its third such annual review (the "Annual Review") into UK premium listed companies' corporate governance reporting. The Annual Review presents the FRC's view of the current state of UK corporate reporting practices and identifies any areas for improvement and focus on the coming year. Whilst the FRC noted that the overall quality of corporate reporting by FTSE 350 companies was maintained during the year, it makes clear that there remains room for improvement in certain areas of financial reporting, particularly reporting on financial instruments and deferred tax assets.
The key points of the Annual Review are set out below. First, the good:
- Despite a challenging economic landscape, the overall quality of corporate reporting by FTSE 350 companies held steady throughout the year. The FRC has seen improvements in the reporting of judgements and estimation uncertainty, impairment of non-financial assets and alternative performance measures ("APMs") and revenue.
- Significant progress has been made in climate-related reporting following the introduction of Listing Rule-mandated disclosures by premium listed companies (in line with the Taskforce for Climate-related Financial Disclosures) ("TCFD").
Now, the not-so-good:
- Of the 252 company annual reports reviewed, the FRC wrote to 103 with substantive questions about their reports. The FRC required 27 companies to restate aspects of their accounts, nearly twice the number instructed to do so in 2020/21 (see our ECM Hub Insight for the results of the FRC's 2021 annual review).
- The accuracy of cash flow statements remains an area of significant concern, as well as reporting on financial instruments and deferred tax assets. The FRC was disappointed to find errors in cash flow statements, an area on which both companies and their auditors are requested to improve.
- In a period of economic and geopolitical uncertainty, companies must continually outline future risks and deliver high-quality information for investors and shareholders as part of their strategies and reporting. The impact of risks and uncertainties on their strategy, business model and going concern assessments should be at the heart of a Company's reporting. Consistency across annual reports and accounts is also essential.
- The review sets out examples of matters companies must consider during times of increased uncertainty, such as the need to disclose significant judgements in relation to going concern assessments, in order to help improve their disclosures. Additional guidance on this point in particular can be found in FRC Thematic Review: Viability and Going Concern.
Alongside its Annual Review, the FRC has published Summary: Key matters for 2022/23 reports and accounts which sets out the FRC's expectations for annual reports and accounts prepared in the financial year 2022/23. The FRC’s stated focus will be on disclosures addressing strategic and other material risks, significant management judgements, the effect of inflationary features in financial contracts and the impact of climate change.
The FRC intends to publish a report identifying the key elements of a good annual report and accounts later in 2022.