FRC publishes Annual Review of Corporate Reporting 2022/23 - room for impairment
Every year, the Financial Reporting Council ("FRC") publishes its Annual Review of Corporate Reporting setting out the findings from their analysis of UK corporate reporting during the 12-month period to the end of March. On 5 October 2023, the FRC published its fourth such review (the "Annual Review") which evaluated performance, identified areas for improvement and set forth some key expectations for the forthcoming reporting season.
The Annual Review sets out the findings of the FRC's review cycle, during which the FRC examined the annual reports and accounts of 263 FTSE 350, AIM and large private companies and asked questions of 112 companies (2021/22: 103). During the review cycle, 25 of these companies restated aspects of their accounts as a result of FRC enquiries (broadly consistent with the outcome of the FRC's 2021/22 review).
The key points of the Annual Review are set out below.
First, the good news…
- The general quality of the reporting by the FTSE 350 was maintained and substantive questions were able to be resolved through open and constructive engagement with companies
- There was improvement in several areas. For example, Alternative Performance Measures (APMs) fell out of the 'top ten' issues for the first time in several years
Areas for improvement
- Impairment of assets moved to the top of the list of concerns. The FRC raised queries with more companies in relation to this issue than last year, but the issues involved remained broadly the same. Companies should ensure that inputs and assumptions forming the basis of impairment testing are properly disclosed and explained, as well as communicating how these assumptions are consistent with discussions around heightened uncertainties
- Companies should ensure that all significant judgements have been described and disclosures about estimates include values, sensitivities and explain any significant changes. Each year the disclosures should be reassessed to confirm material remains relevant and judgements and estimates remain appropriate
- The FRC expressed concerns around cash flow statements. Although the number of companies restating their cash flow statement fell to 7 (2021/2022: 15), routine errors were still identified, and the types of questions asked of companies remained consistent with previous years. Errors were identified from basic consistency checks (comparing the cash flow statement to other information in the financial statements). Other issues included classification, netting and reporting non-cash movements in the cash flow statement
FRC expectations unshaken by uncertainties facing business
Section 4 of the Annual Review sets out the FRC's expectations for corporate reporting in 2023/24. The FRC expects companies to:
- ensure disclosures regarding uncertainties affecting the company's business clearly explain stances taken in the financial statements;
- include a clear description of the risks facing the company's business in the strategic report;
- provide transparent disclosures about the nature and extent of material risks from financial instruments, including changes in investing, financing and hedging;
- give a clear statement of consistency with the Recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD); and
- critically review their annual report and accounts before publication to ensure the information is relevant, conveyed within the context of relevant additional information and communicated clearly (so it can be understood by the reader)