FRC seeks corporate reporting improvements
21 Oct 2020
The quality of corporate reporting from some the UK’s largest companies has not improved over the past year, and there remain concerns about the frequency of restatements relating to cashflow, according to the Financial Reporting Council’s (FRC’s) annual review
21 Oct 2020
The regulator reviewed 216 accounts over the year and wrote to 96 companies, or 44%, with substantive questions about their reports.
This is in line with findings for the previous two years (2018/19: 39%; 2017/18: 46%).
Two thirds (67%) of the review were attributed to FTSE 350 companies, and approximately half of the cases arose from thematic reviews.
Fourteen companies were required to restate their accounts in instances where significant non-compliance occurred.
The FRC issued one press notice over the year to bring the reporting lapse to wider attention. This related to the FTSE 250 builder Galliford Try’s disclosures in its December 2019 interim accounts about claims recoverable from third parties.
Overall, the FRC report stated: ‘The frequency of restatements relating to cash flow statements remains a concern, and we will continue to critically review line items appearing on the face of the cash flow statement and challenge companies in relation to any unusual items.’
The FRC said there had been incremental improvements in certain matters, for example fewer inconsistencies between disclosures relating to judgement and estimation uncertainty in different parts of the annual report and accounts.
There were fewer pervasive shortcomings in alternative performance measure (APM) disclosures, which has been an area of focus for the regulator in recent years, while the issues raised relating to strategic reports appeared to relate to a lack of detail, rather than outright non-compliance (e.g. entirely overlooking the non-financial reporting statement).
The review noted: ‘There remains, however, opportunity for further improvement, as evidenced by the fact that a large majority of our reviews result in companies, as a minimum, enhancing their disclosures.’
Areas singled out for improvement include the explanation of judgements and estimates, and disclosures of impairment testing and impairment losses. The FRC said there is also found scope for better disclosure of revenue recognition, especially variable consideration and performance obligations.
The ‘top ten’ list of most frequent areas of findings are: judgements and estimates, impairment of assets; revenue from contracts with customers; financial instruments; APMs; strategic report; statement of cash flows; provisions and contingencies; fair value measurement; and business combinations.
The FRC highlights that ahead of the 2020/21 reporting cycle, preparers will face additional demands to produce high-quality reports against the backdrop of the Covid-19 pandemic and increased economic uncertainty.
It expects disclosure of forward-looking information that is specific to the entity and which provides insights into the board’s assessment of business prospects and the methods and assumptions underlying that assessment.
The FRC’s upcoming monitoring of annual reports will focus on disclosures addressing risk, judgement and uncertainty in the face of the ongoing impact of Covid-19, the UK’s exit from the EU and climate-related risks.
David Rule, the FRC’s executive director of supervision, said: ‘Companies have a key responsibility to prepare high quality annual reports to ensure investors, shareholders and other users can make timely and informed decisions.
‘We expect companies to improve their reporting in the “top ten” areas we identify.
‘Given the heightened need for high-quality disclosures as a result of the Covid-19 pandemic, it is vital companies carefully consider the FRC’s findings ahead of the next reporting cycle.’