The FRC issued their Review of Corporate Reporting at the end of October 2019. Although it might seem a long time after that to be posting an article on the report, it contains many pointers which should be useful for the 2019 accounts now being prepared and audited.
As might have been expected, with a number of recent high-profile corporate failures, the document highlights the importance of trust in annual reports. There is mention also, of the importance of the revised UK Corporate Governance Code and Strategic Report guidance for measuring progress towards clear and transparent reporting on companies? environmental, social and governance responsibilities.
In a pattern similar to that which we see for audit, many of the areas for improvement remain the same as in previous years. However, the FRC note that they have seen improvement in the quality of the reporting, despite their continued appearance as issues. For instance, disclosures of judgements and estimates have improved, but still sometimes lack the sensitivity analysis needed around the range of possible outcomes.
Cash flow statements remain an issue, with items mis-categorised as operating cash flows when they are in fact investing or financing. These are straightforward errors, easily spotted from a desktop review and it means both companies and their auditors are failing to undertake an adequate review before signing off the accounts and audit report.
The FRC found that the introduction of IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments had gone reasonably well. However, further refinement of disclosures, such as the comprehensiveness of the accounting policies for IFRS 15, are still expected. Contingent liabilities and provisions disclosure also caused some issues, with apparent inconsistencies or inadequate disclosures.
Narrative reporting, including environmental, social and governance considerations are seen as increasingly significant for investors. Regulatory changes have highlighted this and provide scope for extended reporting in these areas. The FRC still found it necessary to challenge companies on the completeness of principal risks and uncertainties in the strategic report. This was often triggered by mention of a risk area elsewhere in the annual report, or in external information, that was not included in the strategic report. This suggests a lack of structure in the review of what has been written in the report.
The FRC wrote to some companies who appeared to have a significant climate risk but had not disclosed this in their reports. All listed companies are expected to report under the Task Force on Climate-Related Financial Disclosures (TCFD) on how climate change impacts their business. The Lab has published a report with a list of questions which companies can use to assess the adequacy of their reporting in this area.
Unfortunately, the FRC is still identifying instances where strategic reports are not providing a fair, balanced and comprehensive analysis of the development and performance of the business during the year. Issues omitted included acquisitions in the year, the progress of transformation programmes, or significant changes in credit risk.
Alternative Performance Measures (APMs) have been a focus for the last few years and their reporting has improved. However, there are still too many cases of absent or unclear definitions of what an APM is and the reconciliation required to the nearest equivalent IFRS figure. This suggests to me a deliberate obfuscation by those preparing the company accounts or a singular lack of focus on the required disclosures. The FRC expects all preparers to follow the ESMA guidance on APM reporting, even though strictly it only applies to main market companies.
Companies also struggled with the recent requirement for a Non-Financial Information Statement in the strategic report (this is required for PIEs and large companies ? those with over 500 employees). The information should be set out in a clear and accessible manner and with more focus on the impact the company?s business has on the environment and the risks that environmental matters may pose for the company.
The FRC also mentioned upcoming issues, such as LIBOR reform and the related amendments to IFRS 9 and FRS 102 where companies are using hedge accounting and have LIBOR rates in contracts. There is also reference to the impact of technology and the potential for companies to need to implement the European Single Electronic Format for accounting periods commencing on or after 1 January 2020 if the UK is still part of the EU at that time.
If you are currently auditing or preparing IFRS accounts you will find it useful to consider these issues and ideally read the full report. Care needs to be taken in planning in sufficient time to look at the complexities of disclosures, including narrative ones, by both auditors and preparers.
If you need advice, assistance or a course covering these issues, get in touch.