The FRC has identified ten reporting areas where improvements are needed
This article highlights the ten areas in company reports identified by the FRC as needing improvement
The Financial Reporting Council (FRC) has issued a report following a review of the annual report and accounts of the largest UK Companies highlighting ten common areas where improvements are needed.
During the last year, the FRC reviewed 216 accounts, for the period up to 31 October 2019, and wrote to 96 companies with substantive questions about their reports. Fourteen companies were required to restate their accounts in instances where significant non-compliance occurred. The frequency of restatements relating to cash flow statements remains a concern.
While the report acknowledges that there have been improvements in certain areas, they have identified ten areas that prompt the most questions of companies by FRC’s monitoring function and what to do to avoid challenge. The report also identifies other improvements that they expect to see in their next review.
Ares where improvements are needed
The ten key areas identified by the FRC as those in greatest need of improvement are:
- Judgements and estimates.
- Impairment of assets.
- Revenue from contracts with customers.
- Financial instruments.
- Alternative performance measures.
- The Strategic report.
- The Statement of cash flows.
- Provision and contingencies.
- Fair value measurement.
- Business combinations.
These ten areas are addressed in detail in the report along with the key findings and significant issues identified during the review.
Although not included in the top ten most common areas, issues in relation to earnings per share (EPS) and illegal dividends are also highlighted in the report.
Most of the reports revised had been published before the full impact of COVID-19 had become clear. However, the FRC report emphasises that the need to provide additional information to meet users’ needs is underlined by their expectation that future reporting will sufficiently reflect the economic uncertainty and level of judgement applied by companies when disclosing the impact of the pandemic on their activities and performance.
Looking ahead to 2020/21, the FRC has identified the following areas of focus for their review of annual reports:
- Disclosures addressing risk, judgement and uncertainty in the face of the ongoing economic and social impact of COVID-19.
- The potential consequences of geopolitical tensions and the UK’s exit from the European Union.
- Climate-related risks.
Regarding COVID-19 specifically, the FRC expects to see the following disclosures in 2020/21 annual reports:
- Disclosure of forward-looking information that is specific to the entity and which provides insights into the board’s assessment of the business’s prospects and the methods and assumptions underlying that assessment.
- A clear explanation of any material changes in the business model. We will also assess whether a changed business model is appropriately reflected in the financial statement disclosures of, for example, operating segments, or the allocation and impairment testing of goodwill.
- Going concern disclosures that explain the basis of any significant judgements, including whether there are any associated material uncertainties, and the matters considered when confirming the preparation of the financial statements on a going concern basis.
- Consistency between the business model, going concern disclosures, the viability statement and financial statement assumptions and estimates, notably for impairment testing at group and parent company level.
- Disclosures about significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made, that enable users to understand management’s exercise of judgement and views about the future.
- Appropriate disclosure of information relevant to understanding the company’s financial risk management, particularly the potential impact of debt covenants on liquidity and the use of factoring and reverse factoring in working capital financing.
- ‘Adjusted for Covid-19’ alternative performance measures only in exceptional circumstances. Allocation of items such as impairment charges between Covid-19 and non-Covid-19 are likely to be highly subjective and therefore generally unreliable.