Insights from the FRC’s 2022/23 Annual Review of Corporate Reporting

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting. The report sets out the key themes arising from the FRC’s ongoing monitoring activities and their key messages for companies ahead of the 2023/24 reporting season.

As businesses gear up for the 2023/24 reporting season, the FRC’s findings offer invaluable guidance, pinpointing the key themes and challenges faced by companies today. The top 3 issues identified in this report reflect the recent turbulence in both the political and economic environments, with rising inflation, interest rates and supply chain pressures. 

Key findings of reviews completed in 2022/23

1. Impairments

As a result of a challenging economic landscape, there has been an increase in impairments reported in financial statements. Disclosures relating to these impairments have fallen short when it comes to complying with the relevant accounting requirements.  

What to consider: Ensure that your impairment testing methodology complies with IFRS and that your impairment disclosures explain the key inputs and assumptions. This is particularly important where there is low headroom and where uncertainties over inflation, consumer demand, and interest rates result in a range of future cashflows and discount rate determination.

2. Judgements and estimates

The majority of the queries raised by the FRC this year related to estimation uncertainty, with disclosures that were inconsistent with information elsewhere in the Annual Report and Accounts or did not contain sufficient information.

What to consider: Disclosures relating to key judgements should be specific to your circumstances, clearly explaining the judgement, rather than a list of judgements, and include quantified sensitivities where these judgements involve a significant source of estimation uncertainty. Estimation uncertainty disclosures should include sufficient information on the key assumptions, sensitivities to those assumptions and ranges of potential outcomes. 

3. Cashflow statements

Cashflow statements are an area where the FRC continues to identify a significant number of errors, including prior year restatement following an FRC review. In the current year, the FRC’s queries related to relatively unusual or complex transactions, largely due to a lack of explanation of the transaction and the rationale for the treatment of the associated cash flows.

What to consider: Ensure classification of cash flows complies with the relevant definitions and criteria in the standard, that reported cash flows are consistent with information reported elsewhere in the report and accounts, and that there is sufficient disclosure of material non-cash transactions.

The FRC expects companies to consider the guidance and disclosure examples in their 2021 thematic review. You can read more about this here.

Expert insight from the FRC for your 2023/24 reporting season

The FRC has set significant expectations as businesses approach the new reporting season. 

Companies need to consider the impact of current economic conditions on their narrative and financial reporting in 2023/24. The extent of your company’s exposure to economic uncertainty in an inflationary trading environment with rising interest rates will depend on the territories in which your company operates. 

It’s crucial to explain the risks and changes in the business environment and the impact on the company’s position, performance and future prospects. In addition, you should consider the effect of uncertainty and high inflation on the recognition of assets and liabilities, and related disclosures. This should include a review of whether assumptions and ‘reasonably possible’ ranges for sensitivity disclosures remain appropriate.

Disclosures – FRC expectations

1. Ensure that disclosures about uncertainty meet the relevant requirements and enable users to understand the position that you have taken in preparing your financial statements, with particular focus on:

• values of key assumptions and sensitivities, or a range of possible outcomes must be provided, for impairment tests and major sources of estimation uncertainty;
• describing accounting judgements in sufficient detail so users can understand the position taken and the rationale;
• ensuring that assumptions remain relevant and appropriate; and
• providing a clear linkage between narrative reporting on uncertainties, such as inflation and climate change, and the assumptions in the preparation of the financial statements.

2. Your strategic report should provide a clear description of the risks facing the business, their impact on strategy, business model, going concern and viability with cross-references to the relevant detail in the report and accounts.

3. Disclosure of the nature and extent of material risks arising from financial instruments. This should include changes in investing, financing, and hedging arrangements, any factoring or reverse factoring used to manage your working capital, concentrations of risks and information about material covenants. For IFRS reporters, disclosures should include significant assumptions applied in your expected credit loss (ECL) measurement.

4. Perform a critical review of the annual report and accounts, ensuring that the full report is clear, concise and understandable, omits immaterial information, and whether additional information beyond the requirements of a specific standard is required to enable users to understand particular transactions, events, or circumstances.

5. Companies in scope of the Taskforce for Climate Related Financial Disclosures (TCFD) requirements, should ensure that they provide a clear statement of consistency with TCFD explaining whether they consider disclosure of sufficient information to comply with the framework in the current year.

Companies should consider the recent FRC Lab report on materiality with tips on how to adopt a materiality mindset to ensure that annual reports and accounts provide useful information to users.

How RSM can help

We have a dedicated team of accounting experts, experienced in financial reporting, including the preparation of financial statements complying with the relevant accounting and legislative requirements.

For further information, or if you would like to discuss your financial reporting needs further, please get in touch with Lou Ward or your usual RSM contact.