The Financial Reporting Council (FRC) has recently published its thematic review of private companies. While the review focused on very large entities, with turnovers exceeding £1.5bn, its findings and recommendations are relevant to all companies whether they report under IFRS or FRS 102.

A mixed bag: quality of corporate reporting

Overall, the FRC’s review uncovered a mixed bag when it came to the quality of reporting, particularly on how clearly companies explained material matters that were complex or judgemental.

The best strategic reports focussed on company-specific disclosures that were clear, concise, understandable and consistent with the disclosures in the financial statements. Better reporting does not necessarily require greater volume. The areas of focus in the review included:

1. Strategic report
2. Presentation of Primary Statements including cash flow statements
3. Revenue
4. Judgements and estimates
5. Provisions and contingencies
6. Financial instruments

Expectations and recommendations

The FRC expects entities to focus their efforts on disclosure of the most significant, complex, or judgmental matters and recommends companies to:

• provide a strategic report that contains a balanced analysis focused on those elements of development, performance and position that are key for an understanding of the company;
• explain how the company or subgroup fits into a wider group structure to allow a user to understand fully the context in which it operates;
• tailor accounting policies for transactions and balances that are complex or judgemental and keep policies under review to ensure that they remain complete, relevant and accurate;
• disclose revenue policies explaining the nature of each significant revenue stream, when it is recognised and how its value is determined;
• provide specific details of judgements taken and clearly explain the rationale for the conclusion reached;
• clearly distinguish which estimates have a significant risk of material adjustment to the carrying amount of assets and liabilities in the next financial year. In addition, companies should provide additional quantitative detail where it is necessary for an understanding of the significance of the estimate;
• disclose clearly the nature of the obligation giving rise to a provision and the associated uncertainty in timing or amount for significant provisions;
• explain the nature of each significant financial instrument risk within the company. Where necessary for an understanding of the exposure, this should include quantification and provide information on the sensitivity to potential future changes; and
• conduct a critical review of the annual report and accounts prior to finalisation. This includes considering whether the report as a whole is clear, concise and understandable, as well as checking for internal consistency and more detailed presentation and disclosure matters.

Whilst the review did not specifically scope in climate-related disclosures, the FRC noted that as part of compliance with the mandatory climate-related financial disclosure requirements for private companies, they should consider the extent to which climate-related targets and transition plans could affect the financial statements and ensure that disclosures are consistent with reporting elsewhere in the annual report and accounts. This may include new judgements or uncertainties which arise related to the disclosures.

Commenting on the FRC’s thematic review of private companies, head of accounting and financial reporting at RSM UK, Andy Ka said:

‘The FRC’s thematic review serves as a call for companies to elevate their reporting standards, fostering greater transparency, and strengthening stakeholder trust. It highlights the need for companies to complete a holistic review of their Annual Report and Financial Statements, to ensure that disclosures are company specific and consistent throughout, especially in areas such as critical accounting judgements and estimates’.

For further information or to discuss any of the guidance raised, please get in touch with Andy Ka or your usual RSM contact.