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Annual Review of Corporate Reporting 2021/2022 – Corporate Reporting Highlights

Introduction

During these times of increased economic and geopolitical uncertainty it is even more important that investors and other stakeholders have confidence in the information that companies provide. The Corporate Reporting Review team (CRR) of the FRC plays an important role in this regard by working to ensure that company annual reports and accounts comply with the relevant financial and narrative reporting requirements and deliver high quality decision-useful information for investors and other stakeholders.

This document highlights the key messages from the FRC's Annual Review of Corporate Reporting 2021/22 (the main report). It includes:

a summary of key issues relevant to companies' reporting in uncertain times;
our key disclosure expectations for the next year; and
reminders on the top ten topics we raised with companies in 2021/22.

This year saw a significant advance in climate-related reporting with the introduction by the Financial Conduct Authority of reporting based on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations for premium listed entities on a comply-or-explain basis.

However, scope for improvement remains in some areas of financial reporting, particularly financial instruments and deferred tax. Disappointingly, we continue to find errors in cash flow statements, in most cases from desktop reviews. Companies and their auditors can, and must, do better in this area.

Companies should carefully consider the issues most frequently identified in our reviews. We also remind preparers to consider the overarching objectives of the reporting requirements, as well as the detailed disclosure requirements.

Quality of corporate reporting

We are pleased to note that, despite the challenging environment, the quality of corporate reporting among the FTSE 350 has been maintained. We saw improvements in companies' reporting of judgements and estimation uncertainty, impairment of non-financial assets, revenue and alternative performance measures (APMs). These financial reporting matters are particularly critical to users in an uncertain environment. CRR has been driving improvements in these areas over a number of years. We are pleased with this year's positive development, which we expect to be maintained.

Thematic reviews

In addition to our routine monitoring work, we performed thematic reviews of:

Discount rates
TCFD disclosures and climate in the financial statements
Deferred tax assets
Business combinations
Earnings per share
Judgements and estimates

A summary of the findings of these reviews can be found in the main report.

Reporting in uncertain times

The Russian invasion of Ukraine in February sent geopolitical shockwaves around the world and exacerbated the economic uncertainty created by the Covid-19 pandemic. Rising inflation, slowing economic growth, increasing interest rates, stresses in supply chains, constraints in the labour market and changing consumer behaviour, are some of the challenges businesses are currently facing. In this environment of heightened uncertainty, businesses need to be agile and continually reassess the evolving risks, which they will need to reflect in their strategy and reporting.

Companies should clearly explain the risks and changes in the business environment they are facing and how the risks and uncertainties have been reflected in the strategy, business model and going concern and viability assessments. ¹
Explanation of the business performance and financial position at the end of the year should be made in the context of the business strategy and reflect the risks.
Any changes to definitions and/or calculations of APMs (for example, inflation-adjusted measures) should be adequately explained (please see page 20 of our APM thematic and page 32 of our Covid-19 thematic for our expectations).

The document illustrates a conceptual flow of reporting considerations: - Principal risks and changes in business environment - Strategy and business model - Going concern and viability - Business performance and position - Financial reporting

Companies should consider the effect of uncertainty on the recognition, measurement and disclosures, which may include:

The net realisable value of inventories may be affected by the changing economic environment.
Impairment assessments of non-financial assets should reflect the most recent management expectations, budgets and forecasts and asset-specific risks.
Expected credit loss (ECL) measurements of financial assets need to be updated to take account of forward-looking information and historical default data adjusted accordingly.
Deferred tax assets may no longer be recoverable due to uncertainty over future profitability.
Contracts may become onerous and a liability may need to be recognised for the unavoidable costs.
Investing, financing and hedging strategies may need to be revisited and appropriately reflected in the financial statements.
Entities will need to consider the impact of inflation on the business and financial reporting (please see page 47 of the main report).
More areas of financial reporting may involve significant judgements and estimation uncertainty, which will need to be disclosed (for example, going concern assessment and fair value measurement).
Key assumptions and estimation uncertainty involved in the measurement of recognised assets and liabilities need to be explained and appropriate sensitivity provided.

Key disclosure expectations for 2022/23

Our overall expectations for disclosure include:

unambiguous description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, and cross-referenced to relevant detail in the reports and accounts.
specific, balanced and well-integrated information about the impact of climate change on the company in narrative reporting, and appropriate reflection of material climate-related commitments, risks and uncertainties in the financial statements; clarity about the relationship between assumptions and sensitivities considered in any TCFD scenarios ² (including any Paris-aligned scenarios) and those applied in the financial statements.
impairment disclosures that assign values to, and explain how, the key assumptions used have been determined, with reference to future expectations regarding external conditions and the company's own strategy.
clear disclosure of significant management judgements and key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of reported amounts to changes in assumptions.
transparent disclosure of the nature and extent of material risks arising from financial instruments, including changes in investing, financing and hedging arrangements; the use of factoring and reverse factoring in working capital financing and the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
company-specific information that meets the disclosure objectives of the relevant accounting standards and not just the specific disclosure requirements. Additional information (beyond the standards' requirements) should be included where needed to understand the impact of particular transactions, events or circumstances.
clear explanation of the nature of significant inflationary features in revenue, supply, leasing and other financing contracts, and their effect on the financial statements.
clear, concise and understandable disclosure that omits immaterial information.

See also pages 5 to 8 for reminders to companies on the top ten areas we challenge.