FRC Annual Review of Corporate Reporting 2022/23

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2022/23, which summarises the results of its monitoring activities for 2022/23.

During this cycle, the FRC has placed particular focus upon sectors it assessed to be of higher risk:

• Travel, hospitality and leisure;
• Retail;
• Construction and materials; and
• Gas, water and multi-utilities.

In this blog we take a look at the key findings.

The top 10 findings

As we have come to expect from the FRC, it has once again published a list of its top ten most common findings. For many readers, it will come as no surprise that the list is remarkably similar to that of the prior cycle.

1. Impairment of assets

Common issues have been identified surrounding disclosures and explanation of the inputs and assumptions applied in impairment testing, along with some impairment testing methodologies which failed to comply with the requirements of the accounting standard. In particular any assumptions should be consistent with discussion of uncertainties elsewhere in the report.

2. Judgements and estimates

Jumping up from its previous position at number 8, issues with lack of detailed disclosure around judgements and estimates have been identified. Most notably the FRC has found a number of entities simply listing judgements and estimates, rather than describing them or simply repeating the same disclosure word for word each year, without updating it.

3. Cash flow statements

Refreshingly, the FRC noted fewer ‘routine’ errors in cash flow statements this year but basic consistency checks were still lacking and many errors were still identified with netting and reporting non-cash movements within the cash flow statement.

4. Strategic Report and other Companies Act 2006 matters

Many strategic reports failed to meet the minimum requirements set out in the Act, and auditors failed to pick up on these issues. In particular the need for a fair, balanced and comprehensive review.

5. Financial instruments

Financial instruments makes an appearance once again with the same issues around lack of disclosure around material risks arising from financial statements and details of bank covenants (which must be provided unless the likelihood of any breach is remote).

6. = Income taxes

In at joint number 6 this year, income taxes appears again. Issues noted include weak forward assessments to support the recovery of deferred tax assets and inconsistent tax related disclosures throughout the annual report and accounts.

6. = Revenue

Accounting policies need to be provided for all significant revenue streams along with significant judgements in applying such policies.

8. Provisions and contingencies

Clear and specific descriptions of the relevant exposures were found to be lacking in this cycle, and he calculation and presentation occasionally failed to comply with the requirements of the accounting standard.

9. Presentation of financial statements

Accounting policies were often boiler plated with lack of explanation as to how the policies applied to the company’s particular circumstances. There was also evidence of lack of appropriate review of the financial statements, with classification issues noted in many cases.

10. Fair value measurement

The only new entrant this year is fair value measurement. Most issues arose in relation to Level 3 measurements which entities without internal expertise struggled most. The FRC is reminding companies to consider the need for specialist third party advice where they lack internal expertise.

The FRC’s view

The FRC is pleased to note that the general quality of corporate reporting across the population of its review has been maintained. Whilst many of issues in this cycle’s top 10 have remained the same, it is perhaps unsurprising that impairment of assets, and judgements and estimates are top of the list given the recent economic uncertainty.

The FRC is reminding preparers and reviewers of annual accounts and reports to review its What Makes a Good Annual Report and Accounts publication.

What next for 2023/24?

The FRC announced back in December 2022 that its areas of focus for the next cycle will be:

• Travel, hospitality and leisure;
• Retail and personal goods;
• Construction and materials; and
• Industrial transportation.

We can expect the next Annual Review of Corporate Reporting to be published in October 2024.

Whilst the FRC’s review usually focus on the largest audited entities and audit firms, many of the issues identified in its Annual Review of Corporate Reporting are equally commonplace in smaller audited entities and audit firms. All audit firms can benefit from reviewing the full report and considering their performance in the areas identified.

How can Mercia help?

Mercia offers a range of training courses, support products including manuals to aid compliance with the regulations and offers a comprehensive technical query service for advice on your specific circumstances.