FRC Annual Review of Corporate Reporting 2023/24

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2023/24, which summarises the results of its monitoring activities for 2023/24.

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

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

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

The top 10 findings

As they have done in previous years, the FRC has 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 those from the prior review cycles.

1. Impairment of assets

As was seen in last year’s report, common issues have been identified around the disclosures and explanations of the inputs and assumptions used in impairment testing. Not only do these need to be adequately disclosed, but they should also be consistent with the discussion of uncertainties elsewhere in the report.

2. Cash flow statements

The most common issue identified in this area is incorrect classifications of cash flows within the cash flow statement, whilst other common issues were that the amounts and descriptions are inconsistent with those reported elsewhere in the report and that cash held on deposit is included in cash and cash equivalents.

3. Financial instruments

Financial instruments again appear on this list with the same issues around lack of disclosure to explain both the material instruments as well as the nature and extent of material risks arising from them.

4. Revenue

The most common issue identified is again that of inadequate disclosure of accounting policies and significant judgements.

5. Presentation of financial statements and related disclosures

Accounting policies were found to be too generic and lack detail to enable readers to understand the substance of the transaction. Material transactions or balances were often not separately presented, either on the face of the relevant primary statement or in the notes.

6. Strategic Report and other Companies Act 2006 matters

The need for the strategic report to give a fair, balanced and comprehensive review has been emphasised again this year, along with the need to ensure the lawfulness of dividends is considered.

7. Judgements and estimates

Although the core issues remain the same, the FRC raised fewer queries in relation to significant judgements and estimates compared with last year. The main points continue to be that all significant judgements and estimates should be clearly described, with sufficient detail provided for each. A list of judgements and estimates is not enough!

8. Income taxes

Another topic where the FRC raised fewer queries compared with the previous year, the issues noted include a lack of convincing evidence to support the recognition of deferred tax assets and unclear or inconsistent information being disclosed in tax reconciliations.

9. Fair value measurement

A new entrant last year, fair value measurement has moved up a place in the list to 9^th. Most issues arose in relation to companies not explaining clearly enough the valuation techniques or the key inputs and assumptions that had been used.

10. TCFD and climate-related narrative reporting

The only new boy in class this year, some companies were found to have given undue prominence to green initiatives with little mention of their carbon-emitting activities. With more emphasis being placed on climate-related disclosures, we probably shouldn’t expect this topic to be going anywhere but further up this list in the coming years.

The FRC’s view

Although the FRC was pleased to note that the general quality of corporate reporting by the FTSE 350 companies reviewed has been maintained, they have also observed a widening gap between the quality of reporting by those and other companies.

What next for 2024/25

The FRC announced back in December 2023 that its areas of focus for the next cycle will be:

• Construction and materials;
• Food producers;
• Gas, water and multi -utilities;
• Industrial metals and mining;
• Retail

As ever, whilst the FRC’s review usually focuses 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.

In fact, the FRC was disappointed that there has been an increase in the number of restatements in relation to impairment of assets and cash flow statements, predominantly in companies outside the FTSE 350, where there is evidence of a widening gap in quality. These will likely remain areas of close focus for the FRC going forwards.

We can expect the next Annual Review of Corporate Reporting to be published in October 2025.

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.