October 1, 2024 Corporate reporting review
For the second year in a row ‘Impairment of Assets’ tops the list of concerns identified in the Financial Reporting Council’s (FRC) corporate reporting review. Cash flow statements and financial instruments both rose up the rankings to take second and third places in the list of top ten concerns.
The impairment issues were largely similar to those identified in the previous year’s review, with requests for clarification being raised in 12% of corporate reports reviewed by the FRC. Many of these could have been avoided if companies had ensured that their impairment reviews and related disclosures reflected information provided elsewhere in the report. Key assumptions used in impairment testing also need to be clearly stated and consistent across the entirety of the annual report.
This need for consistency also shows up as one of the key reasons why the FRC raised queries in respect of 11% of cash flow statements reviewed; with their enquiries resulting in a doubling of the number of cash flow statements being restated. One key area identified here was the continued instance of non-cash transactions being included in cash flow statements; for example, when right of use assets were acquired under leases or subsidiaries acquired via a share exchange agreement.
As with many of the other areas of concern, the FRC highlighted the importance of clearly stating the nature of transactions and the rationale for the treatment of related cash flows. This also ties in with concerns raised in respect of the presentation of financial statements which came in at fifth on the top ten list of areas identified for improvement as well as judgements and estimates which was listed in equal seventh place.
Commenting on the review The FRC’s Executive Director of Supervision, Sarah Rapson called on companies to “clearly familiarise themselves with the FRC’s top ten reporting issues and focus on providing material disclosures that are clear, concise, and company specific.”
Aside from the areas of concern identified by the FRC; reviewers also highlighted a widening gap in clear and accurate reporting between the FTSE 350 and other companies. Whilst overall the quality of FRC 350 reports held up well against the previous year’s review, some slippage was noted in other companies. So, whilst substantive letters asking for further information or clarification were issued by the FRC to 28% of FTSE 350 companies reviewed, 61% of other companies reviewed received letters.
This slippage in corporate reporting amongst non-FTSE 350 companies has given rise to a measure of FRC concern. to As Sarah Rapson commented: “Companies outside the FTSE 350 are important to economic growth and good quality reporting improves trust in business and supports investment and growth.”
