The FRC publishes its 22/23 Annual Review of Corporate Reporting

The FRC's annual review of UK corporate reporting provides an overview of the FRC’s activities, findings, expectations for 2023/24 reports and reporting developments which the FRC consider to be relevant to all stakeholders.

The FRC noted an overall increase in the quality of financial reporting across the population of FTSE 350 companies reviewed. Notably, Alternative Performance Measures (APMs) fell out of the top ten issues, with impairments, judgements and estimates and cashflow statements being areas of continuing risk.

In the table below, we have summarised the top 3 issues noted in the report and included tips to avoid these common pitfalls:

#	Area	Summary of findings	Top tips
1	Impairment of assets	More queries were raised on impairment than in previous periods. This could be expected in an environment of higher inflation and rising interest rates, with more instances of impairment or reduced headroom. Questions were raised on non-disclosure of key assumptions, related sensitivity analyses and inconsistencies between assumptions and other disclosures (i.e., going concern and viability). Questions were asked about the impairment method used and compliance with IFRS. Where climate risks were considered significant, questions were asked as to how these risks were factored into the impairment assessment.	Consistency is key. Ensure that impairment indicators and assumptions/judgements used in impairment calculations are consistent with other disclosures in the annual report. For example, adverse trends in performance indicators noted in the director's report may also be an indicator of impairment. Similarly, assumptions used for impairment calculations should be consistent with those used in going concern and viability assessments. Companies should ensure that impairment testing methodology complies with IFRS, particularly that the grouping of assets into cash-generating units (CGUs) is appropriate and the treatments of inflation in the discount rate and in cash flow measurement are consistent. IAS 36 is a disclosure-heavy standard, and we encourage preparers to complete a disclosure checklist in this regard to ensure all relevant disclosures are provided. Generic/boiler-plate disclosures should be avoided. Disclosures should be clear and entity-specific.
2	Judgements and estimates	Significant judgements and estimates have returned to being one of the highest-ranked topics in the top ten. Most of the queries related to estimation uncertainty and often involved disclosures that either did not contain sufficient information to be useful or appeared inconsistent with information elsewhere in the report and accounts. In addition, questions were raised about the non-disclosure of areas of significant/key judgements, including those relating to going concern.	A generic list of judgements and estimates can obscure relevant disclosures. Disclosures should be reassessed periodically to ensure immaterial issues are not rolled forward and all items are appropriate for the entity’s current circumstances. Where a significant judgement, estimate or source of estimation uncertainty is identified, disclosure should provide sufficient granularity in the descriptions of assumptions and/or uncertainties to enable users to understand management’s most difficult, subjective, or complex judgments². Sources of estimation uncertainty should be quantified, and other relevant information, such as sensitivities or ranges of potential outcomes, should be provided where these help readers understand management’s judgements about the future¹.
3	Cash flow statements	Cash flow statement issues remain the most frequent reason for companies making prior-year restatements as a result of CRR enquiries. Findings were largely in line with prior years, with questions being raised on: Incorrect classification of cash flows. Inconsistent amounts and descriptions compared to other information in the reports and accounts. Inclusion of non-cash flow items in the cash flow statement. Net presentation of cash flows, such as a single net amount for notes payable rather than separate cash advances and repayments. Non-disclosure of restricted cash	A robust pre-issuance review of the cash flow statement (CFS) would aid in avoiding many of the areas noted by the FRC. Such a review could include procedures such as (but not limited to): 1) Checking for consistency between the CFS and other information in the financial statements, such as: Non-cash expenses (depreciation, impairment etc) to the statement of comprehensive income and/or related expense notes Additions of assets (i.e., PP&E) to the related asset reconciliation Changes in working capital compared to movements in the statement of financial position. 2) Identifying non-cash items Comparing interest paid, interest received, tax paid and dividends received to the amounts disclosed in the Statement of Comprehensive Income. In general, we would not expect these amounts to be the same as a result of timing differences between accruals and payments and as a result of accounting adjustments. 3) Checking for inappropriate netting Cash inflows and outflows can only be presented on a net basis under narrowly defined circumstances. 4) Consideration of classification of cash flows. This is particularly relevant for new and/or significant one-off transactions. Be aware that the classification of cash flows in the group may differ from the parent company’s separate financial statement and should be considered separately. 5) Consider the composition of cash and cash equivalents. Judgment may have to be exercised in determining what comprises cash and cash equivalents in particular in relation to bank overdrafts and short-term investments.

Area

Summary of findings

Top tips

Impairment of assets

More queries were raised on impairment than in previous periods. This could be expected in an environment of higher inflation and rising interest rates, with more instances of impairment or reduced headroom.
Questions were raised on non-disclosure of key assumptions, related sensitivity analyses and inconsistencies between assumptions and other disclosures (i.e., going concern and viability).
Questions were asked about the impairment method used and compliance with IFRS.
Where climate risks were considered significant, questions were asked as to how these risks were factored into the impairment assessment.

Consistency is key. Ensure that impairment indicators and assumptions/judgements used in impairment calculations are consistent with other disclosures in the annual report. For example, adverse trends in performance indicators noted in the director's report may also be an indicator of impairment. Similarly, assumptions used for impairment calculations should be consistent with those used in going concern and viability assessments.
Companies should ensure that impairment testing methodology complies with IFRS, particularly that the grouping of assets into cash-generating units (CGUs) is appropriate and the treatments of inflation in the discount rate and in cash flow measurement are consistent.
IAS 36 is a disclosure-heavy standard, and we encourage preparers to complete a disclosure checklist in this regard to ensure all relevant disclosures are provided.
Generic/boiler-plate disclosures should be avoided. Disclosures should be clear and entity-specific.

Judgements and estimates

Significant judgements and estimates have returned to being one of the highest-ranked topics in the top ten.
Most of the queries related to estimation uncertainty and often involved disclosures that either did not contain sufficient information to be useful or appeared inconsistent with information elsewhere in the report and accounts.
In addition, questions were raised about the non-disclosure of areas of significant/key judgements, including those relating to going concern.

A generic list of judgements and estimates can obscure relevant disclosures.
Disclosures should be reassessed periodically to ensure immaterial issues are not rolled forward and all items are appropriate for the entity’s current circumstances.
Where a significant judgement, estimate or source of estimation uncertainty is identified, disclosure should provide sufficient granularity in the descriptions of assumptions and/or uncertainties to enable users to understand management’s most difficult, subjective, or complex judgments².
Sources of estimation uncertainty should be quantified, and other relevant information, such as sensitivities or ranges of potential outcomes, should be provided where these help readers understand management’s judgements about the future¹.

Cash flow statements

Cash flow statement issues remain the most frequent reason for companies making prior-year restatements as a result of CRR enquiries.

Findings were largely in line with prior years, with questions being raised on:

Incorrect classification of cash flows.
Inconsistent amounts and descriptions compared to other information in the reports and accounts.
Inclusion of non-cash flow items in the cash flow statement.
Net presentation of cash flows, such as a single net amount for notes payable rather than separate cash advances and repayments.
Non-disclosure of restricted cash

A robust pre-issuance review of the cash flow statement (CFS) would aid in avoiding many of the areas noted by the FRC. Such a review could include procedures such as (but not limited to):

1) Checking for consistency between the CFS and other information in the financial statements, such as:

Non-cash expenses (depreciation, impairment etc) to the statement of comprehensive income and/or related expense notes
Additions of assets (i.e., PP&E) to the related asset reconciliation
Changes in working capital compared to movements in the statement of financial position.

2) Identifying non-cash items

Comparing interest paid, interest received, tax paid and dividends received to the amounts disclosed in the Statement of Comprehensive Income. In general, we would not expect these amounts to be the same as a result of timing differences between accruals and payments and as a result of accounting adjustments.

3) Checking for inappropriate netting
Cash inflows and outflows can only be presented on a net basis under narrowly defined circumstances.

4) Consideration of classification of cash flows.
This is particularly relevant for new and/or significant one-off transactions.

Be aware that the classification of cash flows in the group may differ from the parent company’s separate financial statement and should be considered separately.

5) Consider the composition of cash and cash equivalents.
Judgment may have to be exercised in determining what comprises cash and cash equivalents in particular in relation to bank overdrafts and short-term investments.

The themes of the other issues are as follows:

Strategic report and other Companies Act 2006 matters (previously ranked 4)
Financial instruments (previously ranked 2)
Income taxes (previously ranked 3)
Revenue (previously ranked 5)
Provisions and contingencies (previously ranked 6)
Presentation of financial statements (previously ranked 9)
Fair Value measurement (not previously ranked)

Looking forward

The FRC’s report also includes a list of overall expectations for the 2023/24 reporting season. These are aligned with the top ten areas of challenge raised in the report and are summarised below.

Preparers are expected to:

Ensure disclosures about uncertainty are sufficient to meet the relevant requirements and for users to understand the positions taken in the financial statements
Give a clear description in the strategic report of risks facing the business
Provide transparent disclosure of the nature and extent of material risks arising from financial instruments
Provide a clear statement of consistency with TCFD (where relevant)
Perform sufficient critical review of the annual report and accounts
Complete a robust pre-issuance review.