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FRC sets out expectations for improvements in corporate reporting

06 November 2019

The Financial Reporting Council (FRC) has written an open letter to Audit Committee Chairs and Finance Directors about the findings of its Annual Review of Corporate Reporting 2018/19 and the improvements it expects to see in the upcoming reporting season.

The letter places particular emphasis on recent changes to reporting requirements designed to address broader matters of increasing concern to investors and other stakeholders. Audit Committees and Boards will need to consider these when preparing the next report and accounts. The general theme is that there must be greater transparency of disclosures and scope for improvement in corporate reporting, particulary on forward-looking information.

The key areas emphasised by the FRC are:

Strategic report

  • Non-financial information statement: The FRC highlights the need for the statement to be separately identifiable and for disclosures within it to be non-generic and clear.
  • Section 172 statement: The letter reminds companies that the Government has published a set of FAQs on what might be included in the report and also sets out the specific considerations that the FRC encourages Boards to disclose.
  • Environmental disclosures, including climate risk: While the non-financial information and section 172 reporting requirements don’t specifically require companies to disclose the impact of climate change on their operations, the FRC says these should be considered as part of the ‘emerging risks’ disclosure considerations by the Board. The FRCs Financial Reporting Lab has issued a report on climate-related corporate reporting which includes questions Boards should be asking themselves – read more here.
  • Analysis of the development and performance of the business: The FRC frequently identified strategic reports that did not appear to provide a ‘fair, balanced and comprehensive’ analysis of the development and performance of the business during the year. It cites examples including business reviews that failed to discuss the performance of acquisitions, the progress of transformation programmes, or significant changes or concentrations of credit risk.

2019 year-end reporting environment

Companies are expected to provide clear and detailed disclosure of areas exposed to heightened levels of risk and all areas of material estimation uncertainty. They should also ensure that the identification of these significant risks in the accounts are consistent with matters disclosed elsewhere in the annual report or externally.

All companies that are parties to contracts referencing LIBOR are also encouraged to start planning now for the transition to new rates, including consideration of the need to re-negotiate relevant contracts and agreements. Any significant risks arising from the issue of amendments to IFRS 9 and IAS 39 reflecting the global reforms of LIBOR in relation to hedge accounting should be disclosed. Read more.

Findings of FRC’s monitoring work

This section continues to emphasise the need for distinction between critical judgements and estimates, with detail of where the judgement impacts, and transparency of estimation uncertainties including sufficient adequate sensitivity analysis or range of possible outcomes.

The cash flow statement again is highlighted as often containing basic errors such as misclassification of cash flows. Where a material judgement has been made on presentation, this judgement should be disclosed and explained. Disclosure of supplier refinancing arrangements also continues to be an area of focus. Our article on the FRC’s Lab Report on ‘Disclosures on the Sources and Uses of Cash’ summarises the FRC’s expectations.

The FRC will continue to challenge disclosure of alternative performance measures (APMs) where there is failure to define these, or identify the IFRS numbers from which they are derived along with a reconciliation. Read more on the FRC’s expectations.

Thematic reviews and accounting standards

In the current climate, particular attention is paid to impairment of non-financial assets including the disclosures which, amongst other things highlighted in the letter, should clearly identify and quantify the key assumptions used in the cash flow projections (not just the discount and long term growth rates). This includes parent company investments.

As the IFRS 9 and IFRS 15 standards continue to be embedded, companies are encouraged to focus on greater clarity and transparency in those areas where there is opportunity for improvement in disclosures. The letter sets out specific questions that should be considered when reviewing the quality of these disclosures: you can read more on the FRC’s thematic reviews at:

The FRC also sets out its expectations about the clarity of IFRS 16 disclosures in the December 2019 year end accounts. Expectations include: a clear explanation of key judgements made, effective communication of both the balance sheet and profit and loss effect of the new standard, clear identification of practical expedients used and a well-explained reconciliation between operating lease commitments under IAS 17 and lease liabilities recognised on transition.

Both the letter and the annual review are recommended reading for companies as they start to draft their 2019 year-end financial statements.

Read FRC's Annual Review of Corporate Reporting 2018/19.

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