October 25, 2023 Quality corporate reporting
The Government’s announcement on 16th October 2023 that it was withdrawing draft regulations on corporate reporting was widely welcomed by the business sector. The draft regulations would have required large companies to enhance their annual statements by including additional information covering areas such as annual resilience, material fraud, and distributable profits calculations.
Commenting on the Government announcement Julia Hoggett, CEO, London Stock Exchange plc, said: “Releasing listed companies from the additional reporting burdens that were proposed is another step toward the level playing field UK companies need to compete and drive the growth economy to the benefit of all stakeholders.”
The Government decision was partly driven by an ongoing consultation which aims to reduce the red tape burden on UK business whilst ensuring that corporate reporting continues to provide investors and other stakeholders with the information which they need in order to make balanced judgements. With that in mind, how should companies approach the annual reporting round in order to ensure that they provide quality reports which deliver true insights?
Helpfully, in October the Financial Reporting Council (FRC) released its annual review of corporate reports. On a positive note, the FRC commented that the general quality of corporate reporting previously seen had been maintained.
However, it also acknowledged that “companies are still at very different stages of maturity in their reporting.” And whilst ‘alternative performance measures’ has fallen out of the top ten areas of concern this year, there is still more work to be done in areas such as impairments, judgements and estimates. The FRC speculated that difficulties in these areas may have been exacerbated by current economic uncertainties. However, when uncertainty leads to additional risk, companies should look to provide a greater depth of commentary.
Number three on the FRC’s top ten list of concerns relates to cash flow statements. Discrepancies here have led to a number of companies having to restate their results. Key areas of concern appear to be a lack of reconciliation between cash flow statements and other financial information as well as the classification and reporting of non-cash items within cash flow statements.
With the strategic report, financial instruments, taxes and revenues, contingencies, and fair value calculations also being areas of concern, the key message seems to be one of ensuring that basic information is cross-checked; with clear explanations being included within the annual report. That is echoed in the final area of concern, the way in which financial statements are presented. Rather than using boilerplate language, the FRC comments that company-specific information about material accounting policies should not only be disclosed but should also come with an explanation of how the policies apply to the company’s particular circumstances.