On October 21, 2016 the Financial Reporting Council (FRC) published its annual review of corporate reporting for 2015/2016. This report provides the FRC’s assessment of corporate reporting in the UK based on broad outreach and evidence, including that obtained from the FRC’s own monitoring work, performed by its Corporate Reporting Review (CRR) team, on cases opened in the year to March 31, 2016, and from more recently performed thematic reviews.
The report includes:
- an annual assessment of corporate reporting;
- an overview of corporate reporting enforcement activity; and
- current and future developments
Annual assessment of corporate reporting
The FRC concludes that although compliance with the accounting framework is generally good, particularly by larger public companies, certain areas of corporate reporting have, for several years, required general improvement. The profile of these issues has been raised through annual activity reports, discussions with audit firms and the use of generic press notices.
There have been improvements in some of these areas this year, for example in respect of the disclosure of principal risks and uncertainties (PRUs) and capital management policies. Fewer instances were in evidence this year of:
- boilerplate PRUs;
- lack of discussion of how risks are managed; and
- capital management policies that failed to explain management’s approach in sufficient detail or provide the necessary quantified information.
In addition, there were fewer issues relating to cash flow statements, in particular relating to misclassifications between operating, investing and financing activities.
The review sets out the more significant findings from this year’s monitoring activity relating to the financial statements and the strategic report.
Corporate reporting enforcement activity
This section provides an overview of the disciplinary cases which have been concluded under the FRC Accountancy Scheme in the year to 31 March 2016. In April 2016 the FRC introduced changes to its enforcement and disciplinary arrangements in preparation for the implementation of the EU Audit Regulation and Directive. With effect from June 17, 2016 the FRC implemented a new Audit Enforcement Procedure for new statutory audit cases.
Current and future developments
In this section, the FRC provides an overview of current and future developments in corporate reporting and the expected impacts, including:
- Implications of Brexit for corporate reporting – The legislation underpinning the preparation of financial statements in the UK is generally derived from European law. Therefore, the decision to leave the EU may have significant implications for the corporate reporting framework in the UK, subject to the form and content of the UK settlement with the EU. Over the coming months the FRC will carry out a review to identify potential risks to the reporting framework at, and subsequent to, the date of exit from the EU. The FRC will also consider opportunities for improvement to more closely meet the needs of UK stakeholders.
- Current debates on the future of corporate reporting – The annual report focuses primarily on the information needs of investors, but increasingly there are calls for the provision of information to a more diverse set of stakeholders reflecting the wider societal impact of companies. Given developments in digital communication which are changing the ways people distribute, consume and analyse information and facilitating the reporting of some information outside the annual report, the annual report can be seen as one part of a wider framework of reporting by companies to their stakeholders. These two drivers, calls for greater accountability to stakeholders other than shareholders and new communication channels arising from technological developments, will continue to change the form and content of corporate reporting in the broadest sense.
- New International Financial Reporting Standards (IFRS) and their adoption in Europe – Whilst the UK remains in the EU the legislative framework for the adoption of new IFRS will remain the same. New IFRS are reviewed and adopted on a standard-by-standard basis. IFRS requires disclosures in the financial statements on the future impact of standards before their effective date and as that date approaches the FRC expects those disclosures to become more detailed and descriptive.
(FRC, Annual Review of Corporate Reporting 2015/2016, 21.10.16)