FRC: Financial reporting quality 'vital' amid economic turbulence

Continuing econonmic uncertainty serves as a reminder to businesses that consistent, high-quality financial reporting is more important than ever, a Financial Report Council (FRC) review has found.

On 5th September, the accounting watchdog published its fresh expectations for reporting amid “continous inflation”, having conducted an investigation into the reports of 263 UK companies. Inquiries were sent to 112 companies, with 25 ultimately being instructed to revise certain elements of their accounts.

The final report noted that impairements, judgements and estimates were the issues raised most frequently. This underscores the continuing economic uncertainties companies must consider, emphasising the importance of providing comprehensive explanations to aid user comprehension of the decisions made, it said.

Official for National Statistics data from September showed that consumer price inflation in the UK slowed marginally from 6.8% to 6.7%, which came as a surprise to experts.

But according to Gary Chadwick, audit director at DJH Mitten Clarke, a number of “significant corporate failures” have occured as a result of the current economic and geopolitical uncertainty seen in recent years.

“More transparency is needed with those investors and stakeholders. Enhanced disclosure regarding risks and uncertainties that are faced, together with how judgements affect the financial statements, would keep stakeholders more informed so that they can make informed and better decisions.”

The recent rise in interest rates and inflation may lead to adjustments in discounting rates and anticipated future cash flows for businesses, Chadwick noted. Additionally, he stated this could influence the assessment of asset impairment, recognition of provisions and contingencies, and potentially impact a business’s status as a going concern.

Sarah Rapson, the FRC’s executive director of supervision said: “During periods of economic uncertainty, it is especially vital that companies provide users of annual reports and accounts with decision-useful information.

“While the overall quality of company reporting we have seen remains consistent, companies should continue to familiarise themselves with FRC findings and expectations to ensure they are providing high quality disclosures.”

Cash flow statements

The FRC report found that cash flow statements were a commonly scrutinised area during the investigation, noting that it remains one of the most frequent reasons for companies making a prior year restatement.

However, the number of companies restating its cash flow statements decreased to seven from the 15 reported last year.

To combat restatement, DJH Mitten Clarke’s Chadwick stated that companies need to significantly improve their judgements by regular review and revisiting existing judgements regarding the estimations used, and to obtain advice where necessary.

“It is no doubt challenging when trying to predict future performance in the current environment, but improved disclosures around the basis of estimations and judgements where there is uncertainty can only aid investors and stakeholders and reduce the number of restatements.”

The FRC and Chadwick both said that it is vital that companies provide users of financial reporting and accounts with quality decision-useful information.

“Fundamentally a lack of good information can lead to poor decision making that ultimately affects public interest,” Chadwick stated.