Essential Corporate News – Week ending October 28, 2022

FRC: Annual Review of Corporate Reporting 2021/22

On October 27, 2022 the Financial Reporting Council (FRC) published its latest Annual Review of Corporate Reporting, which describes the activity and findings of its Corporate Reporting Review function for the 12-months to March 31, 2022. The report is primarily aimed at preparers and auditors, investors and other users of corporate reports and accounts. It is supplemented by a Corporate Reporting Highlights document and a Key Matters for 2022/23 Annual Reports and Accounts, which summarises key considerations for the forthcoming reporting season.

The FRC states that it is pleased to note that, despite the challenging environment, the quality of corporate reporting among the FTSE 350 has been maintained, with particular improvements in companies’ reporting of judgements and estimation uncertainty, impairment of non-financial assets, revenue and alternative performance measures (APMs). There has also been a significant advance in climate-related reporting with the introduction of reporting based on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations for premium listed entities on a comply-or-explain basis. However, the FRC notes that there is scope for improvement in some areas, particularly financial instruments and deferred tax, as well as cash flow statements. 

Reporting in uncertain times

The report notes that the Russian invasion of Ukraine in February 2022 sent geopolitical shockwaves around the world and exacerbated the economic uncertainty created by the Covid-19 pandemic. Rising inflation, slowing economic growth, increasing interest rates, stresses in supply chains, constraints in the labour market and changing consumer behaviour, are some of the challenges businesses are currently facing. It states that in this environment of heightened uncertainty, businesses need to be agile and continually reassess the evolving risks, which they will need to reflect in their strategy and reporting.

In light of this companies should clearly explain the risks and changes in the business environment they are facing and how the risks and uncertainties have been reflected in the strategy, business model and going concern and viability assessments. Explanation of the business performance and financial position at the end of the year should be made in the context of the business strategy and reflect the risks, and any changes to definitions and/or calculations of APMs (for example, inflation-adjusted measures) should be adequately explained.

Frequent topics that arise in correspondence with companies

The report lists the topics that the FRC has to raise most frequently with companies and it explores these in detail, providing bullet point summaries of the more significant or common issues identified during reviews. Case studies, including extracts from the CRR’s case summaries, together with extracts from the companies’ annual report and accounts, and comments to illustrate the improvements made, are included as good examples of the constructive way in which companies respond to enquiries. The topics are as follows:

• Cash flow statements
• Financial instruments
• Income taxes
• Strategic report and other Companies Act 2006 matters
• Revenue
• Provisions and contingencies
• APMs
• Judgements and estimates
• Impairment of assets
• Presentation of financial statements and other disclosures
• Leases
• Fair value measurement
• Business combination

Key disclosure expectations for 2022/23

The report sets these out as follows:

• Unambiguous description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, and cross-referenced to relevant detail in the reports and accounts.
• Specific, balanced and well-integrated information about the impact of climate change on the company in narrative reporting, and appropriate reflection of material climate-related commitments, risks and uncertainties in the financial statements; clarity about the relationship between assumptions and sensitivities considered in any TCFD scenarios (including any Paris-aligned scenarios) and those applied in the financial statements.
• Impairment disclosures that assign values to, and explain how, the key assumptions used have been determined, with reference to future expectations regarding external conditions and the company’s own strategy.
• Clear disclosure of significant management judgements and key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of reported amounts to changes in assumptions.
• Transparent disclosure of the nature and extent of material risks arising from financial instruments, including changes in investing, financing and hedging arrangements; the use of factoring and reverse factoring in working capital financing and the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
• Company-specific information that meets the disclosure objectives of the relevant accounting standards and not just the specific disclosure requirements. Additional information (beyond the standards’ requirements) should be included where needed to understand the impact of particular transactions, events or circumstances.
• Clear explanation of the nature of significant inflationary features in revenue, supply, leasing and other financing contracts, and their effect on the financial statements.
• Clear, concise and understandable disclosure that omits immaterial information.

(FRC, Annual Review of Corporate Reporting 2021/22, 27.10.2022)

(FRC, Annual Review of Corporate Reporting Highlights 2021/22, 27.10.2022)

(FRC, Key matters for 2022/23 reports and accounts, 27.10.2022)

Energy & Climate Intelligence Unit: Everybody’s business -The net zero blind spot

On October 18, 2022 the Energy and Climate Intelligence Unit, a non-profit organisation that supports informed debate on energy and climate change issues in the UK, published a report looking at how the pledges and plans for net zero set out by the world’s biggest private companies compare to their publicly-listed counterparts. The comparison includes both the existence and robustness of a net zero target, whether the company has set interim targets, published a plan outlining how it will reach net zero, is committed to report its progress annually and is clear about the scopes of emissions contained in its target, and planned use of offsets.

The report looked at 100 of the largest private companies worldwide and found the following:

• Only 32 have set net zero targets, compared with 69 of the largest 100 publicly-listed companies.
• The combined annual revenue of the private companies with net zero targets is $1.2 trillion; the figure for publicly listed companies is $10.5 trillion. 
• Only 13% (4) of the 32 private companies with net zero targets have published a plan to deliver on their pledges, versus 73% (50) of the 69 publicly-listed companies with net zero targets. 
• The private companies that have set a net zero target are less likely to include Scope 3 emissions within it, are less likely to have set interim targets, and give less clarity on their planned use of offsets. 
• None of the private fossil fuel companies investigated (8) has pledged a net zero target, compared with 65% of publicly-listed companies in this sector. 
• All 10 of the largest publicly-listed companies in the world have a net zero target or similar, compared with none of the largest 10 private companies.

(Energy & Climate Intelligence Unit: Everybody’s business -The net zero blind spot, 18.10.2022)