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Highlights
FRC identifies continuing quality gaps in corporate reporting between FTSE350 and smaller listed companies
Impairment, cash flow statements, and narrative inconsistencies remain key areas of focus
Thematic reviews on share-based payments and investment trusts underline the importance of robust disclosure
The FRC Annual Review 2024/25 highlights key trends in corporate reporting, emphasising clarity, consistency, and disclosure quality across FTSE350 companies.
The corporate reporting landscape in the UK has seen continued attention from regulatory bodies, particularly the Financial Reporting Council (FRC), in its latest Annual Review of Corporate Reporting 2024/25. The review focuses on companies listed on the FTSE350, offering insights into reporting practices and highlighting areas requiring enhanced disclosure. Companies across various sectors, including financial services, consumer goods, and industrials, have been evaluated for compliance with existing standards and clarity in financial statements. The FRC’s analysis reflects persistent differences between FTSE350 entities and smaller listed companies, emphasising the need for comprehensive narrative reporting and accurate financial representation.
Quality of Corporate Reporting Across FTSE350
The FRC's review noted that the quality of corporate reporting across FTSE350 companies has been maintained. Companies in the FTSE350 generally demonstrate stronger compliance with reporting requirements compared to smaller listed companies. However, the review highlights that areas such as impairment testing, revenue recognition, financial instruments, and cash flow statements continue to generate substantive queries. Companies are encouraged to ensure consistency in explanations between the financial statements and narrative sections, providing users with a coherent understanding of the organisation’s performance and position.
Restatements and Key Areas of Concern
The number of restatements prompted by FRC reviews has reduced in recent years, though issues persist, particularly in companies outside the FTSE350. Cash flow statement restatements, often due to classification errors, have been a recurring concern. Impairment remains the most frequently raised topic, underscoring the importance of transparent disclosure regarding assumptions and judgements applied in the valuation of assets. Companies are urged to provide detailed explanations of critical inputs used in impairment calculations to support transparency in reporting.
Expectations for Directors and Reporting Teams
The FRC emphasises that directors should exercise careful judgement in preparing annual reports and accounts. Substantive questions are only raised when there is evidence of a material breach of reporting standards. Companies are advised to implement pre-issuance checks to identify technical compliance issues before publication. This includes reviewing top recurring issues, such as ensuring company-specific accounting policies for revenue recognition are clearly stated. Directors are expected to ensure disclosures of judgements, risks, and uncertainties are clear, consistent, and sufficiently detailed for users to understand the financial statements fully.
Narrative Reporting and Strategic Reports
Clear narrative reporting remains a priority for the FRC. Companies must present a fair, balanced, and comprehensive review of development, performance, and future prospects within their strategic reports. Compliance with climate-related reporting requirements is also highlighted, with the FRC recommending concise presentation that does not obscure material information. Companies are encouraged to review annual reports holistically to ensure that the narrative and financial statements tell a consistent and coherent story. The clarity, conciseness, and completeness of disclosures are essential elements of high-quality corporate reporting.
Thematic Review: Smaller Listed Companies
The FRC has announced a thematic review focused on the reporting practices of smaller listed companies, including those outside the FTSE350 and on AIM. The review addresses the quality gap observed between FTSE350 companies and smaller listed entities, particularly in areas frequently queried during monitoring. Key areas include impairment of non-financial assets, revenue recognition, financial instruments, cash flow statements, and related notes. The FRC aims to provide guidance on proportionality and transparency, outlining approaches that can enhance reporting clarity while maintaining compliance with accounting standards. This review is expected to offer insights for companies striving for improvement in reporting practices.
Thematic Review: Share-Based Payments
The FRC is also undertaking a thematic review of IFRS 2, Share-based Payments, targeting companies with significant share-based payment arrangements. The review will clarify expectations regarding recognition, measurement, and classification of share-based payments, highlighting areas where companies commonly misapply accounting standards. Emphasis will be placed on ensuring disclosures accurately reflect the financial impact and treatment of these arrangements within the annual report.
Thematic Review: Investment Trusts and Similar Entities
Investment trusts, venture capital trusts, and other closed-ended entities are another focus area for the FRC. Despite generally straightforward accounts, common issues have been identified, particularly concerning the fair value measurement of Level 3 financial investments. The thematic review will examine compliance with both IFRS and FRS 102, highlighting examples of good practice and areas where reporting could better meet disclosure requirements. Companies within the FTSE Dividend Yield space are encouraged to provide clear and transparent reporting in these areas.
Common Reporting Issues Identified by the FRC
Impairment, cash flow statements, and inconsistencies between narrative and financial statements remain the most frequent issues identified. The review also notes the need for improved explanation of significant judgements and estimates, particularly for impairment testing, revenue recognition, and financial instruments. Companies are advised to focus on enhancing disclosures, providing sufficient detail to allow users to understand the assumptions, methodology, and rationale behind key financial decisions.
Importance of Consistency and Clarity in Reporting
The FRC highlights the critical importance of ensuring that all sections of the annual report, including narrative reporting and financial statements, communicate a consistent story. Information should be clear, concise, and understandable, avoiding unnecessary volume that does not contribute to users’ comprehension. Companies are reminded to include all material information, even if not explicitly required by accounting standards, to facilitate informed decision-making by stakeholders.
Pre-Issuance Checks and Internal Review Processes
A robust internal review process is essential to prevent technical compliance issues. Companies should systematically review annual reports against frequently identified areas of concern, such as accounting policies, impairment calculations, and revenue recognition. Proactive identification of potential errors and inconsistencies can reduce the likelihood of restatements or substantive queries from the FRC. Ensuring that disclosures are company-specific and tailored to the organisation’s operations enhances the overall quality of reporting.
Disclosure of Judgements, Risks, and Uncertainties
Transparent disclosure of judgements, risks, and uncertainties is a focal point for the FRC. Companies are expected to provide sufficient detail regarding the assumptions underlying key financial decisions and estimates. Such disclosures enable users to understand the reasoning behind accounting treatments and provide insight into the entity’s financial position. Clear articulation of these elements contributes to a more comprehensive understanding of a company’s performance and prospects.
Enhancing Narrative Reporting
Narrative reporting is essential for delivering a complete and fair view of a company’s position. The FRC encourages companies to review the strategic report to ensure it presents an integrated view of development, performance, and future prospects. Compliance with environmental, social, and governance (ESG) requirements, including climate-related disclosures, should be concise yet thorough. High-quality narrative reporting helps ensure that stakeholders are well-informed about the company’s strategy and operational environment.
Step Back Approach for Annual Reports
Companies are reminded to take a step back when preparing annual reports, reviewing the document holistically. This approach ensures coherence between narrative reporting and financial statements, verifying that the report communicates a consistent and understandable story. Only material and relevant information should be included, preventing excessive disclosures that may obscure critical insights. This step back helps maintain the integrity and clarity of corporate reporting.
Thematic Review Timelines and Focus Areas
The FRC’s thematic reviews for 2025 will cover smaller listed companies, share-based payments, and investment trusts. Companies are encouraged to prepare by reviewing prior feedback and areas of recurring queries, ensuring compliance with standards and clarity in disclosures. Smaller listed companies are a particular focus due to the observed quality gap with FTSE350 entities, highlighting the importance of proportionality in reporting and transparent disclosure practices.
Implications for FTSE Dividend Yield Companies
Companies within the FTSE Dividend Yield framework are required to ensure clear reporting of dividend policies and financial impact. Transparency in earnings, cash flow presentation, and risk disclosure remains vital for maintaining high-quality reporting. Adhering to the FRC’s guidance can improve the reliability and clarity of annual reports for stakeholders.
Robust Financial Governance
Financial governance remains a central theme of the FRC review, with emphasis on internal controls, review processes, and board oversight. Directors are expected to exercise careful judgement and provide sufficient detail in all material disclosures. Companies demonstrating strong governance practices tend to maintain higher reporting standards, reinforcing the credibility of financial statements.
Interlinking Best Practices and Resources
The FRC encourages the use of structured internal review frameworks and benchmarking against best practice examples. Companies are advised to consult relevant resources and prior thematic review reports to understand common pitfalls and areas for improvement. Integrating lessons learned from past FRC reviews can enhance reporting consistency and accuracy.
