The Financial Reporting Council (FRC) has called for improvements in areas such as corporate reporting, including key accounting judgements and estimates, eliminating basic errors and how companies have applied the principles of the UK Corporate Governance Code.
The FRC stated in an open letter addressed to finance directors and audit committee chairs: “In times of change and uncertainty – whether due to new accounting standards or broader economic events like the UK exiting the EU – management’s attention will rightly be focused on ensuring that there is quality disclosure around the key judgements and estimates they make in determining material matters in their reports and accounts.
“However, management also need to have effective procedures in place to ensure compliance with the basic reporting requirements of IFRS, which investors take as a given in audited reports and accounts.
Drawing upon findings from the FRC’s work on corporate governance and reporting in its Annual Review of Corporate Governance and Reporting 2017/18, the letter outlines its findings from the recently published report.
Brexit has been a continuous topic looming over financial discussions in the UK. The FRC’s letter addressed this area of reporting extensively.
It noted there is still a high level of uncertainty in respect of the final deal, regardless of the fact companies are strategizing in response to the UK leaving EU.
The FRC urged companies to provide disclosure that distinguishes between the specific and direct challenges to their business model and “broader economic uncertainties which may still attach to the UK’s position when they report.”
These uncertainties include threats such as import/export taxes or delays to companies supply chains. The FRC has expectations that the companies will clearly identify, and management will describe, any actions that they are taking or have taken to manage the potential impact caused by such threats.
The FRC’s executive director of corporate governance and reporting Paul George said: “A lack of transparency in financial and governance reporting, undermines trust in business. More accurate reporting and better governance practices are needed to reverse this trend.
“The UK faces challenges with corporate reporting after EU Exit. Companies should therefore do more to meet the expectations of the market and society in order for the UK to maintain its position as an attractive home for global capital.
“Recent developments in narrative reporting have raised fundamental questions about the purpose of companies’ annual reports. Reporting will need to evolve as a result and the FRC will begin a project to address the future of corporate reporting in response to these developments.”
The letter concludes with a call upon companies to consider issues which are mentioned. The date for the Code, “and the requirement to include a section 172(1) report in the strategic report” will have effect from the January 1st 2019.