The regulator reviewed 203 annual and interim reports and accounts as part of its 2016/17 monitoring activities including three thematic reviews. Half (56%) of those reviews were closed without the need for follow-up action. The rest resulted in letters to the relevant company raising substantive queries that required a response.

The FRC says the quality of narrative reporting has improved following the introduction of the strategic report in 2013. There have been further improvements in the strategic report this year, but it remains an area subject to frequent challenge by the review team, particularly where there is insufficient balance or where disclosures are not sufficiently specific or descriptions too vague.

The regulator said it had continued to challenge the reporting of principal risks and uncertainties (PRUs) including where the description of the PRUs was unclear or insufficiently detailed; or only one PRU was disclosed; and the judgments made by the directors in determining the reported PRUs were unclear, such as risks relating to climate change in an oil and gas company.

Judgments and estimates was another area highlighted, even though the average number of estimates disclosed by the companies reviewed decreased when compared with their previous annual report. The FRC said it still identified a significant number of estimate disclosures that did not appear to have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next year.

The report stated: ‘Most companies in the sample improved the granularity and level of detail of their disclosures. However, it was disappointing that a significant minority still used elements of boiler-plate text, which could apply to any company and gave no additional useful information to users of the accounts.’

On accounting policies, the FRC challenged companies citing accounting policies for items or transactions that were immaterial, no longer relevant or non-existent; unnecessary repetition of accounting policy descriptions and other narrative; e.g. separate policies for impairment of goodwill and of indefinite-lived intangible assets; and boilerplate or irrelevant disclosures of the impact of new accounting standards that are not yet effective.

The other most frequent areas of questioning were business combinations; adjusting/ one-off/ exceptional or similarly described items; revenue; impairment of assets; financial instruments: disclosures; fair value measurement; and cash flow statement.

The FRC also cites the findings of a thematic review of the use of alternative performance measures (APMs) where the main concern was the use of the term ‘non-recurring’ and similar terms, for example, ‘unusual’, ‘infrequent’ and ‘one-off’ in connection with items such as restructuring costs and impairment charges.

The report stated: ‘For larger companies in particular, there will be few occasions when there is only one event in a period of years which drives such charges. We accept that there will be some cases where more than one year is affected, for example, a very substantial restructuring that is part of a single plan with a defined cost. However, we recommend that, in general, companies remove such terms from their definitions of APMs and select more accurate labels.’ 

Paul George, FRC’s executive director for corporate governance and reporting, said: ‘Whilst reporting is generally good, there is no room for complacency. Most companies seek to meet members’ needs through fair, balanced and understandable reporting.

‘Our report provides important information to those involved in the preparation of annual report and accounts. It highlights aspects of good practice, common areas for improvement and changing expectations of stakeholders. High quality and transparent reporting are fundamental to building trust and to the long-term success of UK companies and the wider economy.’

With Brexit on the horizon but a lack of clarity over the outcome, the majority of companies reviewed report continuing uncertainties with more detail than last year. They believe it is still too early to tell about the long-term effects and business impact of leaving the EU. The FRC is encouraging companies to provide as much detail as possible in their next annual report.

Mala Shah Coulon, associate partner in EY UK's corporate governance team, said many of the FRC’s findings echoed the firm’s own views, in particular the requirement to improve linkages across annual reports and to focus on providing information that is company-specific and material to the organisation.

‘In our view, focusing on actions and outcomes rather than providing information on processes and policies is one way companies can balance calls for increased disclosures while at same time keeping their annual reports clear and concise.

‘For example, articulating the key issues that were raised by employees as part of an employee engagement survey, the company's initial response and commitments made/specific actions that will be taken is more insightful than simply stating that an employee survey was undertaken. This would also enable stakeholders to engage better with companies on progress on key issues over time.

‘We also welcome the FRC’s focus on the need for high quality reporting on both value generation and stakeholder engagement, particularly given the increasing focus on these areas from the government and other stakeholders,’ Coulon said.

FRC’s annual review of corporate reporting is here.

The technical findings are here.

Report by Pat Sweet