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Audit and assurance

Corporate reporting bulletin

Below is a summary of recent developments in financial reporting, corporate governance, narrative reporting and audit. You will find more detail within each heading, together with useful links to more information.

Recent developments

Financial Reporting

FRC Annual Review of Corporate Governance and Reporting 2017/2018 published

The Financial Reporting Council (FRC) has published their Annual Review of Corporate Governance and Reporting 2017/18 and an open letter to Finance Directors and Audit Committee Chairs calling for improvements in key areas of corporate reporting.

Key areas identified for improvement include reporting of critical judgements and estimates, and the elimination of basic errors in the annual report and accounts. The Annual Review sets out the issues most commonly raised by the FRC in their reviews of annual reports, with the disclosure of judgements and estimates continuing to be at the top of the list. Other commonly raised issues include:

  • Alternative Performance Measures (APMs)
  • the Strategic Report
  • income taxes
  • revenue
  • business combinations
  • impairment

The FRC also set out what they expect to see in accounts for years ended 31 December 2018 in respect of the adoption of IFRSs 9 (Financial Instruments) and 15 (Revenue from Contracts with Customers), and disclosure of the expected impact of IFRS 16 Leases.

Other topical areas of reporting are also highlighted, including:

  • Britain exiting the EU
  • complex supplier arrangements
  • risk and viability reporting 
  • the Strategic Report
  • Alternative Performance Measures (APMs)

More information, including links to both the letter and the Annual Review of Corporate Governance and Reporting 2017/18, is available on the FRC website.

FRC publishes thematic review findings on IFRS 9 and IFRS 15 company disclosures

The Financial Reporting Council (FRC) has published two thematic reviews to help companies improve the quality of their corporate reporting in relation to the new accounting standards IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments.

The reports analyse the disclosures in a sample of companies’ June 2018 interim reports in relation to the adoption of the new standards and provide examples of better practice in explaining their effect. The FRC notes that it expects other companies to use these examples to benchmark their own disclosures in upcoming reports and accounts.

The FRC has encouraged companies to invest sufficient time during their year-end preparation to ensure that transition disclosures are comprehensive and company-specific and note that they will challenge companies who do not provide an adequate level of disclosure about the impact of the new standards.


In respect of IFRS 15 key findings include a number of areas where disclosures could be improved. For example, information about transition adjustments recognised, explanation of the changes made to accounting policies and information about performance obligations, a new concept introduced by IFRS 15, including judgements made in determining performance obligations and when they are considered to be satisfied.


In respect of IFRS 9 the FRC highlights for improvement the quantification of the effect of estimation uncertainty in measuring expected credit losses and disclosure of the sensitivity of the amounts to changes in assumptions and estimations and / or a range of reasonably possible outcomes and evidence of consideration of the potential impact of the new standard, even where it does not have a material effect.

The reviews can be accessed from the FRC website.

FRC publishes thematic review – reporting by smaller listed and AIM quoted companies

The FRC has issued a report which looks at certain aspects of reporting by smaller listed and AIM quoted companies. The FRC reviewed the reports and accounts of 40 companies to consider:

  • Alternative Performance Measures (APMs) and Strategic Reports;
  • pension disclosures
  • accounting policies, including critical judgements and estimates
  • tax disclosures
  • cash flow statements

The topics were selected from previous FRC thematic reviews, which focused on larger companies, and other aspects identified through the FRC’s regular monitoring activity.

While the review identified some better examples of smaller companies’ disclosures, it also identified several areas requiring improvement. Companies should provide more specific disclosures of significant accounting judgements and more quantitative information on key sources of estimation uncertainty. The FRC also found that companies could do more to ensure that the classification of cash flows complies with IAS 7 Statement of Cash Flows and that all sections of the report present APMs in a balanced and transparent manner.

The report contains a helpful ‘reminders’ section which can be used as an aide memoir to assist companies in considering the requirements of the Companies Act and relevant IFRSs.

The report can be accessed from the FRC website.

FRC thematic reviews of corporate reporting for 2019/20

The FRC has stated its intention to continue analysis of the adoption of IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments). They will perform follow-up reviews on companies’ disclosures around revenue and financial instruments, and their impact, in a sample of annual reports. The assessment will cover companies’ compliance with the more extensive set of year-end disclosure requirements. In addition, the FRC will also undertake thematic reviews of:

  • impairment of non-financial assets
  • the effect of the new IFRS on leases in companies’ 2019 interim accounts
  • the effects of the decision to leave the EU on companies’ disclosures

Samples will be selected from those sectors which are more heavily impacted by the new reporting requirements. The FRC will select companies for its impairment review predominantly from sectors of the economy that are currently under pressure. It will also review the accounts of those for whom circumstances and events in the current year indicate that impairment may be a significant matter. Some, but not all, companies in the sample will be pre-informed of the review.

The FRC will also conduct a focused review of the information reported in June 2019 interim reports of a number of companies, focusing on industries where the adoption of the new standard, IFRS 16 Leases, may have a material effect.

FRC publishes factsheets on FRS 102

The FRC have issued a suite of staff factsheets on aspects of FRS 102, including the 2017 triennial review. The factsheets are intended to assist stakeholders by highlighting certain requirements of FRS 102. 

The factsheets cover the following topics and can be accessed from the FRC website:

Fact Sheet 1 - FRS 102: Triennial Review 2017 Amendments 
Fact Sheet 2 - FRS 102: Triennial Review 2017 Transition 
Fact Sheet 3 - FRS 102: Illustrative Statement of Cash Flows 
Fact Sheet 4 - FRS 102: Financial Instruments 
Fact Sheet 5 - FRS 102: Property: Fair Value Measurement 
Fact Sheet 6 - FRS 102: Business Combinations 
Fact Sheet 7 - FRS 102: Transition to FRS 102 

IASB clarifies its definition of material

The IASB has issued amendments to its definition of ‘material’ making amendments to IAS 1 (Presentation of Financial Statements) and IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors).

The amendments are a response to findings that some companies experienced difficulties using the previous definition when judging whether information was material for inclusion in the financial statements.

Previous definition: Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.

New definition: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

The changes are effective from 1 January 2020, but companies can decide to apply them earlier.

The amendments have not yet been endorsed by the EU.

The press release can be found on the IASB website.

IASB amends definition of business in IFRS 3 (Business Combinations)

The IASB has published definition of a business, amendments to IFRS 3. The amendments are effective for business combinations which occur in the first annual reporting period beginning on or after 1 January 2020. Early adoption is permitted. The amendments have not yet been adopted by the EU.

The amendments include a revised definition of a business.

Previous definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

New definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others.

The amendments also include those which will help an entity in determining whether it has acquired a business or a group of assets.

The press release can be found on the IASB website.

FRC Financial Reporting Lab (the Lab) news 

Reporting on the sources and uses of cash

The Lab is calling for investors and companies of all sizes to participate in a new project. 

Following on from the Lab’s reports on risk, viability and dividend policy this project will explore best practice disclosures around the sources and uses of cash. It will consider how reporting on the location, nature and availability of cash within a group, as well as future uses of cash, can be presented in a way that is most useful to investor decision-making.

More details can be found on the FRC website.

Artificial intelligence and corporate reporting

The Lab has published the latest in its series of reports looking at how technology might impact the production, distribution and consumption of corporate reporting. The report explains what artificial intelligence is, where its use might make sense in corporate reporting, and explores some of the possible and current use cases for the technology.

The report can be accessed from the FRC website.

Corporate Governance

The Wates Governance Principles for large private companies

Governance principles and guidance have been published for large private companies. The principles and guidance are intended to help large companies comply with legislation that requires companies of a significant size to state in their directors' reports whether and how they follow a code of corporate governance. The relevant legislation is the Companies (Miscellaneous Reporting) Regulations 2018 which applies for financial years commencing on or after 1 January 2019. Companies will be able to adopt the Wates Principles as an appropriate framework when making a disclosure about their corporate governance arrangements under the new reporting requirement.

A company that adopts the Wates Principles should follow them using an ‘apply and explain’ approach in a way that is most appropriate for their particular organisation. Accordingly, boards should apply each Principle by considering them individually within the context of the company’s specific circumstances. They should then be able to explain in their own words how they have addressed them in their governance practices.

The Principles address purpose and leadership, board composition, director responsibilities, opportunity and risk, remuneration and stakeholder relationships and engagement. Each Principle is supplemented with guidance.

The Principles can be accessed from the FRC website.

Narrative reporting

FRC Financial Reporting Lab (the Lab) publishes guidance on the presentation of performance metrics

The Lab has released phase two of its report on performance metrics.

The guidance, 'Performance metrics - principles and practice', includes examples of how companies can apply the principles outlined in the Lab’s earlier phase 1 project report, 'Performance metrics - an investor perspective', published in June 2018.

The five principles identified for reporting performance metrics are that they are:

  • aligned to strategy
  • transparent
  • in context
  • reliable

The latest version of the report provides details around how companies understand these principles and how they can ensure they appropriately address the needs of users in relation to reporting performance metrics.

The report can be accessed from the FRC website

Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018

On 9 November 2018, the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 were published.

The regulations amend the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 to require additional reporting on emissions, energy consumption and energy efficiency action by quoted companies, large unquoted companies and large LLPs.

The regulations will come into force on 1 April 2019 and have effect in respect of financial years beginning on or after 1 April 2019.

The legislation can be accessed from the Government website.

FRC Lab implementation study: business model reporting, risk and viability reporting – where are we now?

The FRC Lab (the Lab) have issued a report which considers how business model and risk and viability reporting has changed since the Lab published its original reports on these areas in 2016 (business model reporting) and 2017 (risk and viability reporting). The Lab notes that whilst there have been some good developments, investors continue to emphasise the need for reporting to be more consistent and clearly linked throughout a company’s annual report. Investors value disclosures that tie business model, strategy, risk and viability together to enable them to assess progress against strategy and management. 

The report includes examples of current practice that demonstrate where companies have enhanced the value of their disclosures.

The report can be accessed from the FRC website, as can copies of the earlier reports referred to above.


FRC audit quality thematic review

The FRC have issued the results of a thematic review looking at auditors’ work on Other Information in the annual report. The Other Information is all financial and non-financial information included in an entity’s annual report other than the financial statements and the audited parts of the directors’ remuneration report. Other Information includes the strategic report, the directors’ report, the corporate governance statement and the directors’ remuneration report. This information is helpful to investors in assessing a company’s future prospects.

The FRC note that the nature, extent and quality of the work performed by audit teams on the Other Information vary considerably both between and within audit firms. While the FRC identified instances of good practice in the audits that it reviewed, there were too many instances where insufficient work was performed to support the statements made by auditors in respect of the Other Information in their audit reports.

The key message is that auditors must improve the extent and quality of the work they perform on the “front end” of annual reports. Key areas for improvement include the directors’ fair balanced and understandable statement, principal risk disclosures, the viability statement, KPIs and the directors’ remuneration report. 

The report can be accessed from the FRC website.

FRC announces 2019/20 audit areas of focus

The FRC has announced the 2019/20 audit thematic reviews, priority sectors and audit areas of focus. The key audit areas of focus are going concern and the viability statement, the other information in the Annual Report, long term contracts and the impairment of non-financial assets. 

The thematic review topics are audit quality indicators and the use of technology in audits.

Priority sectors are those considered by the FRC to be particularly high risk in terms of corporate reporting and audit by virtue of particular economic or other pressures. Priority sectors in 2019/2 include general retailers and retail property, business support services and construction and materials.

The full announcement can be accessed from the FRC website.

FRC withdraws Practice Note 25 (Attendance at Stocktaking)

The FRC has withdrawn Practice Note 25 (Attendance at Stocktaking). This is because much of the content is covered by application material in ISA (UK) 501 Audit Evidence – Specific Considerations for Selected Items and other ISAs (UK).

CMA statutory audit market study

The Competition and Markets Authority (CMA) is carrying out a market study into the statutory audit market, to see if the market is working as well as it should. In December 2018, following  earlier consultation and analysis of the audit sector, the CMA published an update paper in which it outlined serious competition concerns and proposed remedies to improve the audit sector. The deadline for views on the proposals outlined in the paper was 21st January 2019, following which a decision on recommendations to be made to Government will be made.

The update paper, as well as other documents relating to the market study can be accessed from the Government’s website.