FRC Annual Review of Corporate Reporting

There is a continuing trend to do reviews of the past year highlights. I'm a particular fan of the Spotify Wrapped series which gives you a playlist of your most played songs in the year. The 2022 edition is fast approaching, a great way to see how my eclectic music tastes have evolved over the 12 months. But what better way to accompany that great music with the Financial Reporting Council's Annual Review of Corporate Reporting. Remember I am a financial reporting nerd...

They've even done their Top 10 and shown how the errors have changed in the rankings each year! I feel an analogy emerging with Top of The Pops but I think I might be going too far as I have a fear that most of my connections on LinkedIn, wouldn't even know what Top of The Pops was!

At number 1, it's the cash flow statement:

• there continues to be misclassifications of group cashflows (subsidiary loan advances and receipts) particularly between investing and financing cashflows; and operating cashflows in individual parent company accounts. Hopefully the IASB's Primary Financial Statements project might focus attention more on what activity sits in an operating and financing category, accepting that this project is principally focused on the distinction in the income statement.
• non-cash flows continue to feature in the cash flow statement. I think its fair to say that this particular issue has been around far too long, as I remember early on in my career being reminded that the cash flow statement isn't a mathematical exercise, it requires real thought on a line-by-line basis to spot those cash flows and remove the non-cash items.

At number 2, its financial instruments:

Now it surprises me this wasn't higher in previous years as I believe that financial instruments have become so complex, partly as a result of more complex financial instruments but also as a result of a limited number of people who have genuine expertise in this area. I will put my chips on the table and state my belief that this will occupy number 1 next year for this reason, given the context of the current economic volatility.

The narrative disclosures around risk and liquidity appear to be the key issue but I do wonder if disclosures were more thorough, which they should be, that might then cast doubt on whether the underlying issue isn't more than just disclosure. The explanation of ECLs also feature and I suspect they will come under far more scrutiny going forward as they are being stress tested presently.

Number 3 brings income taxes:

Deferred tax, in my personal view, is far trickier than it needs to be. But what's surprising is that many of the findings appear prima facie quite easy to resolve: disclosure of reconciling items, disaggregation of effective tax rates and better narrative to support the recognition of deferred tax assets. Perhaps the standard has been around for such an amount of time that people know how to navigate its complexities (quirks) and its just about explaining these items better?

The remaining positions in the league table bring no real surprises unfortunately with the regular items largely moving around a few spots in the league table from previous years: revenue, impairment, provisions, APMs, judgements and estimates remain in the top 10 list. I won't go through each in detail as the report from the FRC is really good reading (I promise!). Annual Review of Corporate Reporting 2021-2022 (frc.org.uk)

Its a shame the FRC don't do a Top 10 of the best examples of corporate reporting in 2022 but alas they start with the rotten tomatoes.