Director JS Penny Ltd
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Corporate reporting: FRC to focus on climate-related risks


The Financial Reporting Council (FRC) is set to closely review climate-related reporting as from next year premium listed companies will need to disclose compliance. Meanwhile, the watchdog has also revealed that despite Covid there has been no decline in reporting standards.

16th Nov 2021
Director JS Penny Ltd
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Each year the FRC issues its review of the quality of corporate reporting of public and large private companies. This report is always of relevance to those who prepare and audit such accounts, but it is also of relevance to others, dealing with smaller entities.

In line with many FRC activities the level of work has expanded this year with 246 annual reports reviewed – a 14% increase on last year.

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Increased resources have also meant the FRC has been able to carry out more thematic reviews on topical issues. This year substantive questions were raised with 97 companies asking for further information which generally led to commitments to improve disclosures.

Where companies do not fulfil such commitments the FRC takes further action, but only one case had to be re-opened in this respect in the current year.

Positive notes

This year’s Review of Corporate Reporting starts on a positive note, highlighting that the FRC is pleased to see that no decline in reporting standards due to Covid were apparent.

It also noted that companies had responded to the additional guidance on Covid issues (which was extensive) that they had published.

Still on a positive note, was mention of incremental improvements in the quality of information in strategic reports and in the disclosure of significant judgements and estimation uncertainty. Of course the report does go on to mention areas where improvements are necessary, but this year’s report and the language used sets an altogether more encouraging approach.

Perhaps there is a realisation that people respond better where you can show you recognise the good in what they are doing, before moving on to explain where they can get even better.

Frequently raised topics

The report provides a summary of the 10 most frequently raised topics (so a lower number means a bigger problem):

Topic 20/21 19/20 18/19
Judgements and Estimates 1 1 1
Revenue 2 3 10
Statement of Cash Flows 3 7= 5
Impairment of Assets 4 2 4
Alternative Performance Measures 5 5 3
Financial Instruments 6 4 8=
Strategic Report and Companies Act 7 6 2
Provisions and Contingencies 8 7= 7
Leases 9= - -
Income Taxes 9= - -
Fair Value Measurement - 9= 8=
Business Combinations - 9= -


Although the table lacks the nuances and detail given further in the report it is useful in showing that almost inevitably judgements and estimates continue to top the table.

This area will always, by definition, be subjective and disclosures need to be considered carefully, bearing in mind the overall objectives set out in IFRS. Indeed, in relation to all items the report highlights that just providing individual disclosures as set out in the standards are insufficient if, overall, the objectives of the disclosures are not met.

Lack of understanding in IFRSs

Perhaps worryingly, there continues to be evidence that there is a lack of understanding or knowledge of the detailed requirements in IFRSs.

Mistakes of a technical, rather than a judgemental, nature were found in many of the above areas. This is evident in respect of cash flow statements, which is sadly an area that has worsened.

The FRC conducted a cash flow statement thematic review in 2020 to help identify the areas that need improvement. Another area of concern is the recognition of deferred tax assets by loss-making entities. The pandemic may mean more companies have tax losses to carry forward and there is strict guidance as to when these can be recognised as an asset, which is not always adequately considered or disclosed.

Climate related risks

It is also worth picking up some of the climate-related issues identified. For example, in respect of impairments the FRC queried whether climate change and the move to decarbonisation by carbon intensive companies were considered as impairment indicators. Clearly if a company owns coal fired power stations, the requirements set out in law to tackle climate change (such as required under the Paris Agreement) may make such assets redundant and the question then is whether they are already impaired.

The FRC also noted that it had queried the calculation of a provision for decommissioning fossil fuel assets, where it wasn’t clear how climate change had been taken into account in the calculations.

Many of the issues connected with climate change are relatively new territory to both accountants and their auditors. It is vital that the impact on risks, judgements and estimates in particular are considered carefully, as well as the work required in respect of specific disclosure obligations.

The report provides some examples of areas that should be considered in the light of decarbonisation requirements:

  • Impairment of individual assets or cash generating units;
  • Useful economic lives of assets;
  • Expected amounts and timing of cash outflows for provisions and other liabilities;
  • Fair values of assets and liabilities;
  • Disclosure of key accounting judgements, estimation uncertainties and related sensitivities.

Further information is provided in the FRC Climate Thematic.

The priorities for 2021/22 include a focus on climate-related risks, new disclosures, and judgement and uncertainty in the face of the continuing impact of Covid-19. None of these should be much of a surprise and given the recent Cop26 event in Glasgow, at which the formation of the International Sustainability Standards Board (ISSB) was announced, the need for focus on climate issues is clear.

I will speak more on climate-related reporting at AccountingWEB Live Expo in Coventry on 1-2 December.

Next year premium listed companies will need to disclose their compliance with the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations.

The FRC will therefore be looking at how well such companies have met the requirements, but will also be considering the quality of disclosures under the Streamlined Energy and Carbon Reporting Rules (which we looked at in an earlier article).

If you are responsible for preparing or auditing IFRS accounts this report will provide much of interest, including helpful examples of good disclosures as well as what doesn’t pass muster. The report concludes with the FRC’s key disclosure expectations for next year. This is a bit like being given the exam questions in advance - so make sure you take advantage!


Julia Penny will be speaking at AccountingWEB Live Expo on 1-2 December. She will be hosting a financial reporting session with Steve Collings and will be putting the spotlight on anti-money laundering compliance in a session with AccountingWEB regular David Winch. Register to attend and claim your FREE ticket today


Replies (1)

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By AquaCool
02nd Dec 2021 11:31

Nice resource and very usefull

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