Kathryn Donkersley: Good morning and welcome to our latest accounting and reporting updates. My name is Kathryn and I'm a Director in PwC's Corporate Reporting Services team.
Today, I am joined firstly by PwC's ESG expert and guru on all things sustainability reporting, Ollie Law. And secondly, I am delighted to welcome a special celebrity guest to the webcast. We have Andrew Watchman, Director of Corporate Reporting Review at the FRC here with us today. Many thanks both of you for joining us.
So on to today's agenda. We will be starting with the front half of the annual report with an update from Ollie on all of the latest news. We'll then be turning to Andrew to hear all about the FRC's recently published annual review of corporate reporting and highlighting some recent thematic reviews.
As always, we'll be saving time at the end for your questions. So please do use the box on your screen to submit those throughout the webcast and they will come through to us here in the studio.
So, starting with the front half and turning to you, Ollie, last time back in July you were talking about a lot of then current and upcoming consultations. Can you give us an update?
Ollie Law: I absolutely can. So, there are some now closed consultations. So, the three that we discussed at our previous webcast around transition plans, an oversight regime on sustainability reporting and then the sort of the big one, which was sustainability disclosure standards.
The sustainability disclosure standards consultation was a little bit more advanced in terms of where it is in its timeline. So, we'll spend a little bit of time just reflecting on that now. And the other two we'll hear more about over the over the coming months.
So, sustainability disclosure standards, that consultation is closed and what we are now waiting for is for the endorsement of those standards. So, all the feedback that everyone has submitted, including ourselves, other sort of auditors and our clients as well, that will all be collated and worked through. And then the standards will be endorsed. There may be some tweaks that are made, etcetera.
And then what we do or what will happen from that point is there's probably 2 prongs that we need to look at. So, the first is for our listed companies. So, the FCA, they will release a consultation on updating the listing rules and look at how our listed, how listed companies will apply those standards when they come out.
And then we also have another follow up consultation from the DBT, which will look at how they get endorsed through the company's act and how that will apply to economically significant entities. Which, if we think back to the consultation and the last webinar, that was a phrase that wasn't necessarily defined, but they're used as, as part of that.
I'd love to sit here and give, you know, appropriate time scales and, and when those consultations will come out and implementation dates, but we're not quite there yet. So, sort of over the next, I'll say couple of months, but we're nearly at the end of 2025, aren't we? Sort of over the next couple of weeks, but it it's more likely looking into 2026.
Alongside that, we've also had some government updates as well. So as part of their aim to reduce the burden on companies, we had announcement in October that looks at sort of firstly removing the director's report. Not everything will go from that. There will be some bits that were moved around the annual report.They did mention streamlined and energy and carbon reporting, so that will still be here. We've just been in a different location, but we don't know sort of the insurance and outs of that just yet.
They will also look to remove the requirement to produce a strategic report for medium sized companies and also for UK subsidiaries of UK parents where they're incorporated as well. So, they'll remove the strategic report for them as well. So, some potentially big changes coming through.
Again, timing of those were a little bit up in the air, but that may feature and form parts of the final point on the slide, which is it says the future of non-financial reporting, but it's been renamed as sort of the modernization of corporate reporting. So that will look at non-financial reporting, but it's also been expanded into financial reporting, governance and remuneration reporting.
That's a pretty bold, DBT S words, not mine, bold consultation that will cover as I say a number of topics. Early 2026, maybe a little bit late depends what you define as early, but sort of looking at H1 of 2026 for that. So, a lot of things a lot of moving parts going on, but just not quite there on the timings just yet.
Kathryn: Understood. I am I suspect many watching this will be happy to hear the words reducing the burden. I suspect that falls within the bucket of unclear timing. Does it?
Ollie: Yeah, absolutely. There's a lot of as I say a lot of moving parts, but the real focus of all of these is around reduction. And I appreciate that some of the timing, particularly for December year ends, these consultations may come out when you know, they're in the sort of the thick of producing annual reports and accounts, etcetera. But I just really encourage something engagement, whether that's with your auditors, advisers, design agencies, whoever you can get to, to speak to, because ultimately it's going to be the audience that reports against this. It's, sort of not us as sort of the, the, the technical sort of accountants, it's going to be you guys. So, if you've got any issues, please do raise that because they do listen and it is going to be bold.
Kathryn: Thanks very much, Ollie. So, turning to you, Andrew, welcome to the webcast. We are very happy to have you. So, I know that you quite recently took on the big role of leading the corporate reporting review team over at the FRC. So firstly, congratulations. Have you got any immediate ambitions for corporate reporting review under your watch?
Andrew Watchman: Well, thank you, Kathryn. Glad to be here. I'm about coming up to five months into my role, but I'm now in my, I think it's 39th year of a career that's one way or another focused on corporate reporting.
And one reason I took this role, this stage in my career is that I've always had a huge respect for the work, the corporate reporting review team and the, the team I've inherited. I said in my interview that any CRR publication was issued whatever else was going on, that would go straight to the top of my reading list. I've got the job now, so I don't actually need to repeat that. But it's, it's said in all sincerity and I think that reflects the, the technical ability of the team, the care and rigour that goes into the reviews that the commitment to the public interest.
So, so of course I want to maintain build on all of that, but we do need to move with the times. One element of that is responding to changes in the reporting requirements. So, you know, all these outline perhaps some longer term direction of travel, but already on the horizon we've got things like AFRS 18 coming into effect 2027. Mustn't forget the very important changes to FRS 102 coming into effect next year. We need to obviously deal with all of that, figure out how that effects our work.
No surprise to hear that we're looking at AI and how that can make our work, how we can use that effectively but safely. And at this stage, certainly not taking away any of the, the human judgement that's so fundamental to what we do.
But to pick out one thing I'm personally very passionate about, the core of our work is reviewing typically 220 to 260 annual reports each year. And undoubtedly our process, our engagement will drive improvements where necessary in, in the reports we look at. But there are about 10,000 companies within our remit that's listed companies, large private companies, also LLPS. And if we want to actually make a difference to that whole population, we have to be really good at identifying the key messages, the key recommendations that stem from those messages and kind of getting the word out there. So that's one reason I'm very pleased to be here today.
Kathryn: Thanks so much, Andrew. And we are going to talk about some of those publications that used to be at the top of your reading list. We will start with the annual review of corporate reporting. So this is a report that your team publish every year in the autumn. My experience is that it is a very helpful resource for companies as they gear up to year ends. Can you tell us a bit about it?
Andrew: Sure. Well, we published an interview at the end of September. We tried to make sure it's kind of out there in time. So companies with 31 December year ends can make full use of it.
I'll start with kind of why we published this document. You ll appreciate that this role of monitoring corporate reporting and so challenging companies where necessary. That's basically a statutory responsibility that kind of vests in the Secretary of State but is delegated to the FRC. So, we very much want and need to be accountable and transparent as to how we've gone about discharging that really important responsibility. So, accountability and transparency are part of the objective.
But the other piece is that it is a key part of doing what I just referred to, kind of leveraging off the findings from the work that we have done and hopefully turning that into something that's a useful practical aid for companies looking to actually maintain and improve their quality. There s plenty of guidance out there, plenty of really useful guidance out there. But we feel that there's something that's actually based on the real-life findings by the regulator is hopefully very useful.
In terms of key messages from 20/24/25 ever. Overall, It's quite a good news story I think. So, our kind of main metric for quality of proxy is the number of our reviews that or the ratio of our reviews that result in some kind of substantive challenge to companies.
We write a letter if we have comments, questions, then we divide those into substantive challenges or observations where we'd like the company to actually respond and engage with us and what we call appendix points, which matters that we want the company to take seriously, if you will, but we don't require a response.
And so that ratio of substantive challenges is what we call the right rate and that's gone down slightly. It's gone down from just under 50% to just under 40%. That's a good thing. Among the top 350 based on that metric, quality is already quite high and that high quality has been maintained. That's all already good.
We're not kind of shouting from the rooftops about this just yet because these it's not yet a sustained trend, but promising, let me put it that way. Perhaps on the other side of the Ledger, we do one of the more I guess more commonly referred to pages of our review as our top 10 findings. So the top 10, so very good, very good.
So, there are some, I'll call them persistent offenders among those top 10. Some points are a bit sticky. If I, if I pick out two, it's an impairment and cash flow statements, probably no, no big surprise
So, we're very much going to maintain focus in our work on those areas. It's indeed all the areas in the top 10.
But I think there's some threads that run through all of our or most of our common areas of challenge, which are first of all, what often we do desktop reviews for the most part. So, we're looking at any raising challenges if there's something evident from the published annual report. And what often triggers the challenge is some form of inconsistency, inconsistent messaging between the front end and the back end quite often.
So an example of that might be if the front end will refer to different revenue streams, the business model, if we can't really kind of relate that very easily to the accounting policy note that describes the contracts and performance obligations, that might well lead to a challenge.
And I think the other common thread is many areas of the flash statements that are forward-looking and disclosure requirements around estimates and assumptions. And quite often we just feel there's room for improvement in the granularity and usefulness of those assumptions and sensitivities.
Kathryn: OK, thank you, Andrew. And if I may, I'm going to delve into one of what you call the persistent offenders a little bit more, if I may. You talked about cash flow statements. One statistic that really leapt out at me from all of the communications around this report was about those circumstances where companies are required to refer to an FRC finding on their annual report when they make subsequent improvements.
And I'm sure I read that 56% of those cases in the year just gone did relate to the cash flow statements. That seems like a lot of cash flow statement errors. Could you talk a bit about the kinds of things your team were finding and whether you've got any sort of practical actions that companies might be able to take to possibly catch those errors earlier?
Andrew: Sure. Well, fortunately, it isn't any evidence that companies can't count the cash, so to speak. Not that that might be evident from a desktop review of the annual report, of course. Probably four things, the most prevalent one is some form of misclassification among operating financing, investing cash flows.
One example, just one is misclassification of the cash flow to purchase non-controlling interest in the group accounts, the standard says that should be a financing cash flow but we've seen it classified as investing for example, not maybe it's a kind of a specific point, but it's not a deeply judgmental or complex matter, it's kind of there in the standard.
Quite often what triggers a question is that we can't quite make sense of some of the working capital movements, can't quite tie those back to the notes to the accounts. There can be good reasons such as the business combination in the year why they wouldn't be a precise time. But if we can't see some clear explanation for a big difference that will lead to a question. Sometimes it's sort of inappropriate netting down of cash flows as quite as you'll know quite a sort of high hurdle to justify reporting cash flows on a net rather than the gross basis. And from time to time we find evidence of a of a non cash transaction that's actually somehow in the cash flow statement rather than in the notes of the cash flow statement.
So those are the four perhaps most common themes. Rather unusually, perhaps not the state secret. We had a standalone cash flow and liquidity thematic. It was a few years ago back in 2020, but we actually in one of the appendices published the kind of consistency checks that we undertake. So, my, my practical advice would be if you're not already doing it, then to do those consistency cheques before we do.
Kathryn: OK, so if people aren't aware of it, go and look at that, that list from a few years ago and add those into your process. And I know we you've mentioned on the slide internal consistency within the annual report and that practical stand back review, which is certainly something that that, that we always talk to companies about being a really, really useful, useful activity as part of that year end process. So thank you for that, Andrew.
And I will highlight for the audience that that was just one example, all of the topics covered in that top ten list you mentioned, you do delve into more detail in the report. So, it is really useful gearing up for those December year ends.
We're going to move on from the annual review now. The FRC have been quite busy this year, I think. And you have also issued a whole number of thematic reviews on different specific topics. Those are listed on the screen now. I will highlight that here on the Accounting and Reporting Update we do deal in hot off the press, news. Number six, reporting by UK, smaller list of companies, I think you published that just this morning. I can tell you I have read it and it does contain lots of great on point findings that I think companies will find really relevant as they gear up for December. So, as I said, those are on the screen now and we will share links with the audience.
What I will say about these, Andrew, my personal favourite, favourite page of every single one of these thematic reviews is that page called Key Expectations, where you list a concise bullet point list of practical actions for companies coming out of the review. I'd really recommend that if people don't have time to read every page of every thematic, they really, really are worth a look.
So, with that theme in mind, before we go to the audience questions, could we perhaps finish on Andrew Watchman's top three practical tips for listeners? What do you most want companies to do as a result of hearing from you today?
Andrew: Absolutely. I'll come right to that question. But just to mention our most recent thematic briefly, we've tried something a little bit different with that. So, we quite often include examples of good practise or good ways of meeting the disclosure requirements in our thematics. But the reasons that are probably quite obvious, we don't include examples perhaps of less good disclosures from real life that have prompted a question but we do sometimes get asked, well, what was it, what did you actually see? How did you spot this question or challenge?
So, we've made-up some examples that are perhaps inspired by real life events but are nonetheless works of fiction to try and illustrate what might be some of those flags, those triggers for a question. So I hope that's useful but would welcome any feedback.
Kathryn: Yeah, I definitely think it will be. And I think the key point there to anyone reading that document is the fictional examples, definitely warrant attention.
Andrew: But to my top three personal tips, well, the first one might just be a little bit of a cheap. I'll just say please do if you haven't already, have a read of the thematics rather like we want annual reports to be, we aim to make them clear and concise. So, it should hopefully be a good use of time. A quick thing to actually extract the messages which are most relevant to your annual report and build those into your process.
Second point, I'm sure everyone listening undertakes a robust pre issuance review, but in in doing so, please do bear in mind the key messages. So including that kind of step back, are we actually being properly consistent and connected between the front end and the back end? Have we included all the material information and excluded immaterial information? I do recognise that materiality is a judgement, not a fact. I think we do bear that in mind.
And finally, I'm repeating a point, but we really, we really would like to get that cash flow statement down, further down and maybe right out of the top ten list. So please do pay due attention to that.
Kathryn: OK, Thanks Andrew. Some great practical tips for our audience there and I know that we, we are anticipating quite a few questions from today. I can see we have got some coming in. So, let's turn to those now.
Ollie, I think the first one is for you. It looks like it's coming from a multinational group. We've heard a lot about ISSBUK and European standards. Are there any other jurisdictions that UK companies, I suspect that's UK headed groups, need to be thinking about?
Ollie: Yes, is the short answer. You know as I said, there's a lot of moving parts in the UK for those that are potentially caught in Europe, still an ongoing number of parts moving there and they've just sort of entered into some, some negotiations between the various sort of parties out there. So, we may hear more sort of pre-Christmas in where that may land.
Beyond that there is a lot going on. So, in terms of the adoption of the ISSB globally, particularly in sort of South America, African countries, Turkey as well. If you have operations in any of those countries that they re adopting them in a number of different ways and a number of different scopes. It's certainly worth talking to your local teams just to make sure you're aware of those.
But I would say one that may have blown the radar slightly is in the US. So, we know that the USSEC, that has been put on stay and essentially that's sort of not going to go any further. But now we're looking at a state level and in particularly in California. There s there's two elements there around greenhouse gas reporting and also around sort of TCFD aligned disclosures as well. So, if you have operations or you do business and that's a very specific sort of phrase that's used within those sets of regulations, do reach out to your US teams just to see whether you are caught. The thresholds are quite high, but worth just checking on those as well. And there are a number of other states that are looking to do sort of things as well. So there is a lot going on and parts are moving quite quickly at times. So just keep in contact with your teams would be my advice.
Kathryn: That is helpful. Thank you, Ollie. And I'm going to reiterate your point that the thresholds are quite high. It's not quite panic stations.
Ollie: No, no, they're significant thresholds. But you know, if you do have any operations over there, just it's worth a check just to make sure.
Kathryn: OK, brilliant. Thank you, Ollie. OK, Andrew, I think you might have been writing to one of our audience members. Do you have any advice for responding to an FRC letter?
Andrew: Great question. I might answer in terms of some recommended do's and don'ts. So, I'll start with a don't. Don't panic. Obviously, we'd expect our questions to be taken seriously and engaged with, but we are looking for constructive engagement.
At the end of the process, if we agree that some changes to the annual report, possibly a restatement is merited, that will be is for that to be processed in the next annual report through the usual kind of prior restatement mechanism. So, we're not the Spanish inquisition. We want to enter into a constructive dialogue. Do engage with your auditors and the companies, with an audit committee, with the audit committee chair, Auditors are obviously stakeholders in this whole process in the annual report as well.
We generally ask for a response within 28 days. But if you need some more time, perhaps because the issue is complex or because key people are on vacation, whatever the explanation, just ask for more time. That s fine, we're not going to say no in circumstances I can contemplate, put it that way
I appreciate maybe management wants to get to the end of the process, but once or twice we just have an inkling that management's kind of said, OK, we got to change something, but they don't really agree. It sometimes emerges in the survey work we do after the whole process is completed. So they re still your accounts, it's still your annual report. So don't agree to make changes unless you actually have reached the conclusion yourself that they are appropriate.
And the fun thing I've mentioned we're actually always very open to having a call or a meeting. Our sort of default way of dealing with with the process is through an exchange of letters. But very and we're probably not, as you might expect going to kind of agree on a complex accounting matter live over the phone. But nonetheless, a call or a meeting could be at sometimes a much more efficient and effective way of actually clarifying our questions or clarifying the fact pattern we're dealing with. So we're always very open to a call if it's going to help move the process along.
Kathryn: OK, Thanks, Andrew. Some great tips there. And, yeah, the questions are coming in OK. We've got 22 quite similar ones. The FRC has said recently that it aims to be a proportionate regulator. Can you expand on what that means?
And then we've had another question about whether you take a pragmatic view on whether a comment is worth raising. So, pragmatism and proportionality in in in the corporate reporting review team.
Andrew: Good question. I think I might just treat those as the same question. How do we aim to be proportionate within the corporate reporting review?
I guess proportionality to me means that any burdens that are imposed by our process and if you get a letter and we ask you for a response, I recognise there is some degree of burden being imposed by that are justified by the benefits, which I think are not just isolated to the benefits of possible improvements to the annual review, it's our part in the whole kind of reporting ecosystem in maintaining quality and maintaining hopefully justifiable confidence among the users of corporate reports. So that's the benefit and we aim to do that. I think our process is very carefully designed to say not be unduly burdensome.
And whilst it's nothing new, the main element of that is we follow a self-imposed limitation to carry out desktop reviews and only raise a question as I've alluded to, if we see a sufficient trigger or flag. Not every equivalent body around the world does that. Some will ask speculative questions: tell us how you account for this particular type of revenue, irrespective of any indicator.
And there are pros and cons, but we've concluded, keep it under review, but concluded that's only asking a question where there is, if you like, evidence in the annual report that there might be an issue, makes for a less hit and miss type approach, I'll put it that way. And it's part of avoiding those undue burdens.
Something I've mentioned already is dividing our points challenges observations between the substantive ones and the so-called appendix points. And that's a combination of we can't entirely know whether something is actually material from what we see in the financial statements but we we use our judgement and intuition to some extent to determine which are the more important and complex and perhaps judgemental and those other substantive points.
We review about each year about 200 to 250 out of a population of 10,000. So, while we do aim to get to the top 350 listed companies roughly on a 5-year cycle, then on average that means a company could expect a letter from us every 40 years. So, I hope that is not coming across as unduly burdensome, but nonetheless, we want to be effective, and that brings me back to this point about using our thematic reviews and annual review to actually leverage off that number of reviews to help the entirety of the companies within our remit.
Kathryn: Thanks, Andrew. I think we've got time to squeeze in one more question, OK, IFRS 18 with previous standards, IFRS s 15 and 16, there was a big focus on numerical disclosures leading up to transition. Are you, are you allowed to comment on this, Andrew? Is the FRC expecting a similar level of disclosure? Can you give us any thoughts on that?
Andrew: Yes, just briefly. Well, IRFS 18 is a somewhat different kettle of fish to 15 and 16, both of which could affect the bottom line and create new types of assets and liability. So, 18, I don't want to underestimate the importance of that standard, but it's presentation and disclosure. So, I don't think we have quite the same level of expectation around numerical or quantified disclosures.
If companies are saying things like they don't expect it to have any material effect, and we see some clear indication that might not be the case, we do reserve the right to raise a challenge. And there might be situations if I say there's a material associate and currently being the share of profit or loss is being included in operating and that's perhaps an existing judgement, but if under the standards that would move down to investing, which will be the case in some cases, then it might be helpful to users to indicate that and possibly quantify it, but I wouldn't put it in quite the same category as 15 and 16.
Kathryn: Understood. Thank you very much, Andrew. Thank you to the audience for the questions and to both of you for being with us today. That brings us to the end of the update.
You can find more information and some interesting links on pwc.co.uk/aru. That includes links to Viewpoint, which is our online resources tool. I hope you found this webcast beneficial.
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