The U.K. Financial Reporting Council (FRC) will prioritize climate-related financial disclosures in company accounts and climate risks in audits as key areas of supervisory focus for 2022/23.
The corporate governance regulator will focus its review efforts on the corporate reports and audits of companies in “higher-risk” sectors still reeling from economic pressures caused by the COVID-19 pandemic and subsequent lockdowns and travel restrictions. These include travel, hospitality, and leisure; retail; and construction and materials.
Gas, water, and multiutility companies will also come under closer review following the collapse of two dozen U.K. energy companies since the start of August. The firms failed due to a mix of rapidly rising energy prices and the U.K. government’s refusal to remove the present price cap aimed at protecting consumers.
The six areas of corporate reporting that will be subject to thematic reviews in the coming year are:
- Reporting against the Task Force on Climate-Related Financial Disclosures’ recommendations and climate-related reporting in financial statements.
- Compliance with reporting against IFRS 3 on business combinations when companies acquire or merge with other companies.
- Errors relating to calculating earnings per share.
- How companies report deferred tax assets (particularly, losses relating to them).
- How companies apply discount rates to their assets and liabilities.
- Judgments and estimates. The FRC previously said it was not always clear whether companies’ judgments and estimates factored in any future uncertainty about how assets and liabilities could be affected by ongoing issues such as the pandemic and Brexit.
In terms of audit work, the FRC said its inspections will focus on climate-related risks, fraud risks, and cash and cash flow statements.
The regulator will also scrutinize auditors’ work around revenue and group audits, as well as how they audit provisions and contingent liabilities and impairment of assets.