FRC Annual Review of Corporate Reporting 2025/26: What Companies Should Take From the Latest Findings

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2025/26, providing its latest assessment of the quality of reporting by UK companies and highlighting the areas that generated the most substantive questions during its Corporate Reporting Review activity.

The overall picture is encouraging. The FRC reports that the quality of corporate reporting among FTSE 350 companies has been maintained, while the gap in reporting quality between larger listed companies and other companies has narrowed. The proportion of reviews resulting in substantive enquiry letters also fell for a second consecutive year.

That improvement, however, does not remove the need for careful preparation and review. Cash flow statements, financial instruments, impairment of assets, fair value measurement and revenue were among the most common areas in which the FRC raised substantive questions during the year. The findings reinforce a broader point: high-quality corporate reporting depends not only on applying the relevant accounting requirements correctly, but also on ensuring that significant transactions, assumptions and judgements are explained clearly and consistently throughout the annual report and accounts.

Cash flow statements remain a recurring area of attention

Cash flow reporting continues to attract regulatory scrutiny. This is significant because the cash flow statement can sometimes receive less attention than the income statement or statement of financial position during the year-end reporting process, despite being an important source of information about liquidity and the way a business generates and uses cash.

Classification is a particular area requiring care. Under IAS 7, cash flows are classified between operating, investing and financing activities, and that classification must reflect the nature of the underlying transaction. Companies should also ensure that non-cash transactions are not incorrectly presented as cash flows and that the cash and cash-equivalent balances presented in the cash flow statement reconcile appropriately with other information in the financial statements.

The practical lesson extends beyond checking individual classifications. The cash flow statement should be reviewed as part of the financial statements as a whole. Material movements should make sense when compared with the balance sheet, financing disclosures and narrative discussion of the company’s performance and liquidity.

A technically correct number presented without that wider consistency can still leave users with an unclear picture.

Financial instruments require transaction-specific analysis

Financial instruments are another recurring source of substantive questions.

The accounting requirements can become particularly demanding where companies enter into unusual financing arrangements, derivatives, instruments containing both debt and equity characteristics or other complex transactions. The appropriate treatment may depend on detailed contractual terms rather than the commercial label attached to the instrument.

This makes early analysis important. Companies should establish how an instrument should be classified, recognised and measured before the reporting process is well advanced. The associated disclosures should then explain material accounting policies, financial risks and significant judgements in a way that is specific to the company’s circumstances.

Generic or boilerplate disclosures are unlikely to be sufficient where the underlying transaction is material or complex. The financial statements should allow a reader to understand both the accounting treatment adopted and the economic exposure created by the instrument.

This is also an area where documentation matters. For significant or unusual arrangements, the reasoning supporting the accounting conclusion should be recorded contemporaneously and should remain consistent with the contractual documentation and disclosures in the accounts.

Impairment: assumptions must connect with the wider business story

Impairment remains an inherently judgemental area of financial reporting.

Assessments under IAS 36 can depend on forecasts of future cash flows, discount rates, growth assumptions and the identification of cash-generating units. Small changes to assumptions can sometimes have a material effect on the outcome, particularly where headroom is limited.

For preparers, the issue is therefore not simply whether an impairment calculation has been performed. The assumptions supporting it need to be reasonable, supportable and consistent with other information used or communicated by the business.

For example, forecasts used for impairment purposes should be considered against approved budgets, the company’s current trading position and relevant information elsewhere in the annual report. Where material uncertainty exists, the disclosures should enable users to understand the assumptions to which the assessment is particularly sensitive.

Connectivity is important. An optimistic set of assumptions in an impairment model may be difficult to reconcile with a strategic report describing significant pressure on the same business. Conversely, disclosures that explain the commercial context and the principal sensitivities can make a technically complex assessment considerably more understandable.

Fair value measurements need transparency as well as methodology

Fair value measurement also features prominently in the FRC’s latest findings.

Valuation becomes particularly sensitive where there is limited observable market information and management must rely more heavily on models and assumptions. This can arise, for example, with certain unquoted investments, complex financial instruments or other assets and liabilities for which an active market does not exist.

Under IFRS 13, the fair value hierarchy distinguishes between measurements according to the nature and observability of their inputs. Where significant unobservable inputs are used, disclosures become especially important because users cannot independently observe those assumptions in the market.

Companies should therefore consider whether the valuation technique, significant inputs and relevant sensitivities are explained with sufficient specificity. Simply identifying an item as a Level 3 measurement, for example, does not by itself explain how management arrived at the valuation or which assumptions could materially affect it.

The underlying valuation process should also be supported by appropriate evidence and governance. Where external valuation specialists are used, management remains responsible for understanding the methodology and determining whether the resulting measurement is appropriate for financial reporting purposes.

Revenue remains an area where clear accounting policies matter

Revenue recognition continues to appear among the FRC’s principal areas of enquiry.

Under IFRS 15, the accounting outcome depends on understanding the contractual arrangement with the customer and applying the standard’s requirements to the particular facts. For straightforward transactions this may present few difficulties. More complex contracts can require significant judgement, including in identifying performance obligations, determining the transaction price and establishing when control transfers.

A revenue accounting policy should therefore describe what the company actually does rather than repeat the wording of the accounting standard.

Where different material revenue streams have different recognition characteristics, the disclosures should explain those differences. Significant judgements should also be identified where they have a meaningful effect on the timing or amount of revenue recognised.

The objective is not greater disclosure for its own sake. It is to provide sufficient company-specific information for a reader to understand how material revenue is generated and accounted for.

Reporting quality is also about consistency

One of the broader messages arising from the FRC’s review is the importance of looking beyond individual notes and considering the annual report and accounts as an integrated document.

The financial statements, strategic report and other narrative reporting are often prepared by different people and through different processes. This creates the possibility that individually reasonable disclosures do not tell a coherent story when brought together.

That can become particularly important where the accounts involve significant judgements or uncertainty. Assumptions supporting impairment assessments, fair value measurements, going concern considerations and other estimates should not sit in isolation from management’s description of the company’s performance, risks and prospects.

For boards, audit committees and finance teams, a final review should therefore consider more than technical compliance. It should ask whether material information is consistent across the report, whether significant judgements are adequately explained and whether the document as a whole is clear and understandable.

Preparing for the next reporting cycle

The latest review provides companies with a useful basis for assessing their own year-end processes.

A robust pre-issuance review should focus particularly on areas that have repeatedly generated regulatory challenge. Cash flow classifications and reconciliations should be checked carefully. Material and complex financial instruments should be supported by documented accounting analysis. Impairment and fair value models should be challenged against current evidence, and the assumptions used should be consistent with the wider reporting narrative. Revenue policies should reflect the company’s actual contractual arrangements rather than generic descriptions.

Companies should also consider the reporting changes ahead. IFRS 18, Presentation and Disclosure in Financial Statements, will introduce significant changes to presentation and disclosure for IFRS reporters and is effective for annual reporting periods beginning on or after 1 January 2027, with retrospective application. Companies that have not already begun assessing its impact should consider doing so before the first year of mandatory application.

UK GAAP reporters are already dealing with another significant transition. The FRC’s Periodic Review 2024 amendments to FRS 102 apply for accounting periods beginning on or after 1 January 2026 and include substantial changes to the accounting for leases and revenue recognition.

For companies applying the UK Corporate Governance Code, Provision 29 of the 2024 Code also applies for financial years beginning on or after 1 January 2026 and introduces enhanced board reporting in relation to the effectiveness of material controls.

Taken together, these developments make the quality of the reporting process itself increasingly important.

Final considerations

The FRC’s 2025/26 findings do not suggest that corporate reporting quality is deteriorating. On the contrary, its latest review points to continued high standards among FTSE 350 companies and improvement across its risk-based sample.

The recurring areas of regulatory attention nevertheless provide a useful warning against complacency. Many of the issues identified arise in familiar parts of the financial statements: cash flows, financial instruments, impairment, valuations and revenue.

For preparers, the practical response is not necessarily to produce longer annual reports. It is to ensure that material transactions and judgements receive the right level of technical scrutiny, that assumptions are properly supported, and that the financial statements and narrative reporting tell a consistent and understandable story.

A strong year-end review process can therefore serve two purposes: identifying technical errors before publication and testing whether the annual report communicates the company’s financial position and performance as clearly as the underlying accounting permits.