That looks like rebar to me. Rebar should have a minimum of 1-1/2" coverage to protect it against rusting.

This rebar is rusting and will continue to rust. As steel rusts it expands causing the concrete to flake away from the steel. (Concrete has very little strength in tension.) This exposes the steel deeper in the concrete to moisture and oxygen causing more and more rusting. If allowed to continue the rusting rebar can eventually severely damage or destroy the concrete.

I would NOT leave this out of the report. I would explain what I saw and the possible implications of not repairing it. It's not really your job to explain how to perform a repair. I would recommend the client contact a qualified, licensed foundation repair contractor for advice on how to repair this.

__________________
"Baseball is like church. Many attend but few understand." Leo Durocher
Bruce Breedlove
www.avaloninspection.com