Over the past few weeks, the Financial Reporting Council (FRC) has released a flurry of publications that highlight the areas where it considers corporate reporting could be improved and, consequently, which it will be focussing its monitoring activities in the coming months.
The FRC’s Annual Review of Corporate Reporting summarised the key findings from its Corporate Reporting Review Team’s (CRRT) work during the year to March 2017. The review highlighted the following areas where corporate reporting could be improved:
- Accounting policy disclosures – Policy disclosures should be complete and sufficiently tailored to the company’s circumstances. They should not be out of date, irrelevant, immaterial or to be based on boilerplate text taken from the standard.
- Effect of the adoption of IFRSs 9, 15 and 16 – Detailed quantitative disclosures regarding the effect of the adoption of major new standards, which are tailored to the company’s specific circumstances and transactions, should be included in the last set of accounts before the implementation date of those new standards.
- Business combinations – Disclosure of estimation uncertainty on the measurement of contingent consideration should be improved. Companies should also ensure all material intangible assets have been separately identified and consider whether contingent consideration that is linked to future employment has been appropriately treated.
- Revenue – There should be consistency between the description of revenue streams in the narrative sections of the annual report and the accounting policies disclosed in the financial statements. Accounting policies should clearly describe how revenue is recognised for each significant business stream, including an explanation of the judgments made.
- Impairment of non-financial assets – The key assumptions relating to impairment tests should be clearly identified. Where ranges are wide and cover multiple cash generating units, disaggregation should be consisted. The reasons for significant changes to assumptions used compared to the previous year should be disclosed and sensitivities in key assumptions highlighted.
- Financial instruments disclosures and measurement – Financial instruments disclosures should include descriptions of risks that are company-specific rather than generic. Maturity analyses should include all significant financial liability balances. The clarity of the disclosure of valuation techniques and, where relevant, the unobservable inputs to them should be improved.
- Cash flow statements – Care should be taken to ensure that cash flows are accurately presented as operating, investing or financing.
- Consolidation – Disclosures should clearly describe the judgements made when applying IFRS 10 to more complex situations, such as where investment fund managers own significant minority stakes in the funds they manage.
- Strategic reports – There should be better communication around performance, trends and the extent to which the strategic report is sufficiently balanced and comprehensive.
The Review also summarises the findings of the three thematic reviews that the CRRT conducted during 2017. These were on the subjects of judgements and estimates; alternative performance measures (APMs); and defined benefit pension scheme disclosures. The full reports expand on the summaries included in the Review and include “real life” examples of good practice and more detail on where improvements can be made. The key messages from the Thematic Reviews are:
- Judgements and estimates – Judgements and estimates should be separately identified. The disclosures should be limited to the most important judgements and estimates made by the directors. They should be clear and specific, pinpointing the precise source of uncertainty or nature of the judgement. Amounts at risk and assumptions underlying estimates should be quantified, and sensitivities highlighted. Changes from year to year should also be explained.
- APMs – APMs should be defined and reconciled, used consistently and described accurately. Movements in them should be explained in the narrative and items eliminated from those measures should also be addressed in the narrative where material.
- Defined benefit pension schemes – Information in addition to that required by IAS 19 should be provided where it is necessary to understand the risks associated with the pension scheme and how they may affect the amount, timing and uncertainty of the company’s future cash flows.
Finally, the FRC has announced a further series of thematic reviews that it intends to conduct over the course of 2018. They will cover the following topics:
- Targeted aspects of smaller listed and AIM-quoted company annual reports;
- The effects of the new IFRSs on revenue and financial instruments on companies’ 2018 interim accounts;
- The expected effect of the new IFRS for lease accounting; and
- The effects of Brexit on companies’ disclosure of principal risks and uncertainties.
It is our understanding that companies selected to participate in the small companies’ thematic reviews are likely to receive a letter from the FRC informing them of this by the end of the year but that pre-notification is less likely for the other three thematic reviews. If you receive a letter from the FRC on this or any other matter, you should contact your auditor for advice as soon as possible.
This article was written by Jonathan Compton, a Director in BDO LLP's Financial Reporting Advisory team. For more information, please contact Jonathan Compton.