Improvements in corporate reporting that the FRC expects
17 November 2020
The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2019/20 (the Annual Review), which sets out the findings of its Corporate Reporting Review team’s monitoring and recent Thematic Reviews. It highlights a number of specific areas in which the FRC is looking for improvement to better meets the needs of investors.
The report highlights some specific disclosure requirements that it sees as being applied poorly. It also makes it clear that companies should be focusing more on the general disclosure objectives set out in the more recent IFRSs and the general disclosure requirement set out in paragraph 31 of IAS 1 to seek additional explanations where it considers disclosures to be inadequate. This means that, after complying with the explicit disclosure requirements set out in the accounting standards, it remains necessary to step back and consider whether the resulting disclosures are clear and provide the appropriate level of decision-useful information. If the answer is “no”, then additional disclosures should be considered in order to meet these general objectives.
Specific topic areas, and some of the key points, included in the Annual Review are:
- Judgements and estimates – Generic and unquantified disclosures remain a concern.
- Impairment of assets – A focus on disclosures where there has been an indicator of impairment but no impairment loss.
- Revenue from contracts with customers - Improvements are needed in quantitative information to enable users to understand the nature, amount, timing and uncertainty of the revenue and cash flows from contracts with customers. Improved explanations about variable consideration and judgment and estimates are also needed.
- Financial instruments - Non-financial services companies should ensure that they pay careful attention in the classification of financial instruments, liquidity disclosures and supply-chain financing arrangement. Financial institutions need to ensure that disclosures on expected credit loss provisions are sufficient.
- Alternative Performance Measures (APMs) - As part of its future monitoring activities, the FRC will be looking closely in the consistency between APMs in preliminary announcements and other investor information and those included in the annual reports and accounts.
- Strategic reports – Companies need to consider the specific/detailed requirements of the Companies Act as well as the more overarching requirement to produce a strategic report that provides a fair, balanced and comprehensive review of the company’s business.
- Cash flow statements – The FRC was concerned to see a significant and continuing trend in errors relating to the cash flow statement, and strongly encourages companies to consider the guidance included in last year’s Annual Review.
- Provisions and contingencies - Information is too often insufficient to enable users to understand the nature of the provisions, related uncertainties and potential timing.
- Fair value measurement – It is important that there is sufficient qualitative and quantitative information to provide an overall understanding of the valuation techniques used and the unobservable inputs and assumptions, including sensitivities.
- Business combinations – The FRC noted a lack of sufficient explanations about valuation methods and omission relating to information that would appear critical to achieving the overarching disclosure objectives of IFRS 3 Business Combinations.
- Earnings per Share (EPS) – The report reminds companies that an important exception to the non-adjusting post-balance sheet event rule relating to share capital transactions is specified paragraph 64 of IAS 34.
- Unlawful distributions – The report highlights that a breach of the company or common law requirements relating to distributions may have consequences for both directors and shareholders.
As with the recently published Thematic Reviews on IFRS 15, IFRS 16 and the effects of COVID-19 on financial reporting, the Annual Review should be considered required reading for all preparers of annual reports and, particularly, for listed and large private companies.