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Article:

FRC corporate reporting focus areas for 2020 and beyond

14 January 2020

The FRC announced its corporate reporting focus areas for the coming reporting season and beyond immediately after the purdah restrictions had been lifted following the December General Election.

Focus topic areas

As in previous years, the FRC’s Corporate Reporting Review team will supplement its routine reviews of annual reports with four thematic reviews (expected to be published in late autumn 2020) covering:

  • IFRS 16: review of disclosures in the first year of implementation
  • IFRS 15: a deeper dive
  • Cash flows and liquidity disclosures
  • The effects of the decision to leave the EU on companies’ disclosures.

The IFRS 16 thematic review will assess the extent to which the findings of the FRC’s 2019 review of interim reports have been addressed by considering how a sample of companies apply IFRS 16 to their annual report. The IFRS 15 ‘deeper dive’ will focus on certain findings in its 2019 thematic review on the adoption of that standard.

Expanding on the cash flow statement thematic review, the FRC noted that it considers it unsatisfactory that it finds many examples of basic errors in the cash flow statement, often from a desktop review of the financial statements. It highlights its 2019 Financial Reporting Lab Report on Disclosures on the Sources and Uses of Cash and reiterates that understanding the generation, availability, and use of cash is fundamental to investors. It makes clear that they require reliable and thorough analysis of how cash is generated and spent, as the figures presented in the cash flow statement are used as the starting point for a number of performance measures.

The thematic will consider how the presentation of the cash flow statement and disclosures can help readers assess the ability of the company to generate cash flows and the cash flow needs of the company. The FRC has identified the following specific areas where improvements can be made. It expects:

  • Cash flow statements to follow the treatments prescribed in IAS 7, where provided, and to be free from basic errors
  • Disclosure of accounting policies for complex transactions where the cash flow presentation is judgemental and, where relevant, any significant accounting judgements applied in the cash flow statement
  • Company specific disclosures of liquidity risk consistent with disclosures given for going concern and the viability statement
  • Where material, disclosure of supplier financing arrangements, including the impact on cash flows and the presence of any concentrations of liquidity risk
  • Disclosure of what constitutes cash and cash equivalents, including any restrictions on the availability of cash
  • Compliance with the ESMA Guidelines for cash flow based Alternative Performance Measures.

The Corporate Reporting Review team will also contribute to a planned FRC-wide project focusing on climate change, by reviewing the relevant disclosures given in companies’ annual reports - something on which it has already provided guidance.

Priority sectors

Priority sectors are those considered by the FRC to be particularly high risk in terms of corporate reporting and audit by virtue of particular economic or other pressures. Although the annual reports selected will by no means be limited only to entities in the following priority sectors, companies operating in the following economic sectors will be at a heightened risk of review:

  • Financial Services
  • Retail, including retail property and travel and leisure
  • Construction and materials
  • Manufacturing.

If you receive a letter from the FRC’s Corporate Reporting Review team, whatever the content, it is highly advisable that you contact your auditors immediately for assistance and advice as to how to approach it.

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