For many reporting businesses, 31 December brings with it the need to apply a number of new accounting standards and other reporting requirements in their annual report. Small companies will be moving away from the Financial Reporting Standard for Smaller Companies (FRSSE) but for larger businesses there are relatively few financial reporting changes applicable to periods beginning on or after 1 January 2016. Therefore, 2016 is a year of consolidation and a great time to make improvements. So here are our recommendations for matters accounts preparers should be focussing on during this accounts-drafting period.
In November 2016’s Business Edge, we highlighted that the FRC’s Corporate Reporting Review Team (CRRT) had carried out a thematic review on tax disclosures in company annual reports.
One of the most significant areas identified for improvement was in relation to disclosure of tax uncertainties. Companies are encouraged to appraise what specific information about judgments and estimation uncertainties would be most helpful to users of the accounts and, in particular, consider whether:
- There are significant judgments and estimation uncertainties relating to tax that should be disclosed
- Previously disclosed information remains relevant in subsequent years’ accounts
- The disclosure of risk specifically relating to the next year is quantified and clear.
IFRS preparers – disclosing accounting standards issued but not yet effective
Three significant new IFRSs have been issued by the IASB: IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases. As a result, paragraph 30 of IAS 8, which requires the disclosure of ‘known or reasonably estimable information relevant to assessing the possible impact that application of new IFRS will have on the entity’s financial statements in the period of initial application’, is becoming increasingly important as their mandatory effective date approaches.
In September 2016’s Business Edge, we provided an overview of ESMA’s expectations in respect of the disclosure of the potential effects of the adoption of IFRS 15. Since September, the FRC has also highlighted the importance of the disclosure requirement in their year-end reminder letter and ESMA have issued a similar public statement on IFRS 9.
Alternative performance measures
The FRC has published a thematic review on Alternative Performance Measures (APMs) in which it highlights the importance of both defining any APMs used and not obscuring accounting measures – read more.
Implications of ‘Brexit’
Following the EU referendum result in June 2016, there is a level of uncertainty that may last for several years. Uncertainty effects assumptions used in accounting estimates, which are pervasive in financial reporting (eg fair value measurements, impairment assessments, going concern forecasts, actuarial calculations and narrative reporting on principal risks and uncertainties). We provided a summary of questions that boards needs to ask themselves in September 2016’s Business Edge.
As alluded to above, small companies may have more to deal with, with potentially significant changes being applied for the first time in their December 2016 accounts.
Firstly, the FRSSE has been withdrawn and, instead, most such companies that wish to continue to apply UK GAAP, will need to apply the recognition and measurement requirements of FRS 102. This means, for example, that they will need to measure derivatives at fair value, provide for deferred tax on revaluations and recognise equity settled share based payments. A new Section 1A to FRS 102 sets out the disclosure requirements applicable to small companies.
Secondly, changes to the law introduced by The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (the Regulations) give rise to further matters applicable to small companies. For example, the option to file abbreviated accounts is removed and replaced with a different option to prepare and file abridged accounts.
In October 2016’s Business Edge, we provided a summary of the changes and why these may mean filings are rejected.
Improvement areas identified by the FRC
In addition to the above matters, the FRC has recently issued its Annual Review of Corporate Reporting and its year-end reminder letter which highlight additional areas for improvement.
For help and advice on corporate reporting please contact Richard Matthews
Business Edge 2016 Index