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Corporate Reporting Thematic Reviews – FRC’s key findings and guidance

11 December 2017

The FRC has published the results of three Thematic Reviews: the specific findings (summarised below) include a number of examples of better disclosures which illustrate how companies could address these areas. It can be assumed that, over the course of the coming reporting season, the FRC will continue to focus on these areas as well as the other areas for improvement highlighted by its Annual Review of Corporate Reporting.


Judgments and estimates

From routine monitoring work the FRC identified many examples of generic disclosures which do not describe the specific judgments a board has made or that fail to explain the extent to which changes in estimates could have a material effect on the following year’s accounts. Better quality disclosures are required to enable readers of an annual report to assess the quality of management’s decisions.

Most of the 20 companies reviewed had made some improvements to their disclosures, but those improvements were not as significant as the FRC had hoped. As a result, follow-up letters were written to five of the participating companies seeking further explanations and improvements.

The key messages from the thematic review on judgments and estimates are:

  1. Judgments and estimates should be separately identified and the differing relevant disclosures provided for each.
  2. Detailed descriptions of the specific, material judgments made by the directors in applying their accounting policies should be made. Where there are no judgments that are significant enough to require disclosure, it is helpful to state that fact. The reasons for changes in the judgments disclosed from year to year should be explained.
  3. Estimates disclosures should focus on those where subsequent re-estimation will give rise to a significant risk of a material adjustment to the carrying value of assets or liabilities within the next year. Information about longer-term uncertainties may be useful for users of financial statements but these additional disclosures should be clearly identified and explained. The reasons for changes in the estimates disclosed from year to year should be explained.
  4. Estimates disclosures should be clear and specific, pinpointing the precise sources of uncertainty and avoiding the use of boilerplate language. The FRC observed that audit committee reports and audit reports often provided more granular information regarding the significant judgments made; information of a similar depth should be included in the notes to the financial statements.
  5. The specific amounts at risk of material adjustment, rather than just the value of the financial statement line item within which the amount is contained, should be disclosed.
  6. Assumptions underlying estimates should be quantified when investors need this information to fully understand their effect.
  7. The sensitivity of carrying amounts to assumptions and estimates, and/or the range of reasonably possible outcomes within the next financial year should be disclosed, even where such disclosure is not specifically required in accounting standards.
  8. Where past assumptions have changed, these changes should be explained if the past uncertainty remains unresolved.

Read more on the disclosure of Judgments and estimates.


Alternative Performance Measures (APMs)

This review on the use of APMs in annual reports follows the 2016 review on the use of APMs in interim reports. Both reviews assess the application of the European Securities and Markets Authority’s (ESMA) 2015 “Guidelines on Alternative Performance Measures”.

The FRC found compliance with the Guidelines was generally good and very much improved on previous years. The key messages from this Thematic Review are:

  1. Definitions of all APMs used should be provided and labels should be used that accurately describe the APM to which they are applied.
  2. Where terms such as ‘non-recurring’ are used, they should be clearly justified and accurately defined.
  3. Companies should set out clear explanations of why they have used APMs.
  4. Reconciliations to amounts appearing in the financial statements should be presented for each APM disclosed.
  5. APMs should be disclosed with no greater prominence than measures directly stemming from the financial statements.
  6. The definitions and bases of calculation of APMs should be consistent over time. Readers of the annual report should be informed of any changes and told why they result in reliable and more relevant information.

In addition, the review sets out some more specific messages on adjusted profit measures by stating that companies should explain:

  1. Why individual items have been excluded from the adjusted measure of profit; and
  2. Why, and to what extent, restructuring costs have been excluded from the adjusted measure of profit.

Read more on the use of alternative performance measures.


Pension disclosures

The FRC notes that low interest rates and the economics of defined benefit pension arrangements have increased the need for companies to improve the transparency of their pension reporting. Key to this is helping users understand the factors that could affect the future expense and cash flows of the company. The key messages are:

  1. Information beyond that required by IAS 19 ‘Employee Benefits’ 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.
  2. Where a net pension asset has been recognised, or it appears that required future contributions may create a surplus, there should be an explanation of the judgments made when assessing trustee’s rights (eg whether the company has an unconditional right to a refund from a defined benefit scheme or if the trustees have rights to utilise the scheme’s surplus).
  3. Where a company adopts an asset-liability matching strategy, it should be adequately described.
  4. The strategic report should refer to the pension scheme where such information is material to an understanding of the business’s financial position.
  5. Plan assets of a different nature and risk should be aggregated into classes.
  6. It should be clear how unquoted plan assets have been valued.

Read more on pension disclosures.

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