Corporate reporting – where the FRC expects improvements
11 December 2017
The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting (the Review) in which it highlights the key findings from its Corporate Reporting Review Team’s (CRRT) monitoring work and thematic reviews conducted over the past 18 months.
Areas for improvement
The Review highlights a number of areas in which the FRC is looking for future improvements:
- Accounting policy disclosures – The FRC notes that users of financial statements rely on accounting policies to interpret information in the rest of the annual report and assess the comparability of companies with their peers. The Review indicates that the FRC approached companies where policy disclosures did not appear to be complete or sufficiently tailored to the company’s circumstances or where policy disclosures appeared to be out of date, irrelevant, immaterial or based on boilerplate text taken from the standard.
- Effect of the adoption of IFRSs 9, 15 and 16 – During 2017, the FRC conducted a focused review of the expected impact of issued accounting standards that are not yet effective in a sample of companies’ annual and interim reports. It found that the level of detail in these disclosures was generally disappointing. It expects to see “detailed quantitative disclosures” (which are tailored to their specific circumstances and transactions) regarding the effect of the adoption of major new standards to be included in the last accounts before the implementation date.
- Business combinations – The review acknowledges that the accounting for business combinations can be complex and may include finely balanced judgments. The FRC highlights areas of particular difficulty as:
- The disclosure of estimation uncertainty on the measurement of contingent consideration,
- The completeness of intangible assets other than goodwill identified, and
- The treatment of contingent consideration linked to future employment as remuneration rather than contingent consideration (as required by IFRS 3.B55).
- Revenue – The FRC has challenged companies where there is an apparent disconnect between the description of revenue streams in the narrative sections of the annual report and the accounting policies disclosed in the financial statements. It notes that accounting polies should clearly describe how revenue is recognised for each significant business stream, including an explanation of the judgments made (eg when the risks and rewards are transferred to the customer).
- Impairment of non-financial assets – Disclosures in this area have improved but the FRC highlights their continued relevance in the light of the uncertainty caused by Brexit and other macroeconomic issues. It notes that it raised questions where it was not clear what the key assumptions were or where wide ranging assumptions covering multiple Cash Generating Units were disclosed. It also challenged companies that did not explain why assumptions used had changed significantly from the previous year or did not adequately highlight sensitivities in key assumptions.
- Financial instruments disclosures and measurement – The review indicates that financial instruments disclosures included descriptions of risks that were generic or unclear and that maturity analyses sometimes omitted significant balances. It also highlights poor practice in the clarity of the disclosure of valuation techniques and, where relevant, unobservable inputs into them.
- Cash flow statements – Investors consider reported operating cash flows to be an important indicator of a company’s current and potential future performance. The FRC comments that it is, therefore, important for cash flows to be accurately presented as operating, investing or financing: the FRC approached a number of companies to ask questions on this topic.
- Consolidation – Although preparers have become familiar with the requirements of IFRS 10, the FRC continues to raise questions where investment fund managers own significant minority stakes in the funds they manage.
- Strategic reports – The Review includes extensive material on the strategic report, which the FRC cites as one of the areas that is most frequently the subject of challenges. It continues to pursue better communication around performance, trends and the extent to which the report is sufficiently balanced and comprehensive.
Focus for 2018
It can be assumed that, over the course of the coming reporting season, the FRC will continue to focus on the areas mentioned above and, in particular, those areas covered by the three Thematic Reviews conducted during 2017. It has also announced a further series of Thematic Reviews that it intends to conduct over the course of 2018. Read more here.
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