The Financial Reporting Council (FRC) has published its Annual Review of Corporate Governance and Reporting (the review) along with an open letter to Finance Directors and Audit Committee Chairs: these highlight the key findings from its Corporate Reporting Review Team’s (CRRT) monitoring work and thematic reviews.
Areas for improvement
The Review highlights a number of areas in which the FRC is looking for future improvements.
Critical judgements and estimates
The FRC says that the reporting of significant judgements and estimates is crucial for investors to understand the basis on which management has applied the requirements of the accounting standards. The quality of the disclosures remains below expectations in a number of areas:
- Appropriate distinction between key judgements and significant estimates
- Inclusion of estimates where it does not pose a significant risk of material adjustment in the next 12 months, and
- Lack of detail of the nature of assumptions/estimates, carrying amount, sensitivity analysis or a range of reasonably possible outcomes.
Cash flow statements
The number of errors identified by the CRRT that relate to the cash flow statement has increased significantly. The main improvements relate to ensuring that the appropriate classification of cash flows under IAS 7 between “operating”, “investing” and “financing” is followed and that non-cash movements are correctly eliminated from the cash flow. The majority of errors identified led to an increase in operating cash flows that the FRC notes is considered a key indicator by investors.
Taken from the full thematic review on the interim disclosures of the impact of IFRS 9 and 15, to be published next month, the annual review gave some useful insights on areas for improvement. This included giving sufficient disclosure over the performance obligations that have been determined and when these are assessed to have been satisfied. It was also noted that there has been a lack of disclosure of the balance sheet impact, the impact on costs, as well as limited focus on how accounting policies have changed in comparison to the previous policies under IAS 18.
The review notes that the FRC is identifying an increasing number of basic errors in accounts and reports it believes should not occur if companies have a suitable control environment in place for corporate reporting.
The strategic report continues to be an area that is challenged by the FRC. Consistent with the findings of their thematic review into alternative performance measures (APMs) published in November 2017, it notes that there is still room for improvement. For example, where APMs are used, the rationale for using them should be explained with reasoning for items removed and the calculation of the APM should be clearly set out, including a reconciliation to the relevant IFRS number. In addition, APMs should not be given undue prominence over the equivalent IFRS measure. It also reiterated the need for the strategic report to include a sufficiently fair, balanced and comprehensive review of the company’s business.
Effect of the UK decision to leave the EU (Brexit)
The nature and depth of disclosure over the implications of Brexit should be specific to each company and ideally split between those factors arising from the company’s business model/operations and those arising from the broader economic uncertainties. The importance of having a robust post balance sheet review process in place was highlighted, given the continuing uncertainties and the timing of the UK’s exit compared to December 2018 reporting deadlines.
Looking ahead to 2019
Companies should be starting to think about forthcoming reporting changes now to ensure that high standards of governance and reporting are achieved in 2019. The items highlighted include the 2018 update to the FRC’s Corporate Governance Code as well as the new section 172 disclosures required in strategic reports – both of which will apply to periods commencing on or after 1 January 2019. IFRS 16 will also apply from this date, so IAS 8 reporting of the expected impact should now be suitably detailed to explain both the quantitative and qualitative impacts as well as details of any specific judgements and policy changes expected under the new standard.
This is a summary of the key issues affecting most companies. Other issues were highlighted in the report relevant to large and quoted companies – read the full report.
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