The Financial Reporting Council (FRC) has published the results of its Thematic Review of smaller listed and AIM quoted companies, which highlights findings in five key areas:
- Alternative Performance Measures (APMs) and strategic reports
- Pension disclosures
- Accounting policies (including critical judgements and estimates)
- Cash flow statements, and
- Tax disclosures.
In late 2017, the FRC notified 40 companies that it would be reviewing their next annual reports, focusing on two of five specified aspects of corporate reporting (which picked up on the FRC’s 2016 and 2017 Thematic Reviews).
In addition to the corporate reporting Thematic Reviews announced for 2019/20, we expect the FRC to continue to focus on the areas highlighted in the Report, together with the other matters highlighted in its general Annual Review of Corporate Governance and Reporting.
APMs and strategic reports
The FRC was pleased to see that most companies improved the quality of their APM disclosures following the 2017 Thematic Review on the topic. IFRS measures were given increased prominence, explanations were improved and reconciliations were provided. Companies achieved this without a major redraft, indicating, the Report suggests, “that most smaller companies can improve the quality of information available to investors”.
However, the Report indicates that there is still room for improvement. The FRC has once again advised against using general terms such as ‘non-recurring’ and called for better explanations to be given for why each item is excluded from an APM measure. With particular reference made to share-based payments, the FRC has reiterated that it considers these to be genuine business costs which should not be routinely eliminated from APMs. It was also unpersuaded by arguments that certain debit items, such as defined benefit pension costs, are adjusted out because directors cannot influence them.
In relation to the wider strategic report, only one entity in scope of the non-financial reporting regulations complied fully with the disclosure requirements. The FRC highlights that providing a cross-reference to demonstrate how the new disclosures have been integrated into the wider strategic report is necessary to meet the Companies Act requirements; this is further explained in paragraph 6 of the Basis for Conclusions of the FRC’s revised Guidance on the Strategic Report. The discussion of cash flow matters was also considered to be of mixed quality, with poorer examples failing to ‘present a comprehensive review of the cash flow position’.
The majority of companies made improvements to the quality of their pension scheme disclosures, reflecting the 2017 Thematic Review guidance. Improvements highlighted included better risk disclosures, deficits being discussed within the strategic report and explanations provided on how unquoted investments were valued. However, several companies did not include sensitivity analyses on pension valuation assumptions and the split of scheme assets between those that have a quoted price in an active market and those that do not. Six of the 16 companies reviewed in this area included accounting policies that were based on the pre-2013 version of IAS 19.
Accounting policies, including critical estimates and judgements
The FRC was very clear about the qualities it expects in disclosures in this area, particularly on estimates and judgements disclosures (as set out in its 2017 Thematic Review). Accounting policies should be thought about carefully each year - boilerplate wording should be avoided. The FRC considered revenue policies still require improvement; the adoption of IFRS 15 will give companies the opportunity to do this. The FRC also noted that judgements and estimates are expected to be disclosed separately and described in detail using ‘clear and specific language’ and that few companies are providing the level of sensitivity analysis necessary for users to see the possible impact of a change in the next year.
Cash flow statements
The cash flow statement continues to be one of the most important and revealing statements from a user perspective. The FRC says companies should: categorise cash flows correctly, only netting them off if they meet the IAS 7.22 criteria; and provide a ‘fair, balanced and comprehensive’ discussion of cash flows in the strategic report and (as with other primary statements) explain any one-off or unusual items. A substantial minority of companies did not include the new IAS 7.44A reconciliation of changes in liabilities arising from financing activities.
The Report reiterated the findings of the 2016 Thematic Review on tax disclosures, calling for better labelling within the tax notes, including avoiding the use of the description ‘other’ for significant items. Companies should also be consistent when reporting ‘exceptional’ items; tax items should not be forgotten.
Read the FRC’s full report.
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