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Article:

FRC Thematic Reviews: How to improve IFRS 9 and IFRS 15 disclosures

07 December 2018

The aim of these Reviews was to provide guidance and examples of better practice to guide companies preparing their annual reports. The Reviews analyse the adequacy of disclosures about the adoption of these new standards in a sample of June 2018 interim reports published by companies operating in industry areas expected to be more significantly affected by the changes. 

The FRC noted many good examples of disclosure and the Thematic Review reports include extracts from published interim reports that illustrate the level of detail the FRC considers helpful when explaining various aspects of the impact of adopting IFRS 15 and 9 to users. The FRC also identified a number of areas where it expects companies to provide more comprehensive disclosures in their annual reports; these are set out below:
 

IFRS 15

Key points for companies to consider when preparing year-end disclosures for IFRS 15 are that:

  1. Explanations of the effects of transition should be comprehensive and linked to other information disclosed in the annual report. For example: companies should explain the transition method and break down the transitional adjustments into areas that can be related to the accounting policies disclosed (including the effects on the accounting for costs). 
  2. Changes made to accounting policies (including the reasons for these changes and associated judgements) should be clearly articulated and should convey company-specific information. Preparers should ensure accounting policy wording is updated, avoid boilerplate accounting policy wording and, if the effect of adoption is not material, explain why and disclose the judgements made in reaching that conclusion. 
  3. Judgements made in determining performance obligations and the timing of their delivery to the customer should be identified and explained. For example: companies should explain when control is transferred, and why, in company-specific terms and with reference to the contractual arrangements.
  4. The effect on the balance sheet should also be addressed, including accounting policies for contract assets and contract liabilities. For example: where relevant, preparers should explain the difference between receivables and contract assets and the treatment of onerous contracts.
     

IFRS 9

Key points for companies to consider when preparing year-end disclosures for IFRS 15 are that:

  1. Explanations of the effect of transition should be comprehensive and should be linked to other information disclosed in the annual report. For example: ensure all financial instruments within the scope of the standard are considered and explain the effect on deferred tax. 
  2. Changes made to accounting policies (including the reasons for these changes and associated judgements) should be clearly articulated and convey company-specific information. For example: companies should explain and quantify the principal differences between IAS 39 and IFRS 9 and key assumptions adopted. If the effect of adoption is not material, explain why.
  3. Disclosures (for example, information about Expected Credit Loss (ECL) policies, methodologies and estimation uncertainty) should be sufficiently granular to enable users to understand the effect on the business and key groups of assets. 
  4. There should be clear linkage to the business model and risk management strategy that underpins the classification and hedging requirements of IFRS 9. 

The FRC has indicated that it will continue its analysis of the adoption of IFRS 15 and IFRS 9, performing follow-up reviews on companies’ disclosures around revenue and financial instruments in a sample of annual reports. It will assess companies’ compliance with the more extensive set of year-end disclosure requirements and will, again, select its samples from those sectors that are more heavily affected by the new reporting requirements. 

Read the FRC’s reviews.

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