When announcing the publication of the results of its Thematic Review of Reporting by Smaller Listed and AIM Quoted Companies, the Financial Reporting Council (FRC) also announced the subjects of four Thematic Reviews that it intends to conduct during 2019. The topics being covered are:
- Disclosure of the effect of the adoption IFRS 9 and IFRS 15 in annual accounts
- Impairment of non-financial assets
- The effect of IFRS 16 in companies’ 2019 interim accounts; and
- The effects of the decision to leave the EU on companies’ disclosures.
Companies will be selected for a review mainly from industries where the effect of each topic is considered to be most significant. Some, but not all, companies will be pre-informed if they are included in the impairment Thematic Review. It is unlikely that participants in the other Thematic Reviews will be notified in advance. These Reviews supplement, rather than replace, the FRC’s general annual report monitoring activities.
Disclosure of the effect of the adoption of IFRS 9 and IFRS 15 in annual accounts
The FRC recently published the results of its 2018 Thematic Reviews of the disclosures in the interim financial statements relating to the adoption of IFRS 9 and IFRS 15. It noted that the disclosures were “of mixed quality” and that the disclosure requirements that apply to annual accounts are much more extensive than those required within interim statements. The FRC expects to see:
- Comprehensive explanations of the effect of transition, with links to other relevant information in the annual report and accounts
- Clear descriptions and explanations supporting changes to accounting policies, including any associated judgements made in their determination
- Companies using the examples within the 2018 Thematic Review to benchmark the quality of their own disclosures.
Read the FRC’s reviews of interim reporting on IFRS 9 and FRS 15.
Impairment of non-financial assets
The FRC has noted that certain sectors of the economy are currently under pressure and this may be an indicator that a non-financial asset requires an impairment review under IAS 36. It expects greater transparency around the events and circumstances that lead to the impairment and the basis on which a conclusion that the assets are recoverable has been made.
The FRC has highlighted specific areas where disclosures could be improved, including:
- Disclosing the key assumptions used (eg revenue growth, margins or operating costs) and clearly explaining when changes, including the combined impact of individual assumptions, could result in impairment.
- Identifying assumptions that are specific for an individual cash generating unit, rather than presenting an average value or a range.
- Indicating whether a parent company has tested its investments in subsidiaries, associates and joint ventures for impairment when its net assets exceed the group’s and/or its market capitalisation.
The effect of IFRS 16 in companies’ 2019 interim accounts
The FRC will review companies’ disclosures of the effect of the adoption of IFRS 16 in interim accounts issued in 2019. It expects companies to include detailed quantitative disclosure of the expected effect of transition to IFRS 16 in their final accounts before implementation of IFRS 16, (December 2018 year-end accounts) followed up with supporting explanations in the 2019 interim accounts about the effect of the new standard. It will be particularly important to provide meaningful and clear explanations of changes in policies, and judgements made, such as whether a lease exists.
IAS 34 requires a company to describe the nature and effect of a change of accounting policy. The FRC expects:
- Quantitative disclosure to be accompanied by informative and detailed explanation of the changes, specific to the company’s circumstances
- Clear explanations of the effect of transition, including comparison of previous accounting policies with new policies
- Appropriate commentary on comparative amounts, where transitional arrangements may mean these are not directly comparable with current period amounts
- Key judgements explained including clarification of exemptions applied and policy choices made
- An explanation of how the transition has been implemented after careful consideration of the transitional disclosure requirements under IFRS 16 and the requirements of IAS 8.
The results of this Thematic Review will help inform the FRC’s monitoring of the adoption of IFRS 16 in December 2019 annual reports.
The results of these Thematic Reviews are likely to be published towards the end of 2019 and will include examples of best practice and areas in which the FRC considers further improvements are required.
Further information on the Thematic Reviews can be found in the FRC’s press release.
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