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FRC provides useful examples of COVID-19 related disclosures

18 August 2020

The effect of the coronavirus pandemic (COVID-19) has varied significantly from industry to industry. Within some industries it has had either a minimal effect, or even resulted in an improvement in the performance of the company, but for others there can be pervasive effects on both the operational and financial aspects of the business and its future prospects. This means that it can sometimes be difficult to determine what level of detail should be included within the financial statements with regards to annual accounts and interim accounts disclosures.

To assist preparers of accounts in providing the appropriate level of detail in disclosures to enable users to understand the effect on current period performance and also expected effects on future performance, the FRC has recently published a report on its thematic review on the disclosure of financial reporting effects of COVID-19 for interim and annual accounts with a March 2020 period end.

This report identifies areas where disclosures affected by COVID-19 can be improved, as well as providing examples demonstrating the level of detail provided by better disclosures. The examples will not be relevant for all companies or all circumstances, but each demonstrates a characteristic of useful disclosure.

This thematic review builds on the guidance contained in the March 2020 FRC / FCA / PRA joint statement (see - External Audit, Financial Reporting and Coronavirus (COVID-19), and complements the two reports published by the Financial Reporting Lab: ‘COVID-19: Going concern, risk and viability’ and ‘COVID-19: Resources, action, the future’ (see - FRC guidance for reporting in times of uncertainty).

Key findings

The main issues and improvement areas highlighted in the review are:

  1. Providing high quality forward-looking information in the current environment is very important.
  2. The best disclosures that the FRC saw were those that were specific to the company and which provided additional information explaining the effects of COVID-19 on the company.
  3. Going concern disclosures in both interim and annual financial statements should clearly explain the key assumptions and judgements taken in determining whether a company is able to operate as a going concern. The FRC specifically identified a lack of disclosures in accordance with IAS 1:122 on significant judgements in situations where significant judgements had been made as part of the going concern assessment.
  4. Assumptions used in determining whether the company is a going concern should be compatible with assumptions used in other areas of the financial statements, for example liquidity disclosures, impairment disclosures, recognition of deferred tax assets, and expected credit loss (ECL) scenarios, as well as the viability statement.
  5. The FRC expects sensitivity analysis or details of a range of possible outcomes to be provided for areas subject to significant estimation uncertainty. The number of disclosures in this area is likely to increase as a result of COVID-19. The FRC picked out three specific issues in the report:
    1. Lack of explanation as to why certain sensitivity ranges were chosen and what were the key assumptions upon which the sensitivities were based
    2. Indications that the values for which sensitivities were provided did not necessarily correlate with the extent of reasonably possible changes
    3. A high number of instances where disclosures around sensitivities or ranges of possible outcomes were incomplete or missing altogether.
  6. The arbitrary splitting of items such as impairment charges between COVID-19 and non-COVID-19 financial statement captions are discouraged, as such allocations are likely to be highly subjective and therefore unreliable.
  7. Although IAS 34 Interim Financial Reporting has only limited disclosure requirements, interim financial statements would benefit from more detailed disclosures explaining the way in which COVID-19 has impacted a company’s reported performance and future prospects ie going above just the minimum mandatory disclosures. The report highlights areas where the FRC considers there to be particular need of this.

Read the FRC's thematic review on the disclosure of financial reporting effects of COVID-19

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