The Financial Reporting Council (FRC) has published the findings of its review into IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, which has been identified as a recurrent problem area by the FRC.
Provisions and contingent liabilities reporting is of particular importance to investors owing to the forward-looking information it can provide about a company’s exposures. The issues giving rise to provisions and contingent liabilities are often long-term in nature, such as climate change and other environmental obligations, or significant to the assessment of future business performance, for example, onerous contracts and regulatory penalties or compensation.
The FRC’s review considered how a sample of 20 companies’ annual reports had met relevant reporting requirements, identified examples of good practice, and outlined its expectations for future disclosures.
The review found scope for improvements in several areas, in particular in:
- explaining how the amounts of expected outflows have been estimated, identifying the key assumptions applied and describing the associated uncertainties;
- disclosing the phasing of outflows companies expect to see as they utilise their provisions; and
- describing the underlying costs for which companies make provisions.
The FRC also encourages companies to disclose entity-specific accounting policies and to provide more quantitative information about contingent liabilities.
A link to the full report is available here.