The Financial Reporting Council (FRC) has published its annual end of year letter to CEOs, CFOs and Audit Committee Chairs setting out its reporting expectations for preparers of reports and accounts for the year ahead. This year’s letter is of particular significance to companies given the continuing backdrop of economic uncertainty, the impact of Covid-19 on the timing of company reporting and the operational change associated with the UK’s exit from the European Union. Some (but not all) of the key areas the FRC have highlighted are noted below:
Key expectations for Covid-19 reporting:
— Currently available cash and other resources;
— Key actions management has taken or are going to take;
— Longer term impacts on the business model and strategy; and
— The Board’s assessment of going concern and longer term viability (including their assumptions and judgments).
The FRC has highlighted the requirements of accounting standards to provide sufficient information for users to understand the impact of events and conditions on a company’s position and financial performance. This means that even if Covid-19 impact disclosures aren’t explicitly required they should be provided. The FRC has made clear this should, where possible, clearly quantify the impact of Covid-19 on financial performance, position and prospects.
Alternative performance measures (APMs):
The FRC have taken this opportunity to clarify that they expect all UK companies that use APMs to continue to apply the European Securities and Markets Authority (ESMA) Guidelines on APMs as they reflect best practice in the reporting of such measures, notwithstanding the UK’s exit from the European Union.
The FRC noted that whilst companies may comply with requirements on climate change impact, they are often not meeting investor needs. As a result they recommend:
— Describe any environmental policies rather than just listing them;
— Explain terminology used (such as ‘net zero’);
— Give a balanced view on how climate change is incorporated into business plans and performance against KPIs;
— Consider the impact on supply chains;
— Disclose the impact on measurement of financial position (fair values, useful economic lives etc).
Cash flow statements:
During a recent thematic review the FRC noted the quality of cash flow statements was a concern, numerous basic errors were seen and at a time when cash flow reporting is key to investors understanding. They have made it clear that they expect companies to implement robust checks and pre-issuance reviews on cash flow statements.
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Technology is driving change across banking, insurance and investment management companies. Customers expect to receive tailored products and access these in the way they want. Improved data and analytics is making this possible and more people than ever have access to financial products.
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