Be more transparent, balanced and company-specific in your reporting, the Financial Reporting Council (FRC) urges businesses in its Annual Review of Corporate Reporting.
The FRC’s annual review, issued every autumn, summarises its corporate financial reporting review work undertaken in the UK over the previous twelve months – including an assessment of the quality they have found. This year, the FRC also issued thematic reviews on pension disclosures, Alternative Performance Measures (APMs), together with disclosure of judgements and estimates.
Of particular interest for preparers is the insight the annual review offers into the FRC’s focus areas for planned reviews of company's accounts, ahead of the forthcoming reporting season.
The FRC is focusing on narrative disclosure and is calling for transparent and balanced reporting – encouraging companies to provide entity-specific rather than generic information in those areas they view as the most critical and judgmental to the longer term success and strategy of the entity.
Given the sheer volume of information included in most annual reports, it is sometimes hard for investors and other stakeholders to pinpoint the key areas of judgement and estimate affecting the numbers in financial statements. That could include, for example, judgements required over the timing of revenue recognition or over the determination of a particular sensitive assumption, when calculating a provision.
Investors are looking for a balanced analysis of an entity’s performance. They need to be able to understand the judgements made by directors in choosing appropriate non-GAAP measures when describing the performance of the entity. They are also looking for transparency in describing the risks that might affect the entity: the effect of Brexit on their business model, for example.
Above all, the FRC believes that directors should avoid boilerplate descriptions, in order to make the disclosure entity-specific. That means including only those areas that actually required judgement, rather than a shopping list of all the possible risks an entity might face.
Below is a selection of the points on which the FRC will be focusing in future reviews: for a fuller description, see the FRC’s reports.
Companies will be expected to provide a balanced review, giving equal prominence to those areas of the business performing well and less well – and showing a clear link between the discussion of strategy, KPIs and the financial statements.
- Disclose the amount subject to the estimation uncertainty, rather than just the balance sheet line item in which it is included. Tax uncertainties, in particular, were highlighted as an area where insufficient disclosure is often given.
- Quantify assumptions (for example, the forecast price of platinum used to make an estimate).
The FRC will also review 2018 interim accounts to assess disclosures on the effect of adopting IFRS 9 and 15. The focus will be on industries where these standards are expected to have a material effect.
For the next season, the FRC has already announced the focus areas for its thematic reviews. It will contact about 40 companies in the smaller listed and AIM segment, notifying them about which two of the five areas they will be assessing. These areas are: APMs, accounting policies including judgements and estimates, cash flows statements, tax and pensions.