The FRC has published its findings from its annual Review of Corporate Reporting and its thematic reviews. The FRC wrote to approximately 40 percent of the 246 companies reviewed in its last cycle with substantive questions about their reports, and about 6 percent of the companies reviewed were required to restate their accounts.

The reports published identify the areas where improvements to reporting are required. These include reporting on judgements and estimates, revenue and cash flow statements.  

The FRC has also set out its key disclosure expectations and areas of focus for the coming year which include disclosures around climate related risks and uncertainties in the context of Covid 19.  Companies are expected to provide clear, specific, relevant disclosures on these areas to help investors and other users of the accounts make informed decisions.

This article outlines some of key messages from the FRC reviews for you consider for the upcoming reporting season. 

Consistency within the annual report and accounts

The FRC has called for consistency between the information disclosed in the financial statements and the rest of the annual report.  Many of the queries raised by the FRC were as a result of apparent inconsistencies within the annual report and accounts. Examples of inconsistencies identified by the FRC include disclosure of uncertainties in the strategic report that suggested possible impairment of assets with no discussion of how the uncertainties have been addressed in impairment testing.

Climate disclosures

The FRC expects companies to clearly explain their climate risks, impact and policies. High quality disclosure is expected to include explanation of terminologies such as ‘net zero’, transparency over which emissions are included in emissions targets, how progress will be measured and reported and what assurance will be sought. For premium listed companies, the FRC will also consider the quality of disclosures against the new Taskforce for Climate-related Financial Disclosures (TCFD) requirements which are effective for accounting periods beginning on or after 1 January 2021.              

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Climate change can also affect the balances reported and disclosures in the financial statements. FRC expects companies to consider and ensure the impact of their climate risks and policies are appropriately reflected in the financial statements

Significant judgements and estimates disclosure

Significant judgements and estimates disclosure continues to feature as the area with most queries raised by the FRC.

Detailed, specific and clear disclosures are expected where a particular judgement had a significant impact on financial statements. Information such as the reasons why judgement was required, the factors considered, the conclusion reached and the impact on the financial statements enable the users of the accounts to better understand the judgement applied by management.

Disclosure of significant estimates requires transparent reporting of the estimation uncertainties. Companies are expected to provide description and quantification of underlying assumptions and sensitivity of changing assumptions or range of possible outcomes to give clearer insight into possible changes in balance sheet values over the next twelve months.

High quality disclosures of significant judgements and estimates are particularly important given the uncertainties over the future impact of Covid 19 and climate change on the economy and businesses.

Alternative performance measures (APMs)

While the FRC noted that companies generally provided good quality APM disclosures, the most frequent issues identified include{

  • APMs being given more prominence or authority than GAAP measures.
  • Lack of explanation or rationale for excluding amounts from APMs, including reasons for classifying amounts as adjusting, ‘non underlying’ or ‘non-core’.
  • No reconciliations of APMs to the GAAP balances and where reconciliations are provided, no support for reconciling items. 

Disclosure objectives and material disclosures

FRC emphasises the need for companies to consider the disclosure objectives of the accounting standards and disclose additional information to meet these overall disclosure objectives, where material. This is in addition to providing the detailed disclosure requirements of the individual standards. Such enhanced disclosure is expected to provide users of the accounts with better information for their decision making.

Companies are encouraged to disclose only material information, especially where immaterial disclosures may obscure the more important information.

Addressing errors in the reporting of cash flows

The FRC continues to raise a significant number of queries in relation to cash flow statement. There is concern that companies are not picking up the errors as part of their quality procedures. The FRC has called for companies to consider the guidance in the relevant thematic report and perform a robust review of the cash flow statement.

Issues identified from the review include misclassification of cash flows between operating, investing and financing activities,

inconsistency between amounts reported in the cash flow statements and amounts reported elsewhere in the annual reports and accounts and inappropriate netting of balances.

IFRS 15 improvements

The FRC expects companies to provide:

  • Clear description of variable consideration, including the methods used to estimate the variable consideration.
  • Clear and specific accounting policies for significant revenue streams
  • Better disclosure in relation to timing of revenue recognition and the methods used for over time revenue recognition.
  • Details of significant judgements made over revenue recognition.

IFRS 9 improvements

The FRC expects companies to provide clear and transparent information of how specific material financial transactions or arrangements were reflected in the financial statements, including details of financial risks and mitigating actions. Where material, expected credit loss (ECL) disclosures are expected to explain the approach and significant assumptions used in the measurement of ECL. Also, companies are expected to continue to disclose additional information about their banking covenants unless the likelihood of breach is considered remote.

If you would like to discuss any of the topics in more detail, then please contact us.