FRC Annual Review of Corporate Governance and Reporting 2017/2018 published

The Financial Reporting Council (FRC) has published their Annual Review of Corporate Governance and Reporting 2017/18 and an open letter to Finance Directors and Audit Committee Chairs calling for improvements in key areas of corporate reporting.

Key areas identified for improvement include reporting of critical judgements and estimates, and the elimination of basic errors in the annual report and accounts. The Annual Review sets out the issues most commonly raised by the FRC in their reviews of annual reports, with the disclosure of judgements and estimates continuing to be at the top of the list. Other commonly raised issues include:

• Alternative Performance Measures (APMs)
• the Strategic Report
• income taxes
• revenue
• business combinations
• impairment

The FRC also set out what they expect to see in accounts for years ended 31 December 2018 in respect of the adoption of IFRSs 9 (Financial Instruments) and 15 (Revenue from Contracts with Customers), and disclosure of the expected impact of IFRS 16 Leases.

Other topical areas of reporting are also highlighted, including:

• Britain exiting the EU
• complex supplier arrangements
• risk and viability reporting 
• the Strategic Report
• Alternative Performance Measures (APMs)

More information, including links to both the letter and the Annual Review of Corporate Governance and Reporting 2017/18, is available on the FRC website.

FRC publishes thematic review findings on IFRS 9 and IFRS 15 company disclosures

The Financial Reporting Council (FRC) has published two thematic reviews to help companies improve the quality of their corporate reporting in relation to the new accounting standards IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments.

The reports analyse the disclosures in a sample of companies’ June 2018 interim reports in relation to the adoption of the new standards and provide examples of better practice in explaining their effect. The FRC notes that it expects other companies to use these examples to benchmark their own disclosures in upcoming reports and accounts.

The FRC has encouraged companies to invest sufficient time during their year-end preparation to ensure that transition disclosures are comprehensive and company-specific and note that they will challenge companies who do not provide an adequate level of disclosure about the impact of the new standards.

IFRS 15

In respect of IFRS 15 key findings include a number of areas where disclosures could be improved. For example, information about transition adjustments recognised, explanation of the changes made to accounting policies and information about performance obligations, a new concept introduced by IFRS 15, including judgements made in determining performance obligations and when they are considered to be satisfied.

IFRS 9

In respect of IFRS 9 the FRC highlights for improvement the quantification of the effect of estimation uncertainty in measuring expected credit losses and disclosure of the sensitivity of the amounts to changes in assumptions and estimations and / or a range of reasonably possible outcomes and evidence of consideration of the potential impact of the new standard, even where it does not have a material effect.

The reviews can be accessed from the FRC website.

FRC publishes thematic review – reporting by smaller listed and AIM quoted companies

The FRC has issued a report which looks at certain aspects of reporting by smaller listed and AIM quoted companies. The FRC reviewed the reports and accounts of 40 companies to consider:

• Alternative Performance Measures (APMs) and Strategic Reports;
• pension disclosures
• accounting policies, including critical judgements and estimates
• tax disclosures
• cash flow statements

The topics were selected from previous FRC thematic reviews, which focused on larger companies, and other aspects identified through the FRC’s regular monitoring activity.

While the review identified some better examples of smaller companies’ disclosures, it also identified several areas requiring improvement. Companies should provide more specific disclosures of significant accounting judgements and more quantitative information on key sources of estimation uncertainty. The FRC also found that companies could do more to ensure that the classification of cash flows complies with IAS 7 Statement of Cash Flows and that all sections of the report present APMs in a balanced and transparent manner.

The report contains a helpful ‘reminders’ section which can be used as an aide memoir to assist companies in considering the requirements of the Companies Act and relevant IFRSs.

The report can be accessed from the FRC website.

FRC thematic reviews of corporate reporting for 2019/20

The FRC has stated its intention to continue analysis of the adoption of IFRS 15 (Revenue from Contracts with Customers) and IFRS 9 (Financial Instruments). They will perform follow-up reviews on companies’ disclosures around revenue and financial instruments, and their impact, in a sample of annual reports. The assessment will cover companies’ compliance with the more extensive set of year-end disclosure requirements. In addition, the FRC will also undertake thematic reviews of:

• impairment of non-financial assets
• the effect of the new IFRS on leases in companies’ 2019 interim accounts
• the effects of the decision to leave the EU on companies’ disclosures

Samples will be selected from those sectors which are more heavily impacted by the new reporting requirements. The FRC will select companies for its impairment review predominantly from sectors of the economy that are currently under pressure. It will also review the accounts of those for whom circumstances and events in the current year indicate that impairment may be a significant matter. Some, but not all, companies in the sample will be pre-informed of the review.

The FRC will also conduct a focused review of the information reported in June 2019 interim reports of a number of companies, focusing on industries where the adoption of the new standard, IFRS 16 Leases, may have a material effect.

FRC publishes factsheets on FRS 102

The FRC have issued a suite of staff factsheets on aspects of FRS 102, including the 2017 triennial review. The factsheets are intended to assist stakeholders by highlighting certain requirements of FRS 102. 

The factsheets cover the following topics and can be accessed from the FRC website:

Fact Sheet 1 - FRS 102: Triennial Review 2017 Amendments 
Fact Sheet 2 - FRS 102: Triennial Review 2017 Transition 
Fact Sheet 3 - FRS 102: Illustrative Statement of Cash Flows 
Fact Sheet 4 - FRS 102: Financial Instruments 
Fact Sheet 5 - FRS 102: Property: Fair Value Measurement 
Fact Sheet 6 - FRS 102: Business Combinations 
Fact Sheet 7 - FRS 102: Transition to FRS 102 

IASB clarifies its definition of material

The IASB has issued amendments to its definition of ‘material’ making amendments to IAS 1 (Presentation of Financial Statements) and IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors).

The amendments are a response to findings that some companies experienced difficulties using the previous definition when judging whether information was material for inclusion in the financial statements.

Previous definition: Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.

New definition: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

The changes are effective from 1 January 2020, but companies can decide to apply them earlier.

The amendments have not yet been endorsed by the EU.

The press release can be found on the IASB website.

IASB amends definition of business in IFRS 3 (Business Combinations)

The IASB has published definition of a business, amendments to IFRS 3. The amendments are effective for business combinations which occur in the first annual reporting period beginning on or after 1 January 2020. Early adoption is permitted. The amendments have not yet been adopted by the EU.

The amendments include a revised definition of a business.

Previous definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

New definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others.

The amendments also include those which will help an entity in determining whether it has acquired a business or a group of assets.

The press release can be found on the IASB website.

FRC Financial Reporting Lab (the Lab) news 

Reporting on the sources and uses of cash

The Lab is calling for investors and companies of all sizes to participate in a new project. 

Following on from the Lab’s reports on risk, viability and dividend policy this project will explore best practice disclosures around the sources and uses of cash. It will consider how reporting on the location, nature and availability of cash within a group, as well as future uses of cash, can be presented in a way that is most useful to investor decision-making.

More details can be found on the FRC website.

Artificial intelligence and corporate reporting

The Lab has published the latest in its series of reports looking at how technology might impact the production, distribution and consumption of corporate reporting. The report explains what artificial intelligence is, where its use might make sense in corporate reporting, and explores some of the possible and current use cases for the technology.

The report can be accessed from the FRC website.