November 13, 2020 FRC Annual Review of Corporate Reporting 2019/2020
Quality of Corporate Reporting
The FRC assesses the quality of corporate reporting in the UK through its routine monitoring and thematic reviews. The FRC has seen incremental improvements in some areas and believes that the level of corporate reporting in the UK remains consistent.
However, the FRC emphasises that the most common outcome of its work is that companies enhance the quality of their future disclosures. Such disclosures should be sufficient for users to understand the effect of significant matters on the company’s performance, cash flows and financial position.
The need for companies to meet the overarching objectives of accounting standards as well as their detailed disclosure requirements is particularly relevant in the current COVID-19 affected environment where companies must explain novel transactions or unusual circumstances.
Impact of COVID-19 on financial reporting
Although the FRC notes that the context for company reporting has changed in the COVID-19 crisis, the key considerations for companies when preparing their report and accounts, such as clarity, consistency, relevance and transparency, remain.
Some characteristics of good disclosures include clear explanations as to how COVID-19 has affected the company’s reported position and performance and how it may affect future prospects. A consistent outlook across the business model, principal risks, going concern and accounting judgements is also identified as a good trait.
The FRC has published a detailed thematic review into the impact of COVID-19.
Frequent areas of FRC findings
The FRC identifies a number of different areas that are subject to frequent findings. Three of these are discussed below.
Impairment of Assets
In light of the COVID-19 pandemic, this is an area of focus. According to the FRC, companies which disclose significant judgements about whether to test investments, tangible or intangible assets for impairment need to explain the outcome of those judgements, the basis for the assumptions made and any sensitivities to changes in those assumptions.
Judgements and Estimates
Critical judgement disclosures should be tailored and not just repeat the accounting standard. They should explain the specific accounting judgements made and the effects.
Sources of estimation uncertainty should be quantified. Information about sensitivities or ranges of outcomes should be disclosed to help users understand the effect of management’s assumptions.
A company’s strategic report should give a fair, balanced and comprehensive view of the performance and position of the business, which includes consideration of the balance sheet and cash flows, as well as the result for the year. Other matters, taxation for example, may also be particularly relevant.
How Elemental can help
One of Elemental’s areas of specialism is the management of SPVs and holding companies. These companies will be undoubtedly impacted by a closer focus on impairment reviews, judgements, and estimates. We have certainly noted an increase in auditor activity in this area and expect closer scrutiny going forward. Our experts can advise on the appropriate level of disclosure to be made in financial reports. We will ensure that management have sufficient evidence to support impairment reviews, judgements and estimates so that financial statements are drawn up accurately and approved in good faith.