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Technical findings of the Conduct Committee’s Financial Reporting Review Panel: 2012/13

Common areas of questioning

  • Business reviews
  • Revenue recognition
  • Cash flow statements
  • Hedging
  • Financial instruments
  • Investment property
  • Income taxes
  • Provisions, contingent liabilities and contingent assets
  • Segmental reporting
  • Business combinations
  • Earnings and other amounts per share
  • Presentation of financial statements

Business reviews

balanced and comprehensive

  • We challenged companies where there was no discussion or explanation of key items (often described as exceptional):
    • Release of bad debt provision.
    • Impairment loss/tax credits.
    • Significant business streams.
    • Regulatory investigations or legal claims.
    • Fall in profits of core business stream.
  • Some private company business reviews were not consistent with the size or complexity of their business.

principal risks and uncertainties

  • We expect business reviews to identify the actions taken to mitigate the effects of principal risks and uncertainties (PRUs).
  • We challenged where there was a question whether:
    • all PRUs disclosed were principal;
    • PRUs were not company-specific; or
    • all PRUs were disclosed, eg, reliance on a single customer, licence due for renewal.

key performance indicators

  • Key performance indicators (KPIs) are required 'to the extent necessary' to provide an understanding of a company's position or operations.
  • We challenged companies where:
    • definitions were unclear or inconsistent; or
    • indicators could not be recalculated, eg, net cash flow identified as KPI but only financing cash flow discussed.

Revenue

  • Our questions on revenue recognition were prompted by:
    • lack of company-specific information; or
    • reliance on reference to the principles underlying the standard or to the text itself.
  • We queried lack of explanation of the point at which risks and rewards are transferred to the customer.
  • We queried methods for determining stage of completion involving provision of services.
  • We considered the accounting for unusual transactions not covered by the company's stated accounting policy, eg, part exchange transactions for house builders, deferred payment terms.
  • We challenged disclosures which did not support the company's description of its business model.
  • We challenged an insufficiently detailed policy for the recognition of rental income. Our work found that a company had not correctly applied the requirement to recognise rents on a lease containing stepped increases on a straight-line basis over the term of the lease.

Cash flow statements

  • We noted a range of minor mistakes indicative of lack of care.
  • Instances of misclassification included:
    • acquisition costs shown as investing;
    • listing costs disclosed as financing;
    • loan to third party as financing;
    • flows from acquisition of NCI as investing; and
    • purchase of assets under finance lease as outflow.
  • We challenged instances of inappropriate netting, eg:
    • Cash flows from acquisitions and disposals.
    • Single number reported for working capital requirements.
    • Interest paid and received shown as single number.

Hedge accounting

  • Criteria for hedge accounting need to be:
    • carefully and robustly assessed; and
    • considered on an on-going basis and determined actually to have been highly effective throughout designated period.
  • It is not permitted to hedge the group's presentation currency

Cash flow hedges: reclassifications

  • If a forecast transaction results in the recognition of a financial asset/liability, associated gains/losses in other comprehensive income (OCI) must be reclassified to profit or loss when the forecast cash flows of the hedged item affect profit or loss.
  • The amount reclassified to profit or loss must be disclosed separately, presented either in the statement of profit or loss and OCI or in the notes.
  • If a portion of a loss recognised in OCI is not expected to be recovered, that portion must be reclassified to profit or loss.

Impairment

  • Discount rate(s) should be pre-tax reflecting current market assessments of time value of money and asset-specific risks.
  • We challenged when a single discount rate was applied to CGUs with apparently different risk profiles.
  • The discount rate must equate to an investor's return.
  • A CGU is the smallest group of assets, including the asset, that generates largely independent cash flows, eg, usually means retail branch rather than brand.
  • A description is required of each key assumption driving cash flow projection determining value in use.
  • A description is also required of the approach to determining those values including how past experience or external sources of information have been used.

Financial Instruments

classification

  • The classification of instruments should be determined by the substance of the contractual arrangement.
  • We challenged the classification of:
    • limited partnership interests held by pension scheme trustees (noting the obligation to deliver financial assets and degree of discretion to avoid payments);
    • a payment made to extinguish convertible loan stock; and
    • shared equity receivables shown as loans and receivables.

inconsistent policies and practice

  • Policy said that trade payables were carried at fair value when they were disclosed at amortised cost.
  • Policy said gains/losses on hedging relationships were adjusted against the hedged item when this is not the case in practice.
  • Gains/losses were recognised on a fair value hedge when the hedge was described as fully effective.

Financial instrument disclosures

  • We challenged where no credit, liquidity or market risk was disclosed, as might be expected, for certain classes of financial instrument – eg, other receivables / loans and lease deposits excluded from credit risk disclosures.
  • We queried inadequate analysis of financial assets past due and not impaired.
  • We probed seemingly incomplete maturity analyses.

Investment property

  • We challenged minimal disclosures supporting investment property
  • Simple RICS/IVS compliance statements are inadequate to meet the requirements of IAS 40.
    • Significant assumptions applied must be disclosed.
    • Disclosures should include statements whether the fair value is supported by market or other evidence.
  • IFRS 13 will require more extensive fair value disclosures than IAS 40.

Income Taxes

  • We challenged lack of deferred tax on fair value adjustments to assets acquired in business combinations.
  • Deferred tax should be measured at the tax rates expected to apply when the asset/liability is realised or settled, based on tax rates enacted or substantively enacted at the period end.
  • The nature of evidence supporting a deferred tax asset is a required disclosure when its use depends on future profits and the company is loss-making.
  • Companies seemed confused about where to recognise current and deferred tax relating to items recognised outside the income statement; if the item is recognised in equity, tax should also be recognised in equity and not OCI.
  • We challenged deferred tax disclosed in OCI on share based payment credits.

Provisions, contingent liabilities and contingent assets

  • Disclosures should enable users to understand the nature, timing of relevant amounts.
  • We challenged the adequacy of provisions for potential fines arising from regulatory breaches and investigations.
  • We challenged possible incomplete disclosure of contingent liabilities, eg:
    • Arbitration with former investor in JV.
    • Regulatory breaches/fines.
  • We requested the components of provisions classified in a significant class of 'other' provisions.
  • We challenged aggregation of accruals and provisions.
  • Relevant disclosures are required for each class of provision, contingent liability and contingent asset and include uncertainties relating to amount or timing.

Segmental reporting

  • Our questions had a focus on:
    • material items not identified or described in required reconciliations;
    • entity-wide disclosures which were either inadequate or overlooked;
    • major customer information which was incomplete (must identify revenues and segment); and
    • geographical analysis of non-current assets which should exclude financial instruments and deferred tax.

Business combinations

recognition

  • All identifiable assets, subject to qualifying conditions, are to be recognised separately from goodwill.
  • We queried the lack of customer-related intangibles and mineral rights acquired.

measurement

  • Identifiable assets acquired and liabilities assumed are to be measured at the acquisition date fair values.
  • We challenged whether fair value adjustments were those of a market participant.
  • We queried whether exchange rates used were those ruling at the acquisition date.

consideration

  • Accounting for contingent payments to employees/selling shareholders has been clarified by the IFRS-IC.
  • Acquisition-related costs (except debt/equity issuance amounts) are to be expensed in the period.
  • Disclosures should enable users to evaluate the nature and financial effect of business combinations.

Earnings and other amounts per share

  • Key performance indicators should facilitate performance comparison over different periods and with peers.
  • Errors in determination and presentation of EPS, eg:
    • Own shares held not deducted in EPS calculation.
    • EPS from continuing operations was in fact from total operations.
    • Potential ordinary shares treated as dilutive where conversion would decrease loss per share.
    • Dilutive EPS adjusted by full number of options outstanding rather than the bonus element.

Presentation of financial statements

  • We challenged lack of disclosure of key judgments made in applying policies, eg:
    • Effective interest rate.
    • Non-recognition of some deferred tax losses.
  • We probed inadequate capital management disclosures, eg, failure to provide quantitative data or company's objectives.
  • We challenged non-disclosure of proposed dividends.
  • We challenged failure to present separately on face of balance sheet, eg:
    • Pension deficit.
    • Current tax assets and liabilities.
    • Material items of income and expense.
  • We challenged the aggregation of accruals and deferred income as these liabilities are different in nature and liquidity. Similar challenges were made in respect of prepayments and accrued income.

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Name Technical findings of the Conduct Committee’s Financial Reporting Review Panel: 2012/13
Publication date 27 September 2023
Type Report
Format PDF, 97.0 KB
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