Findings of the FRC in respect of the report and accounts of Galliford Try plc
12 March 2020
The Financial Reporting Council (FRC) today announces the following restatements in relation to its review of the annual report and accounts of Galliford Try plc (the company), for the year ended 30 June 2018.
The FRC raised a number of issues with the company, including the recognition of revenue on construction contracts, and the classification of certain cash flows in its cash flow statement.
In its December 2019 interim report, published today, the company discloses that:
- it should not have recognised an £80m claim recoverable from the customer on the Aberdeen Western Peripheral Route contract at 30 June 2018 and 2019, as it did not meet the recognition criteria of the relevant revenue accounting standards4. It has corrected this error by way of a prior year adjustment to reduce retained earnings at each of those dates by £64.8m, net of tax. This adjustment would have reduced revenue and profit before tax in the years to 30 June 2017 and 30 June 2018 by £62.5m and £17.5m, respectively.
- it should not have recognised certain claims recoverable from third parties at 30 June 2018. The company derecognised these claims when it adopted the new accounting standard, IFRS 154 from 1 July 2018. The FRC challenged the company’s treatment of the adjustment. The company has now concluded that £21.9m of the net £28.7m transition adjustment should have been presented as the correction of an error in its application of the previous accounting standard, IAS 114. This adjustment would have increased cost of sales and reduced profit before tax in the years to 30 June 2016 and earlier, 30 June 2017, and 30 June 2018 by £13.8m, £8.7m, and £4.6m, respectively.
It has also restated its cash flow statement, to report cash flows from loans and advances to joint ventures within investing activities5
. The company had previously reported £53.2m of cash flows within operating activities in 2018, prior to correcting this treatment in its annual report and accounts to 30 June 2019.
The FRC notes that the company has also reflected on other aspects of its financial reporting, which has led to certain other restatements of comparative information in the interim accounts. The total effect of all the errors identified was to overstate net assets by £94.3m at 30 June 2018.
Following the corrective action taken by the company, the FRC regards the enquiries arising from its review of the company’s annual report and accounts for the year ended 30 June 2018, initiated on 22 May 2019, as concluded.
The FRC’s Executive Director of Supervision, David Rule said:
“The FRC found that Galliford Try overstated its revenue in 2018, which the company has now corrected. We will continue to hold companies to account when they do not comply with the requirements of relevant financial reporting standards.”
- The FRC’s mission is to promote transparency and integrity in business. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
- The FRC’s Conduct Committee is a body authorised under the Companies Act 2006 (the Act) to review and investigate the annual accounts, strategic and directors’ reports of public and large private companies to see whether they comply with the requirements of the Act, including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK or International Financial Reporting Standards.
- Where breaches of the Act are discovered the Conduct Committee seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts, strategic or directors’ report are defective in a material respect the Conduct Committee will, wherever possible, try to secure their revision by voluntary means. If this approach fails, the Conduct Committee is empowered to make an application to the court under section 456 of the Act for an order for revision. To date no court applications have been made.
- IFRS 15 ‘Revenue from Contracts with Customers’ applies to accounting periods beginning on or after 1 January 2018. The introduction of IFRS 15 led to the withdrawal of other accounting standards, including IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’. Under IFRS 15, variable consideration receivable from customers should be recognised only to the extent that it is highly probable there will not be a significant reversal of revenue in future. Under IAS 11, revenue from claims should only have been recognised if the claim was in an advanced state of negotiations such that it was probable that the customer would have accepted the claim, and the amount was capable of reliable measurement. The FRC routinely considers the application of new accounting standards, through its published thematic reviews highlighting examples of good practice and areas for improvement: https://www.frc.org.uk/accountants/corporate-reporting-review/corporate-reporting-thematic-reviews.
- IAS 7 ‘Statement of Cash Flows’ requires cash flows arising from loans and advances to other parties to be classified as investing cash flows.