FRC reviews of disclosures relating to reporting requirements
10 October 2019
Companies have responded positively to newly introduced reporting requirements for Revenue Recognition and Financial Instruments but there is still considerable scope for them to improve the quality of their annual report disclosures. The findings relate to three thematic reviews
conducted by the Financial Reporting Council (FRC) to analyse companies’ disclosures for the new requirements and for existing requirements on the Impairment of Non-financial Assets.
The implementation of IFRSs 9 and 15, which applied for the first time to 2018 year-ends, represented significant challenge and change for many companies, following a period of relative stability in terms of financial reporting requirements.
The FRC recognises the significant work that was undertaken in preparing for, and complying with, the new requirements. It takes time for such wide-ranging standards to be embedded but there were many examples of good disclosures within the accounts sampled and which are shared in the reviews published today.
However, as expected, there is considerable scope for companies to improve the quality of their disclosures which will be a focus of future reviews in the early years of application of the new standards. The FRC encourages all companies to review the reports in detail and consider the findings carefully when preparing their future reports and accounts.
Impairment is a matter of particular interest to investors in sectors that are experiencing structural change and across all sectors in periods of heightened macroeconomic uncertainty. The thematic review of IAS 36 disclosures in relation to non-financial assets found opportunities for improvement in a number of areas. The FRC therefore encourages companies to consider how they can improve their disclosures.
Each thematic review selected a sample of company accounts, skewed to focus on those sectors most affected by the relevant accounting requirements.
IFRS 15 ‘Revenue from Contracts with Customers’
The FRC found that, in general, companies provided helpful and meaningful explanation of the impact of the new standard. However, there was still scope for all companies sampled to improve the quality of their revenue disclosures, specifically by:
IFRS 9 ‘Financial Instruments’
- improving the descriptions of accounting policies and ensuring that these are tailored to their own particular circumstances; and
- providing more detailed information about the judgements significantly affecting the amount and timing of revenue.
The FRC identified instances of better practice across the sample of companies reviewed. However, it also identified that there was still room for companies to improve disclosures by:
Impairment of non-financial assets
- analysing the credit quality of trade receivables by non-banking companies; and
- providing details of the indicators of a significant increase in credit risk particularly by the smaller banks.
While the review identified instances of better practice across all key aspects of disclosure, it also identified a number of common disclosure omissions and opportunities to clarify and enhance disclosures. Specifically, the FRC encourage companies to pay greater attention to:
- providing relevant information around significant judgements and key assumptions made in estimating the recoverable amount of assets and cash-generating units.
- explaining the sensitivity to changes in key assumptions, where reasonably possible changes could give rise to impairment of goodwill or material further adjustments to already-impaired assets.
A link to the three thematic reviews can be found here
Notes to editors:
IFRS 15 sets the principles to apply when a company reports information about the nature, amount, timing and any uncertainty of revenue or cash flows from a contract with a customer. The amount recognised should represent the transfer of goods or services to the customer for an amount the company expects to be entitled to in exchange for the promised goods or services.
IFRS 9 specifies how an entity should classify and measure financial assets and financial liabilities. It introduces new impairment requirements which result in earlier recognition of impairment losses on financial assets, contract assets and lease receivables. The changes to hedge accounting are intended to align hedge accounting with risk management activities and make it more feasible for non-financial entities to use hedge accounting.
The underlying principle in IAS 36 is that the value an asset is recorded at in the accounts must not be more than the higher of the amount it could be sold for and the net benefit of continuing to use it. If the recorded value exceeds the amount from the asset’s use or sale, the asset is impaired and its recorded value must be reduced by recognising a loss.