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FRC flags hot topics in financial reporting

FRC flags hot topics in financial reporting

Do the disclosures in the latest Financial Reporting Council's briefing provide the reader with sufficient clarity over the effect of the new standard?

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The FRC’s Corporate Reporting Review (CRR) has issued a short briefing of topical issues that came out of their most recent monitoring activities. This should be helpful for financial statement preparers particularly during the upcoming 2018 interim reporting season. It further confirms that the Financial Reporting Council will focus on those areas in their Corporate Reporting Review process.

New accounting standards – do the disclosures provide the reader with sufficient clarity over the effect of the new standard?

Preparers and auditors are reminded about the FRC’s expectations with regards to disclosure of the first time adoption of IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from contracts with Customers’ which we discuss in more detail in the article ‘IFRS 9 & 15: What are the new disclosures in interim accounts?’

On selected companies’ interim reports the FRC will be conducting thematic reviews on the disclosure of the effects of implementation of both IFRS 9 and IFRS 15.

Directors should consider the implications that the adoption of these new standards might have on profits available for distribution. For more information see our article in Prepared - Realised and unrealised profits: why it’s vital to know the difference.

Other topical issues

Do you have any significant supplier financing arrangements?

Are your suppliers paid on your behalf by a finance provider, such as a bank; for example in a reverse factoring arrangement? Is the arrangement material to your financial statements? If so, the FRC would expect to find an explanation of the nature of the arrangement, any implications for the company’s liquidity, as well any significant accounting judgements taken. The FRC will also look at the classification of those arrangements in the balance sheet and the cash flow statement.

The transparency of supplier finance arrangements will be an area of FRC focus during 2018. In the briefing, the FRC refers to a press release it issued in December 2014 that described some of the accounting and reporting issues related to such arrangements.

Has there been a trigger for impairment?

Have you identified any significant adverse changes in the technological, market, economic or legal environment that you operate in? In these cases the FRC expects disclosure of the judgements made when assessing the possible effects of such triggers on the financial statements. For example, the judgements made over the assumptions used when determining estimates for forecast future cash flows used in asset impairment tests.

The FRC will pay particular attention to the impairment disclosures for companies in their priority sectors [footnote] and market sectors where there have been profit warnings and asset write-downs.

Recurring themes as noted by the CRR’s monitoring activities

The cash flow statement remains an area of focus for the FRC. A frequent finding is cash flows erroneously classified as investing activities in cases where they didn’t result in a recognised asset.

Where you have undergone a capital reorganisation you need to consider the implications for EPS. Following a change in the number of shares outstanding as a result of a a share split or consolidation, the prior year comparative EPS amounts are restated.

Decisions over the materiality of a matter should be based on IFRS numbers not management’s alternative performance measures.

A continuing key area of focus is the FRC’s review and challenge of disclosures about significant judgements taken and estimates made.

Last but not least

The FRC reminds directors of public companies that if they are planning to pay a dividend and last year’s annual accounts of the parent company don’t show sufficient distributable profits, then they need to file accounts that show sufficient profits before the dividend is declared (or paid, in the case of an interim dividend). The requirement for filing such accounts is often overlooked. [for more information see our previous article in prepared 'Realised and unrealised profits: why it’s vital to know the difference']

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