In line with previous years, the UK’s Financial Reporting Council (FRC) has written an Open Letter to Audit Committee Chairs and Finance Directors setting out its perspective on key matters that are relevant to the 2019/20 financial reporting season. These matters include old favourites, such as disclosures on critical judgements and estimates; but new topics, such as environmental disclosures and reporting of cash, have also been highlighted this year.
The FRC considers the strategic report to be an important means of communication between the board and users of the accounts. The letter highlights the need for improvement in the preparation of the non-financial information statement (a new requirement last year) and the importance of the new section 172 report, mandatory for periods commencing on or after 1 January 2019. For more information on the requirements and some practical tips on preparation, see the Financial Reporting Faculty’s online guide The strategic report and how to prepare one.
The non-financial information statement and the section 172 report do not specifically require companies to disclose the impact of climate change on their operations. However, the FRC highlights that companies should disclose the impact of climate change (when relevant) on their operations in line with the UK Corporate Governance Code focus on emerging risk. For more information on communicating climate risk and the Task Force on Climate-Related Financial Disclosures (TCFD) visit icaew.com/climate.
One of the key messages from the FRC is the importance of transparency and good quality reporting in promoting trust in business, particularly in times of uncertainty. The FRC expects companies to consider carefully the detail provided in those areas of their report exposed to heightened levels of risk.
The letter also mentions the impact of global reforms of interest rate benchmarks, such as LIBOR, and hedge accounting. To find out more listen to our Bitesize Briefing Financial reporting and interest rate benchmark reform - an introduction.
Although the FRC has seen improvement in the reporting of critical judgements and uncertainty and alternative performance measures (APM), there is still work to be done. The FRC continues to find basic errors in the preparation of the cash flow statement. Impairment of non-financial assets is another area of specific focus in times of uncertainty. In particular, the carrying value of goodwill as well as the investment in subsidiaries in the individual accounts of the parent are likely to come under close scrutiny.
IFRS 16 Leases is effective for accounting periods beginning on or after 1 January 2019 and the letter sets out what the FRC expects to see by way of disclosure. This was expanded in a press release published in November FRC expects companies to expand discussion of new leasing standard in annual reports and accounts.
Although IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers are not new, the FRC highlights areas for possible improvement and includes questions to be considered when preparing the accounts to ensure good quality disclosures.
The FRC has also published its Annual Review of Corporate Reporting 2018/19 . This provides further detail and context to the Open Letter to Audit Committee Chairs and Finance Directors. In particular, it provides extracts from some of the Financial Reporting Lab’s reports relevant to the FRC’s areas of focus. The Financial Reporting Faculty’s webinar ‘Looking ahead – hot topics and tips for the 2019/20 reporting season’ considers the findings of the FRC’s Annual Review of Corporate Reporting 2018/19 and recent thematic reviews, as well as other hot topics. For more information on this webinar and other faculty events visit icaew.com/frfevents.