In November 2020, the Financial Reporting Council (FRC) issued an open letter that focused on key issues for the 2020/21 financial reporting season. Imogen Massey summarises the main points.
Investors expect reports to include details of:
currently available cash and other resources;
key actions management has taken and plans to take;
longer-term impacts on the business model and strategy;
the board’s assessment of going concern and viability, as well as the methods, judgements and assumptions underlying that assessment.
Companies should consider including quantitative information that relates to impact on performance, position and prospects. They should also disclose information on any judgements involving estimation uncertainty. This might include relevant sensitivities or ranges of outcomes to help users understand the assumptions being made. Significant judgements made in deciding whether impairment indicators exist should also be disclosed and explained.
Reports should contain company-specific risks and uncertainties, including impacts on different parts of the business, any major sources of estimation uncertainty, and the range of potential outcomes.
More emphasis on climate change
The FRC says that current disclosures have not been meeting investors’ needs. Companies are encouraged to add more – including a clear explanation of environmental policies, a balanced description of how they incorporate these policies and targets into business plans and their expected impact, and the impact of their businesses on the environment, including their supply chains.
Clarity on IFRS 15 compliance
Companies are expected to explain clearly how they have applied IFRS 15 (‘Revenue from Contracts with Customers’) to their specific circumstances. This includes:
clearly described performance obligations, timing of revenue recognition, and any significant judgements made by management;
identification of ‘contract balances’ and explanation of any significant movements;
consistent reporting of revenue-related information in the strategic report and in the financial statements (e.g. significant customer contracts or disaggregation of revenue).
IFRS 16 improvements
The FRC has asked companies to improve reporting on IFRS 16 ‘Leases’ arrangements by:
using entity-specific, rather than boilerplate, accounting policies;
providing sufficiently detailed explanations to help users understand any significant judgements and their implications (e.g. in relation to lease term or items not within the scope of the standard).
Cash flow and liquidity risk disclosures
The FRC expects to see the following in forthcoming reports:
a clear explanation of methods, assumptions and judgements, in assessing going concern and viability;
consistency in the amounts and descriptions of items in the cash flow statements and other areas of the annual report, including strategic report, other primary statements, and disclosure of changes in financing liabilities;
disclosure of accounting policies and judgements that relate to the cash flow statement, particularly for large one-off transactions.
Narrative reporting and corporate governance
The FRC highlighted two issues:
Section 172 statements
Following the first reporting season where s172 statements were compulsory for many companies, it seems a large number failed to explain how directors discharged their duties (under s172 of the Companies Act 2006). In particular they did not always clarify how they took responsibility for the consequences of decisions in the long term, nor adequately demonstrate a two-way dialogue with stakeholders and how feedback from stakeholders influenced their decision making.
Companies are encouraged to improve reporting in the following areas:
how employee-related issues and concerns are elevated to the board;
the basis on which views are promoted to board discussion;
direct actions arising from board discussions;
how the company relays its decisions on feedback provided by its workforce.
In many cases, companies are not doing effective succession planning for the departure of the chair (or other directors). There is a lack of detailed and transparent disclosures in governance reports about succession planning, and, in many cases, the chair or other directors are having to stay in post while a successor is found.
Companies must develop effective succession plans which anticipate departures and allow sufficient time in the recruitment process to enable a smooth transition. They should also consider the importance of a diverse leadership team, and disclose details of measures to identify such diverse individuals as part of their succession plan.