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Financial Reporting Brief

August 2016

Our featured article for August is 'Uncertainty – The Accounting and Reporting Challenge' with Brendan Sheridan commenting on the challenges of clear, entity-specific reporting during periods of uncertainty, with Brexit presenting such challenges.

Uncertainty – The Accounting and Reporting Challenge

Financial statements provide investors and analysts with information about a company’s ability to manage its financial transactions and build value in the organisation. The information gathered to prepare financial statements includes estimates which require the entity to determine what financial value to record when the actual amount is unknown.

Accounting estimates take on additional complexity where there is significant uncertainty. The challenge is to recognise uncertainty and apply appropriate methods to measurement and recording of uncertain amounts in the financial statements.

An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period. Determining the carrying amounts of some assets and liabilities requires estimation of the effects of uncertain future events on those assets and liabilities at the end of the reporting period. The greater the scale of variables and assumptions, the greater the scale of uncertainty and consequently the potential for consequential material adjustments to be made in future periods.

In the following paragraphs we comment on how Brexit is giving rise to such uncertainty with it only being in the early stages of evolution as to its potential impact on the profitability, financial condition and prospects of a wide range of entities.

Not since the peak of the economic recession in the late noughties have there been circumstances that have sent shockwaves through the business community and the economy in general more than Brexit.

The challenges to the UK will include the lack of clarity over the UK’s future trading relationships in goods and services (including financial services) with Europe and the rest of the world, and the changes that may be required to UK legislation where it has followed EU laws.

Over the next couple of years how the UK deals with these challenges is likely to have a substantial impact in Ireland with room for both positives and negatives.

Reporting Considerations

Stakeholders need to know the overall environment of the company with which they are engaged, either by investment or otherwise. The financial reports should provide a general understanding of a company’s business model, including a description of the main markets in which a company operates and its value chain.

Not all businesses will be affected to the same extent. Boards must determine what disclosures, if any, are required to ensure their financial statements and narrative reporting meet the needs of investors and other stakeholders.

Entities in the UK will be aware that there are many financial and regulatory reporting considerations, which may even at a secondary level have a major impact on Irish entities, with some of the main areas being:

Risk factors – Brexit may be expected to have an affect on an entity’s risk factors, including new risks or changes to existing risks that may need to be disclosed,
Accounting policies – in a volatile environment, disclosure of accounting policies and the methods of applying those policies may be particularly critical to an investor’s understanding of the entity’s financial statements. Disclosure requirements should be carefully considered,
Impact of market volatility on assumptions and forecasts – entities should identify which judgements and disclosures could be affected by volatility, with a good starting point being an evaluation of the assumptions underlying the critical accounting policies,
Impairment reviews – market reaction may have triggered a reaction to consider whether financial or non-financial assets, including goodwill and other intangible assets, are impaired,
Financial instrument considerations – which may include such matters as hedge accounting and fair value considerations, and
Going concern – movements in anticipated short-term cash flows in regions affected by Brexit may lead entities to consider whether they should continue to prepare their financial statements on a going concern basis.

The areas above are fundamental, they should not be considered to be exhaustive and the relative significance of the matters may vary between entities.

Interim Reporting

The most immediate challenge for listed companies, many of which have half-years ending on 30 June, will be the interim reporting to be carried out by the end of September. Some may already have filed. These interim reports will have to give due consideration and appropriate disclosure to:

Important events during the first six months and their impact on the interim financial statements. For many, the Brexit impact will be potentially significant on their business model and disclosure should consider detail of the main markets in which the company operates.
Risks and uncertainties for the remaining six months – which for many may have changed from those disclosed in their most recent annual reports. Currency risk and volatility in the market place, for both customers and suppliers, will most likely be matters of concern.

Disclosures should be entity specific and ‘boilerplate’ disclosures should be avoided. It is important that the information conveyed provides a clear picture of the entity’s circumstances and how they are changing.

Conclusion

The longer term political and economic effects of Brexit are likely to remain unclear for some time, but it has triggered a significant amount of turbulence in the marketplace in terms of declining equity values and falling currency rates. The impact of these challenges will be significant for all entities.

Clear and concise reporting attaches great importance to disclosure of risks and uncertainties, enabling the user of the information to understand how those risks and uncertainties are relevant. Explanations should be reviewed by the company directors of any steps being taken to manage or mitigate the risks.

In these changing times those entities that make the effort to keep stakeholders informed of developments and their impact have greatly improved the prospects of earning the benefits of continuing investor and stakeholder loyalty.

What's New- Monthly Reporting Pack

Irish GAAP / GAAS & Related Developments

IAASA Information Note ‘Consideration of impact of Brexit for issuers’ half-yearly financial reports’

IAASA publishes survey of operating lease commitments in issuers’ 2015 annual financial statements

Corporate culture key to sustainable growth

FRC publish update on reporting by smaller listed and AIM quoted companies

ICAEW publishes report on the principal factors affecting financial reporting outcomes

Financial Reporting Council publishes Annual Report for 2015/16

Confidence grows in audit, but more needs to be done says FRC report

Reminders for half-yearly and annual financial reports following the EU referendum

FRC concludes annual review of FRS 101 and proposes further changes in response to feedback

FRC comments on Executive Remuneration Working Group’s final report

IFRS & Related Developments

Recent sustainability reporting developments

ESMA calls for consistent application of IFRS 15

Two non-papers on European public good and true and fair view

FEE proposal for public country-by-country reporting on disclosing tax information

European Banking Authority consults on guidance on accounting for expected credit losses

Analysis of IFRS application by listed companies around the world

ESMA publishes statement highlighting matters for consideration in implementing IFRS 15 Revenue from Contracts with Customers

Regulatory & Related Developments

19th ESMA enforcement decisions report released

IAASA Annual Report 2015

Market Abuse Rules and Guidance published by the Central Bank

Proposals for Pension Reform

Publications

Alternative performance measures: A practical guide

IFRS in Focus — IASB proposes amendments to clarify the Definition of a Business and the Accounting for Previously Held Interests

IFRS in Focus — Brexit - Financial reporting implications

IFRS on point — June 2016