Financial Reporting Brief 

December 2016 

Our featured article for December is '2016 Reporting – The Challenges' with Brendan Sheridan commenting on the matters highlighted by the regulators as priority issues for 2016 reporting and some helpful Deloitte suggestions.

2016 Reporting - The Challenges

The resilience and flexibility which Irish businesses have shown in the past are going to be called on again to deal with the challenges that are to be brought about by such major happenings as the UK decision to leave the EU – Brexit – together with the changing political climate, particularly in the US.

These factors increase the difficulties for directors to make commercial decisions and judgements about the way in which business should be managed. The complexities of the operating environment are further increased by matters such as low interest rates, changing exchange rates and other factors.

It is important that companies take the opportunity that their annual report provides to communicate key information to investors about the company’s performance, strategy and future prospects. Investors and other stakeholders should be made aware of and should be provided with an assessment of the risks and associated impacts these factors may bring about to a company’s business plan and its ability to achieve its objectives.

ESMA – Enforcement Priorities

ESMA is the overall supervisory authority for financial reporting in the European Union with national supervisors, including the FRC and IAASA, being part of its overall reporting network.

The priorities specifically identified in the ESMA report include: -

  • Presentation of financial performance – with a focus on increasing the communication effectiveness of financial statements and the manner in which the financial performance of an entity is presented.

Particular attention is drawn to a number of areas, including: -

- Any additional information included in the annual report being prepared on a basis consistent with ESMA guidelines, e.g. alternative performance measures and their presentation and disclosure

- Expense classification on a reliable basis, relevant to the particular business

- Segment information presented ‘through the eyes of management’ on a consistent basis with other information releases

- Movements in other comprehensive income and what is permitted to be reclassified to the income statement

- Earnings per share, and the manner in which they are presented in the financial statements

  • Financial Instruments – Distinction between Equity Instruments and Financial Liabilities

ESMA emphasises the need for issuers to keep in focus the underlying basis for distinguishing between the two - being the question of whether the entity has an unconditional right to avoid delivering cash or another financial asset to settle the contractual obligation. Attention is drawn to a number of matters including contingent settlement features, economic compulsion, embedded derivatives and others where particular care is needed to ensure that accounting and disclosure requirements are appropriately attended to.

  • New Standards (IFRS 9: Financial Instruments, IFRS 15: Revenue, IFRS 16: Leases)

Significant new standards are on their way over the next couple of years. Issuers are encouraged to commit resources as soon as possible on the implementation of these standards and ensure they are ready when the new requirements become mandatorily applicable. Relevant disclosures should be provided in the 2016 financial statements on the expected impact.

FRC – Letter of Advice

The UK Financial Reporting Council has written a letter to preparers of annual reports of around 1,200 large and smaller listed companies, highlighting key issues and improvements that can be made to annual reports in the 2016 reporting season. The letter underlines that a company’s annual report should consider a broad range of factors in their narrative reporting, which include: -

  • Business model reporting – how the company makes money and what differentiates it from its peers
  • Alternative performance measures – their basis and the appropriate disclosures
  • Principal risks and uncertainties – with continuing developments broadening the horizon to include such matters as cyber security and climate change

There are a wide range of financial statement disclosures also highlighted in the letter, including: -

  • Tax – clearer explanation of effective rates by companies and how they account for material tax uncertainties
  • Dividends – improved disclosure of how dividend policies operate and how they may be impacted by the risks and capital management decisions that are challenging the company
  • Pension obligations – the impact of low interest rates on the valuation of liabilities
  • Critical judgements and estimates – clear explanation of the specific judgements the Board has made and their effect on the financial statements
  • Accounting policies – the need for improvement in disclosure, particularly in relation to revenue recognition
  • Developments in IFRS – disclosure on the progress of implementation of the three new major standards and the likely impacts of each of the new standards when they can be reasonably estimated.

Other matters commented on in the letter include a call for more informative reporting about the specific actions taken by Audit Committees. These include any specific issues in relation to the financial statements and how these were addressed together with any communications or interactions with such bodies as the FRC’s Corporate Reporting Review team.

IAASA Observations Document

The Irish Accounting and Auditing Supervisory Authority (IAASA) has published its annual Observations document highlighting key topics to be considered by those preparing, approving and auditing 2016 financial statements. The topics referred to in the IAASA report are similar to those in the reports of ESMA and the FRC.

IAASA pays particular attention to the economic uncertainties that are challenging entities in relation to interest rates, commodity prices, exchange rates and inconsistent economic growth. These uncertainties increase the difficulties of forecasting future cash flows which will impact throughout the financial statements including the impairment of assets, the measurement of provisions and the estimation of recoverability of such assets as deferred tax.

A Clear Vision

The Deloitte report ‘A Clear Vision – Planning Your Report’ is of major help providing a proposed blueprint for implementing the financial reporting process and preparing the financial statements. This is broken down into four areas: -

  • Getting things shipshape – emphasis on a shipshape report being one that complies with the rules
  • Testing the water – focus on how you can better communicate your company’s message
  • Making a splash – introduce value-added disclosure which means the user can truly understand your company
  • Immersing yourself in your surroundings – telling the story that your company lives – in the annual report and other communications.


The preparers of financial statements and those charged with governance are facing many challenges with their 2016 reporting. All guidance available should be welcomed in ensuring that the final product is of a high quality standard and communicates the messages in a meaningful way to stakeholders.

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