Financial reporting Brief November 2016

Insights

Financial Reporting Brief

November 2016

Our featured article for November is Financial Reporting – the Supervisors’ Views with Brendan Sheridan commenting on a number of reports published in recent times and their messages for reporters.

Financial Reporting – The Supervisors’ Views

There has been much activity recently with regard to those engaged in the oversight and supervision of accounting, providing their views on the general status and quality of financial reporting.

ESMA (The European Securities and Markets Authority) has announced the priority issues that the assessment of listed companies’ 2016 financial statements will focus on, which followed on from a report earlier in the year reviewing the 2015 work of the various regulators throughout Europe. 

Earlier in the month, the UK Financial Reporting Council published its Annual Review of Corporate Reporting 2015/2016.

A few months back, IAASA (The Irish Auditing and Accounting Supervisory Authority) published as part of its Annual Report 2015 its summary of the examination of issuers’ financial reports.

All share the common goal of overseeing and actively pursuing a framework for corporate reporting that fosters and supports continuous improvement in the quality of reporting.

ESMA is the overseeing body for the European accounting supervisors, including the FRC and IAASA.

The Deloitte UK Firm’s suite of publications ‘Annual Report Insights 2016’ examine how companies have dealt with the latest corporate reporting challenges, including the narrative, corporate governance and financial statements elements.

ESMA Activities

ESMA published its ‘Report on Enforcement and Regulatory Activities on Accounting Enforcers in 2015’. TThis was based on an examination of the interim or annual financial statements of approximately 1,200 issuers, representing an average examination rate of 20% of all IFRS issuers with securities listed on regulated markets. It commented on a number of areas where it considered that remedial action and/or improvement could be made. European enforcers took actions against 273 issuers, representing around 25% of the selected sample. The main deficiencies were identified in the areas of financial statements presentation, impairment of non-financial assets and accounting for financial instruments.

Areas which were in particular focus included (a) the presentation of consolidated financial statements and related disclosures, particularly where the notion of control was highly judgmental and/or groups recognised material non-controlling interests in their 2015 consolidated financial statements, and (b) the recognition and measurement of deferred tax assets and uncertain tax positions.

FRC Comments
The FRC’s stated mission is to promote high quality corporate governance and reporting to foster investment. The building of trust through good governance and transparent reporting is fundamental to the success of individual businesses and to a healthy economy.

The FRC has concluded in its recent report that compliance with the accounting framework, particularly by large public companies, is generally good and the introduction of the strategic report in the UK has improved the quality of narrative reporting. However, there is room for further improvement, particularly as not all companies provide sufficient balance in their reporting, with companies failing to recognise when things have gone wrong. Furthermore, the FRC comments that the excessive use of underlying profit figures or inappropriate use of alternative performance measures (‘APMs’) undermine the quality of corporate reporting and erode trust.

The FRC calls on reporters to recognise that the concerns of stakeholders will have a bearing on their reputation and could materially affect their profitability and the interests of stakeholders. Shareholders themselves are looking for more disclosure in relation to public interest matters, including for example sustainability and climate change and the overall culture of a company.

Some of the more significant findings of the FRC and on which they comment in their 2015/16 report include:

  • Accounting policies – more specific, granular accounting policies are needed in many cases, which should provide a clear linkage with business models, particularly in relation to revenue recognition policies.
  • Judgements and estimates – the FRC raised queries as to how well companies explain specific judgements or explain how uncertainty could affect next year’s accounts.
  • Tax reporting – a thematic review has been undertaken of companies’ tax disclosures. Areas commented on include disclosures in relation to the structuring of tax charges and the sustainability of such structures, with further scope for articulating better how companies report tax uncertainties.
  • Pension disclosures – continued low interest rates and similar factors increase the need for companies to improve the transparency of their pension arrangements, and the risks to which they are exposed.

The FRC encourages corporates to increase emphasis and focus on:

  • Properly explaining and quantifying key judgements and estimates
  • Ensuring information is included that is relevant and material to an understanding of the business, its performance and prospects 
  • Ensuring narrative reports provide a fair and balanced account of the performance, position and prospects of the business, and
  • Ensuring there is adequate linkage between different parts of the annual report.

A significant uncertainty to which the FRC draws attention is Brexit with a need for companies to disclose the associated risks and expected impacts it may have on their business activities.

IAASA – Decisions Published

During 2015 Irish law was amended to allow IAASA more discretion in terms of the publication of its financial reporting decisions than had previously been the case. The 2015 Annual Report summarises the eleven decisions in relation to individual issuers made by IAASA, amongst which were included:

  • The absence of certain liquidity risk information
  • Segment information reviewed by the Chief Operating Decision Maker
  • The discount rate applied by the issuer in respect of determining the recoverable amount for its cash generating units and related disclosures
  • The write-back of corporate tax over-provisions recognised in earlier years and reversed in the current year.
    The above are just examples of the matters raised and there are a number of recurring features, including in such areas as related parties, fair value measurement and cash flow statements and a number of others.

Conclusion

As the financial year end draws to a close for many companies, those involved in the reporting process would be well advised to consider the matters raised in these various reports, as commented on above.

ESMA, the FRC and IAASA have all published documents in recent weeks to highlight focus issues for 2016 reporting and we shall return to these in our next article.

Our Firm’s publication ‘Annual Report Insights 2016’ identifies new innovations and highlights industry better practice as a take away for preparers of annual reports to consider.

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