Financial Reporting Brief

December 2017 

This month’s article ‘Corporate Annual Reporting – Be Positive to Change’ continues the theme of potential enhancements to the corporate annual report to achieve improved quality and transparency of reporting, with Brendan Sheridan taking a look at some recently published reports by IAASA and the FRC.

Corporate Annual Reporting – Be Positive To Change

In our November article we reflected on the Observations document published by the Irish Auditing and Accounting Supervisory Authority (IAASA) and the Annual Review of Corporate Reporting 2016/2017 published by the UK Financial Reporting Council (FRC). These documents highlight those key topics that management, directors and audit committees should consider when preparing, approving and auditing financial statements..

Both IAASA and FRC have since published three documents each of which focus on specific themes highlighted during their review of selected financial statements of issuers. These reports identify and share examples of good practice reporting and highlight areas where improvements can be made. One of these areas is reported on by both the FRC and IAASA, Alternative Performance Measures. The others are: – IAASA : Operating segment disclosures;  Impairment testing; FRC: Pension disclosures; Judgements and estimates.

Read more here:

Alternative Performance Measures

IAASAs report sets out to assess the extent of compliance by listed companies with the European Securities and Markets Authority (ESMA) ‘Guidelines on Alternative Performance Measures’. IAASA’s survey of 2016/2017 annual accounts of listed companies found that 126 different APMs were used, with the most common being Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA), Free Cash Flow, Adjusted Earnings per share and Net Debt. Deficiencies most commonly found in the use of APMs were that some companies:-

  • Failed to include any definition of the APM used
  • Did not reconcile the APM to the equivalent amounts in the annual accounts
  • Did not give prior year comparative accounts

IAASA has indicated its intention to focus on and engage with issuers in relation to:-

  • The directors’ rationale for not including definitions, reconciliations and comparatives for APMs presented in periodic financial reports
  • The reasons why certain items have been excluded from adjusted earnings measures 
  • The directors rationale for not considering certain measures to be APMs
  • The directors rationale for not including a discussion or reference to IFRS measures
  • The reason and explanations for APMs which are redefined or not used in subsequent financial statements.

The FRC report on APMs expresses similar views. A significant concern expressed by FRC is the use of the term ‘non-recurring’ and the use of similar terms such as ‘unusual’, ‘infrequent’ and ‘one off’ in connection with items such as restructuring costs and impairment charges. For larger companies in particular, there will be few occasions in a period of years when there is only one event which drives such charges.

IAASA -Other Reports

Operating Segment Disclosures

IAASA carried out a survey of the most recently published financial statements of 29 selected issuers, which presented 84 operating segments. Eleven issuers identified the Board of Directors as their Chief Operating Decision Maker (CODM) while seven issuers identified the Chief Executive Officer as CODM. Some of the findings were:-

  • 6 issuers did not disclose the judgments made by management in applying the operating segment aggregation criteria
  • 7 issuers did not disclose or specifically address the basis of accounting for any transactions between their reportable segments
  • 5 issuers did not provide all of the reconciliations required by IFRS 8.

IAASA will continue to focus on and engage with issuers in relation to: -

  • Clarification regarding the information that is reviewed by the CODM
  • The disclosure of judgments in relation to aggregation criteria
  • The rationale for not disclosing information required by IFRS 8, including those in relation to reconciliations and entity wide disclosures.

Impairment Testing

The report is based on the IAASA survey of the 2016/2017 financial statements of 29 listed companies. The total goodwill and intangible assets recognised by the companies amounted to €24.7 billion, equivalent to 35% of those companies aggregate equity, with 1 in 4 of the companies having an equity to market capitalisation ratio of greater than 100%. While many companies were found to have high quality disclosures, a significant minority of companies showed a combination of incomplete information, 'boiler-plate' disclosures lacking company –specific information, and inappropriately aggregated disclosures rather than disclosures at individual significant business unit level (cash generating units).

 IAASA recommends that management, directors and audit committees re-evaluate their impairment test process and significant judgements used to determine the recoverable amount of assets and ensure that the key assumptions remain valid over the life of the asset. In seeking to improve the recognition, measurement and disclosure of the recoverable amount of assets, IAASA makes a wide range of recommendations in its report.

FRC – Other Reports

Pension Disclosures

Key Messages include: -

  • While most companies disclosed information about contributions expected to be paid for several years into the future, distinguishing between those made to cover any deficit and those in respect of current service, companies could usefully explain that these are revised as part of each funding valuation 
  • The use of graphics by a small number of companies to present complex information was found very useful, and could be adopted by other companies to improve disclosures
  • A small number of companies provided useful sub-analysis of equity assets at a level lower than quoted and unquoted, which companies could usefully adopt to provide a clearer picture of the asset risk profile
  • There is scope for companies to better articulate their schemes’ strategy for matching assets and liabilities, in particular how they use liability driven assets.

Judgements and Estimates

The FRC commented on continuing improvements by companies with their disclosures in this regard, with improved consideration, identification and distinction of judgments from estimates. Better quality reports identified a smaller number of judgments and estimates but provided much richer information about the supporting assumptions and sensitivities. However, it was disappointing that a significant minority still use ‘boiler plate’ text. The report emphasises the importance of focussing on specific, material judgements and in particular those with a significant risk of material change to the carrying value of assets and liabilities within the next year. The FRC expects estimate disclosure to be clear and specific, pinpointing the precise sources of uncertainty and avoiding the use of ‘boilerplate’ language. The FRC also expects disclosure of the specific amounts of risk of material adjustment, rather than just the value of the financial statement line item within which these are contained, with quantification of the assumptions. The FRC also expects improved disclosure of the sensitivity of carrying amounts to changes in assumptions with a range of reasonably possible outcomes within the next financial year. 

Disclosure Initiative – Case Studies

The IFRS foundation has recently published a report as part of its Disclosure Initative which includes a number of case studies illustrating how various companies have improved communication of information in their financial statements.  The report focuses on how effective communication in financial statements can contribute to better investment decisions and a lower cost of capital for companies.

The report seeks to inspire companies to improve communication in their own financial statements. The objective is to make financial statements easier to read and understand because information relevant to investors is identified, the information is prioritised appropriately and it is presented in a clear and simple manner.


Both IAASA and the FRC are committed to the mission of achieving enhanced quality and transparency of reporting.  In order for companies to make real progress with any such enhancements, it Is important that those charged with governance and senior management encourage a positive environment for change. The quality of work done by standard-setters and regulators and the objective views of auditors are key fundamentals of the reporting process.

What's New? Monthly Reporting Pack – December 2017

Irish/UK GAAP & Related Developments


IFRS & Related Developments

Legal & Regulatory Developments

Updated Governance Bible and Code of Conduct, and Register of Interests published

Companies (Statutory Audits) Bill 2017


Annual report insights 2017

Closing Out 2017

New UK GAAP application for reporting periods ending 31 December 2017

IFRS on Point 

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