Financial Reporting Brief 

January 2019 

This month’s article Smaller Companies – Sharpen up Reporting! focuses on the comments made by the Financial Reporting Council in their report – ‘Reporting by Smaller Listed and AIM Quoted Companies’.

Our Quarterly Financial Reporting Brief comments on developments in areas including business combinations, fair value, share-based payment and the new standards for 2018. It also comments on reports issued by the corporate reporting enforcers and on continued progress in relation to corporate governance.

Smaller Companies - Sharpen up Reporting!

The Financial Reporting Council (FRC) in the UK has recently published ‘Reporting by Smaller Listed and AIM Quoted Companies’ which is based on a thematic review by the FRC’s Corporate Reporting Review Panel (FRRP).

Each year, the FRC publishes its Annual Review of Corporate Governance and Reporting. While the Review focuses more on larger companies in the FTSE 350, it also monitors reporting by smaller listed and AIM quoted companies (‘smaller companies’). Findings over the years show that the quality of reporting by such companies is generally not as good as their larger peers. In 2015 the FRC published its paper ‘Improving the Quality of Reporting by Smaller Listed and AIM Quoted companies’.

Thematic reviews were conducted in 2016 and 2017 to prompt improvements in the disclosure of certain matters. In November 2017 the FRC notified 40 companies of the aspects of corporate reporting selected for review in their next report and accounts. The main objective of such thematic reviews is to encourage better quality reporting that better enables users to assess the quality of management’s decisions and to provide preparers with examples of better disclosure.

Topics covered by the thematic review were:

  • APMs and Strategic Reports
  • Pension disclosures
  • Accounting policies, including critical judgements and estimates
  • Cash flow statements
  • Tax disclosures

For each of those topics, the FRC sets out its expectations in its report, and includes detailed comment on the findings of its company reviews.

APMs and Strategic Reports
The FRC expectations are:

  • Where companies choose to present APMs, the FRC expects them to be clearly defined, reconciled to the relevant IFRS numbers, accurately labelled and explained, and not given greater prominence than IFRS performance measures
  • The disclosure of business models should explain how the company makes its money and be consistent with other information in the annual report and accounts
  • The FRC expects strategic reports to discuss all material aspects of the business’s performance and financial position, including an explanation of relevant trends in balance sheet amounts such as pensions and cash flows
  • Principle risks and uncertainties should be tailored to the company, regularly reviewed and updated as its circumstances change 

The FRC Review highlighted that companies can make incremental improvements that do not require major redrafting of the report and accounts. Aspects where improvement could be achieved include::

  • Changes made to increase the prominence of IFRS measures
  • Improvements in explanations, for example reasons for presenting APMs and why items were classified as exceptional or adjusting items
  • Updated disclosures to avoid referring inaccurately to items as ‘non-recurring’
  • Reconciliations of APMs to IFRS measures where omitted in the previous year

However, there were aspects of the disclosures where the FRC expressed disappointment including:

  • Only a few companies provided specific, rather than general, disclosures to explain their rationale for excluding certain items from an APM
  • Several instances where definitions or reconciliations were not provided
  • None of the companies described the treatment of unusual tax items 

Pension Disclosures
The FRC expectations are:

  • An appropriate level of information on the risks around pensions and their effect on company future cash flows
  • Meaningful disaggregated information to be provided on the assets held in the plan, including the bases of valuation. In addition, information should be provided on any asset-liability matching strategies
  • Where net pension assets have to be considered, the FRC expects explanations of the basis on which the company expects to benefit, including judgements made when assessing trustees’ rights

There were a number of improvements in this area, including:

  • Enhancing risk disclosures by, for example, describing risk mitigation strategies
  • Disaggregating scheme assets, for example, splitting corporate bonds into different investment grades
  • Explaining how certain unquoted investments had been valued
  • Discussing pension scheme deficits within strategic reports
  • Providing previously omitted disclosure requirements

Again, there continue to be areas where the FRC considers improvement can be made, including:

  • Companies did not always provide the required sensitivity analysis with their scheme valuation assumptions
  • Information was not always disclosed to differentiate between assets that have a quoted price in an active market and other assets
  • Accounting policy disclosure was not always up to date with the most recent standard  

Accounting policies, including critical judgements and estimates 

The FRC expectations are:

  • No ‘boiler plate’ accounting policies, copied directly from IFRS or other literature
  • Revenue policies disclosed in sufficient detail to link to the business model
  • Judgements and estimates to be separately disclosed giving detailed descriptions of specific, material judgements made in applying accounting policies and pinpointing the precise sources of uncertainty
  • Focus on estimates which have a significant risk of a material change to the carrying value of assets and liabilities in the next year, identifying the specific adjustment risks
  • Sensitivity of carrying amounts to assumptions and estimates, and/or the range of possible outcomes within the next financial year to be quantified 
  • Explanations of changes in past assumptions and estimates
  • Consider whether new policy disclosures are required for large or unusual transactions
  • Removal of policies if no longer considered relevant

Improvements noted were:

  • Some companies improved the explanations of the nature of judgements made and the relevant impacts, with the number of judgements increased over a wider range
  • Some companies presented judgements separately from estimates, which is helpful given different disclosure requirements
  • Instances of tailored explanations for more complex accounting and company-specific treatments

Areas in which improvements could be made include:

  • Companies should differentiate judgements that do not involve estimation uncertainty and those that do, as there are different reporting requirements and they should provide appropriate explanations of assumptions underlying estimates
  • Important to distinguish clearly the short-term uncertainties, to which full disclosure requirements apply, from voluntary disclosures of other matters
  • Indicators in the annual report e.g. strategic report, of significant judgements or estimation uncertainty that were not disclosed as such in the accounts – there were instances of similar inconsistencies between the audit report and the accounts 

Cash Flow Statements

The FRC expectations are:

  • Stakeholders stress the importance of quality information about cash flows in smaller companies
  • Companies to identify investing and financing cash flows correctly, consistent with the IAS 7 definitions
  • Companies to pay particular attention to the classification of unusual or one-off items in the cash flow statement
  • The FRC expects companies to provide useful disclosures concerning financing and the impact of non-cash transactions on their liabilities

The FRC expressed particular dissatisfaction in this regard as only one of the selected companies showed any appreciable improvement. Attention was drawn to many areas including:

  • Every company is expected to address key cash flows and cash position in the strategic report, to give a fair, balanced and comprehensive view, which should ideally be linked to the main business model factors
  • Some apparent inconsistencies were identified in classification into operating, investing and financing activities in a number of cash flow statements

Tax Disclosures

The FRC expectations are:

  • Sufficient information to be given to help stakeholders understand the company’s effective tax rate and the factors likely to affect it in the future
  • Explanation of both large differences between the tax charge and tax paid, and significant changes in the prior year assessment of tax liabilities
  • Disclosures around the particular tax issues that could have a material effect on the accounts, and for material uncertain tax provisions to be quantified and appropriate sensitivities provided
  • Discuss the tax effect of exceptional or non-recurring items, such as the effect on an acquisition of a subsidiary with its own deferred tax assets and liabilities

Improvements were seen in this area by the FRC, including:

  • Clear presentation of tax reconciliations with information provided on the sustainability of the effective tax rate, with informative headings and labelling
  • Almost all companies selected disclosed the effect of ‘exceptional’ or ‘non-underlying’ items in their reconciliations
  • Better tax disclosures provided a clear explanation of matters requiring estimation, the amounts in question and sources of uncertainty affecting them

Areas observed where further improvement could be made include:

  • While much improved, the tax reconciliation could further benefit from additional narrative on material reconciling items, with the most appropriate tax rate being applied which may not be the domestic rate for companies with significant overseas interests
  • Explanations for the recognition of deferred tax assets where there is a history of losses
  • Disclosure of tax on items in other comprehensive income and equity


The thematic review is a major exercise within the FRC’s overall objective of promoting transparency and integrity in business with a main pillar being taking action to improve the quality of financial reporting.

Earlier in 2018, a thematic review of the new Standards being introduced this year, IFRS 9 and IFRS 15, was carried out and its findings are commented on in our November article.

The 2018 reviews are parts of a continuum and the FRC will continue to carry out such reviews as part of its overall work on corporate reporting. Thematic reviews will be undertaken in 2019/20 on:

  • Follow-ups on the new IFRSs – IFRS 9 and IFRS 15
  • The effect of the new IFRS on leases in companies’ 2019 interim accounts
  • Impairment of non-financial assets
  • The effect of the decision to leave the EU on UK companies disclosures

The report from the thematic reviews are relevant to all preparers of accounts and auditors. 

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