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Financial Reporting Brief
Our featured article for November is 'Planning the Annual Report – Supervisors' Comments' with Brendan Sheridan giving consideration to the comments made by the Supervisors, particularly IAASA and the FRC, to assist those engaged with the preparation of the annual report.
Planning the Annual Report – Supervisors’ Comments.
In recent weeks a number of reports have been published which are of value to those involved in the annual reporting process – preparers, those charged with governance and auditors – with a view towards improving the quality and transparency of reporting and enhancing the quality of information provided to investors and other stakeholders.
These reports include:
- Irish Auditing and Accounting Supervisory Authority (IAASA): Observations on Selected Financial Reporting Issues (Published: September 2017)
- Financial Reporting Council (FRC): Annual Review of Corporate Reporting 2016/2017 (Published: October 2017)
Even more recently, the European Securities and Markets Authority (ESMA) has pronounced the priority issues that the assessment of listed companies’ 2017 financial statements will focus on, with those matters being reflected in the reports of IAASA and the FRC referred to above. Matters also highlighted by ESMA include the specific recognition, measurement and disclosure issues of IFRS 3 Business Combinations and specific issues of IAS 7 Cash Flows. Significantly also, ESMA has published the results of a peer review conducted into how national competent authorities (NCAs) supervise financial information according to the Guidelines of Enforcement of Financial Information. The main comments arising relate to selection processes, depth of inquiries and the investment of resources in the process. Matters identified include that in some jurisdictions there is a tendency to focus on disclosure issues instead of in-depth inquiries into valuation issues. NCAs are encouraged to ask issuers questions even where there is no suspicion of misstatement. ESMA will consider the issues and work with the NCAs in the corporate reporting area to see if they can be addressed by amendments to the Guidelines or by other work in the area. Changes may be in line to increase the robustness of the inspection process and the supervisory function.
In considering the ‘Observations on Selected Financial Reporting Issues’ one should recognise the extent of work carried out by IAASA during the year. The Observations are derived from a combination of: -
- Financial reporting matters identified during examinations and surveys undertaken in 2017
- Matters identified in the course of IAASAs work, but not raised as specific issues
- IAASA expectations of issuers regarding the 2017 financial reporting season
- Financial reporting matters discussed at ESMA meetings which IAASA representatives attended
The IAASA Annual Report 2016, published in June, indicates that IAASA carried out 45 examinations during 2016. A number of surveys were also carried out which were based on particular matters identified in reviewing the 2015/16 annual reports of equity issuers. These include surveys on (1) operating lease commitments, (2) defined benefit pension scheme assumptions, (3) recognition of intangible assets and scale of acquisition activity, (4) share based payments, (5) fair value measurement. Since then surveys that have been carried out include those on (1) the use of alternative performance measures, (2) disclosures of new accounting standards in 2016 annual financial statements, and (3) disclosure of operating segment information.
The Observations document makes clear that it is delivered within the overall framework of:
- Continued applicability of certain matters raised in Observations documents published in previous years
- The economic backdrop with continuing fears of the unquantified effects from Brexit and other international factors that may impair international trade and that may negatively impact issuers’ business prospects, and
- Barriers to effective communication in financial statements – including the need to avoid boilerplate disclosures with a need to provide entity – specific information that is relevant to gaining an understanding of the significant judgments made in applying accounting policies.
Observations on specific issues include, inter alia, those on: -
- New accounting standards issued and not yet effective – calling on progressively more entity - specific qualitative and quantitative information as the application date of the new standards draws nearer;
- Alternative performance measures – highlighting the need for companies to continually reassess their level of compliance with the ESMA APM Guidelines, with regard to such areas as definitions, reconciliations and comparatives, and the selection of APMs being used;
- Fair value measurement – emphasising the need to give continuing consideration to the measurement and disclosure of fair values and, in particular, the need to ensure that the disclosures are entity – specific and inform users of the measurement bases and valuation techniques;
- Sources of estimation uncertainty – Uncertain Tax Positions (UTPs) – underlining that the nature and carrying amounts of the individual material UTPs should be separately disclosed; and
- Asset impairment testing – calling on entities to reassess the significant judgments used in determining the recoverable amounts of cash generating units (CGUs) where there are material amounts of goodwill and intangible assets.
FRC Review of Corporate Reporting
The FRC comments that the standard of reporting remains generally good, particularly by the largest listed companies. However, it notes that the quality of reporting is not always as good as it could be, and it highlights four areas in which it believes companies should pay particular attention: -
- Properly explaining and quantifying key judgments and estimates;
- Providing a fair and balanced assessment of performance and prospects that covers both positive and negative aspects;
- Ensuring the links between the financial statements and discussions of strategic performance including KPIs, financial position and cash flows,and ensuring that the use of APMs is clear; and
- Providing information that is entity - specific and material to an understanding of the business and its performance and prospects.
Included as an appendix to the report is a letter written by the FRC to companies to highlight changes to reporting requirements and key areas where improvements can be made when preparing annual reports for the 2017/2018 reporting season. The FRC’s letter draws the attention of companies to areas of investor focus, including: -
- The implementation of new accounting standards – the need to make detailed, quantitative disclosures explaining the impact of the new standards;
- Non-financial reporting – implementing the new EU regulations on non-financial and diversity information;
- Viability statements – encourages companies to consider developing their viability statements in two stages – first, to consider the prospects of the company over a period reflecting its business and investment cycles and, second, to state whether they have a reasonable expectation that the company will be able to continue to meet obligations as they fall due over the assessment period;
- Dividends – encourages further adoption of reporting on the capacity to pay dividends;
- Critical judgments and estimates – calling on improvement to disclosures by providing more granular information about a smaller set of judgements and estimates that have a significant impact on results and explaining why certain assets are subject to significant risk of material change; and
- Defined benefit pension schemes – continued low interest rates increase the need for improved transparency regarding pension arrangements.
The pursuit of improved quality of and transparency in financial reporting must remain to the forefront of all those involved to ensure that the information needs of investors and other stakeholders are served well.
Our Firm’s ‘Need to Know’ publication comments on and provides observations on the FRC report.
What's New? Monthly Reporting Pack – November 2017
Irish/UK GAAP & Related Developments
- Desk top survey of issuers’ operating segment disclosures - IAASA
- Annual Review of Corporate Reporting
- Financial Reporting Lab publishes its latest quarterly newsletter
- Financial Reporting Lab - Dividend disclosures improving
- The Parker Review Committee publishes its final report on the ethnic diversity of UK boards
- Updated Governance Bible and Code of Conduct, and Register of Interests published (UK)
IFRS & Related Developments
- IFRS Foundation issues case study report on disclosure improvements
- IASB finalises amendments to IFRS 9 regarding prepayment features with negative compensation and modifications of financial liabilities
- IASB finalises amendments to IAS 28 regarding long-term interests in associates and joint ventures
- Standard-setters split on whether to prohibit non-IFRS information in financial statements
- IIRC publishes results of integrated reporting implementation consultation
- ESMA announces enforcement priorities for 2017 financial statements
- Recent sustainability and integrated reporting developments
- Paper on the transition to full adoption of new revenue recognition requirements
- ESMA expands Q&A document on the implementation of its APM guidance
- ESMA publishes enforcement decisions taken by EU accounting enforcers
Legal & Regulatory Developments
- CAI Technical Alert 03/2017 - Companies (Accounting) Act 2017: Changes to the filing requirements
- Central Bank of Ireland publishes first Systemic Risk Pack
- Research Technical Paper: What drives systemic bank risk in Europe?
- IFRS in Focus — IASB issues Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)
- IFRS in Focus — IASB issues Prepayment Features with Negative Compensation (Amendments to IFRS 9)
- Social Progress in Ireland 2017
- GDPR series: A design for life? Designing the future of privacy
- The State of the State 2017-18
- Retail productivity : Shop for tomorrow’s workforce
Financial Reporting Brief
- Quarterly Finacial Reporting Brief: October 2017
- October 2017: IFRS 9 – Some Reactions to Implementation
- September 2017: Evolution – The Principles of Disclosure
- August 2017: Integrated Reporting - A Solution?
- July 2017: Balance Sheet Size To Grow? – New Leases Standard
- Quarterly Financial Reporting brief July 2017
- June 2017: Revenue - A New Standard for All
- May 2017: Financial Instruments Accounting – A New Age
- April 2017: The New Standards - Busy Times Ahead
- Quarterly Financial Reporting Brief: April 2017
- March 2017: Long–Term Value Focus - ESG Reporting
- February 2017: Financial reporting - Incremental Improvement
- January 2017: The Future of Financial Reporting
- Quarterly Financial Reporting Brief: January 2017
- December 2016: 2016 Reporting - The Challenges
- November 2016: Financial Reporting – The Supervisors’ Views
- October 2016: A New Challenge – The Companies Accounting Bill
- Quarterly Financial Reporting Brief: October 2016
- September 2016: Corporate Reporting - Where to now?