Julia Irvine 24 Oct 2018 11:42am

FRC warns companies over basic errors

The Financial Reporting Council (FRC) has detected a rise in “basic errors” in listed companies’ financial statements over the past year as a result of their preoccupation with Brexit and implementation of the new IFRS on revenue and financial instruments

In its annual letter to the audit chairs and finance directors of the UK’s listed companies ahead of the 2018/19 reporting season, the accounting watchdog warns them not to take their eye off the ball and allow errors to creep in that will “detract from the integrity” of the reports and accounts and undermine trust in management.

“In times of change and uncertainty – whether due to new accounting standards or broader economic events like the UK exiting the EU – management’s attention will rightly be focused on ensuring that there is quality disclosure around the key judgments and estimates they make in determining material matters in their reports and accounts,” writes Paul George, the FRC’s executive director of corporate governance and reporting.

“However, management also need to have effective procedures in place to ensure compliance with the basic reporting requirements of IFRS, which investors take as a given in audited reports and accounts.”

The FRC also warns companies that it will continue to focus on critical judgments and estimates in its monitoring work and press for more informative disclosures. Despite seeing some better disclosures recently, it says there is “significant scope for further improvement”.

What it is looking for is a clear distinction between judgments and estimates, a clear disclosure of the sensitivity of carrying amounts to the assumptions and estimates underlying a measurement calculation, and identification of voluntary additional disclosures provided in relation to estimation uncertainty.

As far as Brexit is concerned, George sympathises with the challenges companies are facing in trying to plan for the “significant uncertainties and unknowns” about the final deal.

“The broad uncertainties that may still attach to Brexit when companies report will require disclosure of sufficient information to help users understand the degree of sensitivity of assets and liabilities to changes in management’s assumptions,” he writes.

“We expect that many companies will want to consider a wider range of reasonably possible outcomes when performing sensitivity analysis on their cash flow projections and which should be disclosed and explained.”

Companies will have to make their own minds up about what impact Brexit uncertainties will have on their viability and going concern statements.

George also reminds them that, given the likelihood of the situation changing between the balance sheet and accounts sign-off dates, they should include a comprehensive post balance sheet events review.

Since the FRC has yet to publish the findings of its thematic reviews on adoption of IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, George sets out the year-end disclosures he expects to see to explain the impact of the new reporting standards.

Where IFRS 9 impacts on non-banking companies, those expectations range from assessing the effectiveness of existing hedges on application of the new requirements, to explaining, and where possible quantifying material differences between IAS 39 and IFRS 9, including key assumptions adopted on implementation.

For IFRS 15, companies will be expected to consider whether: their explanations of the impact of transition are comprehensive and linked to related information in the report and accounts; their descriptions of changes to revenue policies are clear; they have complied with the new requirement to identify and explain performance obligations; and they have addressed the impact of the standard on the balance sheet.

George also looks ahead to implementation of IFRS 16, Leases, on 1 January 2019, and warns that companies should be ready to provide specific disclosure in their December 2018 reports and accounts about the impact of the new requirements on their business.

Other areas of concern that the letter flags cover complex supplier arrangements and risk and viability reporting. It also highlights the changes in the Corporate Governance Code and the s172(1) reporting requirement which also come into effect on 1 January 2019.