18 January 2021
When preparing their 2020/21 annual reports, both listed and private companies should consider the following advice issued by the FRC, summarised below.
- The end of year letter for CEOs, CFOs and Audit Committee Chairs of listed companies outlines the FRC’s expectations and recommendations for financial reporting.
- Corporate Reporting highlights which covers the ten most common themes in the Annual Review of Corporate Reporting 2019-20.
- Consolidated Covid-19 guidance.
Key expectations and recommendations
Consider a longer reporting timetable
Given the continued challenges faced by companies and finance teams, the FRC encourages companies to consider the extensions to reporting deadlines from four to six months announced by the FCA, extended to financial periods ending before April 2021. AIM filing extensions for annual and interim reports will also continue until further notice by the LSE.
An FRC Lab report highlighted that investors expect reports to explain clearly:
- currently available cash and other resources;
- key actions that management has taken and is planning to take;
- the longer-term impacts of Covid-19 on the business model and strategy; and
- the board’s assessment of going concern and viability, as well as the methods, judgements and assumptions underlying the assessments.
Disclosures should clearly quantify the impact of Covid-19 on a company’s performance, position, and prospects. Where judgements have been made involving significant estimation uncertainty, there should be increased disclosure of relevant sensitivities or ranges of possible outcomes.
Narrative disclosures within the strategic report should quantify the historical effect of Covid-19. Covid-19 and non-Covid-19 financial statement captions should not be split arbitrarily. Companies should apply existing accounting policies for exceptional and other similar items consistently to Covid-19-related income and expenditure.
All UK companies that use Alternative Performance Measures (APMs) should continue to apply the European Securities and Markets Authority (ESMA) Guidelines on APMs.
Companies should articulate clearly the impact of Covid-19 on their business models and strategies, and how the changes are compatible with future forecasting assumptions used in other areas of the financial statements eg going concern, viability, impairment testing and recognition of deferred tax assets). Significant judgements made in determining whether or not there is a material uncertainty in relation to going concern should be disclosed and explained.
Significant judgements made in deciding whether impairment indicators exist should be disclosed and explained. Disclosures should describe the approach used to determine key impairment assumptions and explain any significant year-on-year changes, including any changes due to Covid-19.
Companies are expected to explain their company specific risks and uncertainties, the potential impact of Brexit on different areas of the business and the effects on the financial statements (including major sources of estimation uncertainty, amounts at risk and ranges of potential outcomes).
EU adopted IFRS has been frozen as in force at 11pm on 31 December 2020 (12pm EU time). On 23 December 2020 the FRC issued transitional provision guidance which seeks to provide clarity and consistency of terminology in accounts, particularly for accounting periods that straddle the 11pm cut-off.
For accounting periods which commence before 11pm on 31 December 2020 companies must prepare accounts in accordance with the frozen EU adopted IFRS. However, UK companies also have the option to use any standards which have subsequently been adopted for use within UK adopted IAS. Nevertheless, all such accounts should state that they are prepared ‘in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006’.
The FRC also explains that if the company:
- also has transferable securities admitted to trading on a UK regulated market;
- is required to produce consolidated accounts; and
- is preparing accounts to satisfy DTR requirements.
Those accounts should additionally state that they are ‘prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union’.
For subsequent financial years, the accounts should state they are prepared ‘in accordance with UK adopted international accounting standards’.
For those subsequent accounting periods, (ie which commence after 11pm on 31 December 2020), UK entities will apply UK-adopted international accounting standards (UK adopted IAS) which will be IFRSs approved for use in the UK by the new UK Accounting Standards Endorsement Board (UKEB).
For more information on Brexit impact on reporting please see:
- The RSM commentary on the BEIS / FRC joint letter to the accounting sector.
- The joint BEIS / FRC letters of 23 November 2020 and FRC letter of 23 December 2020.
Cash flow and liquidity
For reporting on cash flows and liquidity risks the FRC expects that companies should provide:
- Clear explanations of matters considered in assessing going concern, viability and liquidity (eg the availability of cash, undrawn borrowing facilities and compliance with debt covenants).
- Disclosure of methods, assumptions and judgements made in assessing going concern and viability.
- Consistency in the amounts and descriptions of items in the cash flow statement, and other areas of the annual report, including: the strategic report, other primary statements, disclosures of changes in financing liabilities and other notes.
- Disclosure of accounting policies and judgements in relation to the cash flow statement, particularly for large, one-off transactions.
- Companies are also expected to perform more robust pre-issuance reviews of their cash flow statements.
Working capital arrangements
Disclosures on working capital finance arrangements, such as reverse factoring / supplier financing should cover the significance of such arrangements, the key terms, relevant accounting policies and the effect on the balance sheet, cash flow and debt covenants. Even if a company does not use reverse factoring / supplier financing but it operates in sectors which usually do, the FRC expects, perhaps controversially, that companies should address this.
Following their climate change thematic review, the FRC encourages companies to:
- Provide strategic reports that describe rather than list their environmental policies.
- Explain any terminology such as ‘net zero’ or ‘Paris compliant’, and explain which emissions are included in any emissions targets, how progress will be measured and reported, and what assurance will be sought.
- Give a balanced description (including appropriate use of key metrics) of how climate policies and targets have been incorporated into business plans and their expected business impact.
- Describe the impact of their businesses on the environment, including their supply chains.
- Provide required segmental and disaggregated revenue disclosures to enable users to understand the relative sizes of operations for which climate change presents substantially different risks and opportunities.
- Provide financial statements that explain the impact of climate related risks, policies and strategies on both measurement and disclosure including, in particular:
- impairment of individual assets as well as cash generating units;
- useful economic lives of assets;
- expected amounts and timing of cash outflows for provisions and other liabilities;
- fair values of assets and liabilities; and
- disclosure of key accounting judgements, estimation uncertainties and related sensitivities.
IFRS 15 - Revenue from Contracts with Customers
Following its IFRS 15 thematic review, the FRC will continue to challenge companies who do not explain how they have applied the standard to their specific circumstances; in doing so the FRC expects companies to:
- clearly describe their performance obligations, the timing of revenue recognition and any significant judgements made by management;
- identify the balances that they consider to be ‘contract balances’ and explain any significant movements;
- report revenue-related information consistently in the strategic report and in the financial statements; and
- specify the types of variable consideration that exist within customer contracts and how each type of variable consideration is estimated and constrained.
IFRS 16, Leases
According to the FRC’s IFRS 16 thematic review companies could improve reporting, including providing the following:
- entity-specific, rather than boilerplate, accounting policies for all material items;
- sufficiently detailed explanations that enable users to understand significant judgements and their implications (for example in relation to lease term, or items not within the scope of the standard); and
- sufficient information to address both IFRS 16’s disclosure principles and its detailed disclosure requirements.
Other changes to IFRS
Companies will be expected to apply amendments to IFRSs that became applicable this year and disclose the expected impact of revisions that have been issued but are not yet applicable, if material. These include:
- Interest Rate Benchmark Reform — Phase 1.
- Interest Rate Benchmark Reform — Phase 2.
- Covid-19 – Related Rent Concessions (Amendment to IFRS 16).
For further details on considerations for 31 December 2020 IFRS reporting, please refer to the RSM Insights issued on 15 December 2020.
Section 172 statements and reporting on workforce engagement
In the Section 172 statement companies are encouraged to report on:
- the effectiveness and outcomes of their engagement;
- the oversight that boards have over delegated engagement;
- how feedback has been used within the decision-making process;
- difficult decisions, rather than just focusing on positive engagement;
- how stakeholders are considered strategically and how such consideration is contributing to companies’ long-term success; and
- implications of the decisions on both long-term success and on stakeholders themselves.
Reporting on workforce engagement should cover:
- how employee-related issues and concerns are elevated to the board;
- the basis on which views are promoted to board discussion;
- direct actions arising from board discussions; and
- how the company relays its decisions on feedback provided by its workforce activities.
As noted above, the December 2020 and March 2021 reporting cycle will be against a backdrop of Brexit and Covid-19. Finance teams will understandably be under significant pressure and as such the practical aspects of taking a step back from the detail to make sure the whole report hangs together, and then giving sufficient time for the whole process (including contingency time) has perhaps never been more important. Additional time has been provided to listed companies to prepare and lodge their accounts – this should be taken wherever necessary.
If you require any further information, please speak to Lee Marshall.