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FRC advice for preparing 2020/21 annual reports

When preparing their 2020/21 annual reports, both listed and private companies should consider the following advice issued by the FRC, summarised below.

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.

Covid-19

An FRC Lab report highlighted that investors expect reports to explain clearly:

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.

Brexit

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:

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:

Cash flow and liquidity

For reporting on cash flows and liquidity risks the FRC expects that companies should provide:

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.

Climate change

Following their climate change thematic review, the FRC encourages companies to:

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:

IFRS 16, Leases

According to the FRC’s IFRS 16 thematic review companies could improve reporting, including providing the following:

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:

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:

Reporting on workforce engagement should cover:

Conclusion

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.

authors:lee-marshall