On November 9, 2017 the Financial Reporting Council (FRC) published three thematic reports to help companies improve the quality of their corporate reporting in acknowledged areas of difficulty, namely judgements and estimates, pension disclosures and alternative performance measures.
The Corporate Reporting Review (CRR) is responsible for the FRC’s thematic reviews. The CRR monitors company reports and accounts for compliance with the Companies Act 2006, including applicable accounting standards and other reporting requirements. In December 2016, the FRC approached 60 companies and informed them that the CRR would review one of the three themes in their next annual report and accounts.
Thematic review – Judgements and estimates
The report sets out the CRR’s principal findings on judgements in corporate reporting and the most commonly disclosed estimates. Overall the CRR found that:
- Many companies had reconsidered which judgements, assumptions and other areas of estimation uncertainty are genuinely the most difficult, subjective or complex to report.
- A greater number of companies had clearly distinguished judgements from estimates than in their prior year accounts.
- The reports of higher quality identified a smaller number of judgements and estimates but provided richer information about the supporting assumptions and sensitivities.
- The average number of estimates disclosed by the companies reviewed decreased when compared with their previous annual report.
- While most improved the granularity and level of detail their disclosures a minority of companies still used elements of ‘boilerplate’ text that could apply to any company and gave no additional useful information.
Section 4 of the report sets out the review’s principal findings in more detail and includes examples of better disclosures that illustrate how companies could address these findings. Section 5 sets out the areas where the CRR will challenge companies, including where they do not:
- identify the assets and liabilities at significant risk of material change in the next 12 months;
- quantify the specific amounts; and
- provide sensitivity analysis of the possible range of outcomes.
Thematic review – Pension disclosures
A second report by the CRR on pension disclosures welcomes the new or extended commentaries in strategic reports focusing on how any pension deficit would be addressed and notes that:
- Most companies disclosed information relating to contributions that are expected to be paid several years into the future distinguishing between those made to cover the deficit and those in respect of current service, but companies could go further to explain that these are reviewed as part of each funding valuation.
- A number of companies disclosed that, going forward, an increase in dividend payments to shareholders would trigger an increase in the pension scheme contributions and the report notes that this appears to be an increasingly popular mechanism for securing pension scheme funding.
- Some companies presented complex information using graphics.
- By disaggregating the analysis of quoted and unquoted assets into further sub-classes, some companies provided more informative disclosures about the assets held by their pension schemes.
- There is room for improvement in the way companies articulate their schemes’ strategy for matching assets and liabilities better, in particular how they use liability driven investments. Companies that do not provide clear disclosures about the nature and valuation basis of all material asset classes will be challenged.
- Companies with material net pension assets explained why they considered the asset to be recoverable in terms of IAS 19 and IFRIC 14.
- Generally, pension disclosures in strategic reports have improved with examples of good practice being the provision of more information about the risks and uncertainties companies face arising from their pension scheme and clear explanations of the reasons for the marked increase in deficits and discussion of action being taken to remedy them.
Thematic review – Alternative Performance Measures
The CRR found that Alternative Performance Measures (APMs) were used by all the companies they reviewed. Compliance with ESMA’s Guidelines on Alternative Performance Measures was generally good and had improved from previous year’s annual reports. The CRR notes in its report:
- All companies gave definitions. Labels used generally conveyed an accurate description of each APM, though companies should be clear to identify whether a measure used was an APM or an International Financial Reporting Standards (IFRS) measure.
- Explanations for the use of APMs were given in all cases and less ‘boilerplate’ language was used than in the CRR’s 2016 review.
- Reconciliations were given by all companies but not necessarily for every APM used, the most frequently omitted being for ratio’s such as return on capital and cash conversion.
- Most of the reports gave equal prominence to APMs and IFRS measures.
The CRR was concerned with some of the language used in reports and recommends that companies remove descriptions, such as “non-recurring” from their definitions of APMs and select more accurate labels. A number of examples are given in sections 4 and 5 of the report.
(FRC, Corporate reporting thematic review: Judgements and estimates, 09.11.17)
(FRC, Corporate reporting thematic review: Pension disclosures, 09.11.17)
(FRC, Corporate reporting thematic review: Alternative Performance Measures, 09.11.17)