FRC: Thematic Review: Business Combinations
On September 29, 2022 the Financial Reporting Council (FRC) published the results of accounting and reporting for business combinations. The review looks at annual reports of a number of companies which have recently completed a business combination, and draws out some of the features of better reporting and disclosures, at the same time highlighting areas for improvement.
While the FRC were generally pleased with the quality of reporting, they encourage companies to take note of their findings in the report when they undertake a business combination. The FRC expect companies to:
- Clearly explain the impact of the business combination on the group’s strategy, resources, operations and performance. Explanations should be clear and concise, highlighting the reasons for any significant changes.
- Provide a comprehensive understanding of the effects of the business combination supported by consistent information throughout the annual report, allowing the reader to follow ‘the full story’.
- Avoid boilerplate disclosures, making sure explanations reflect the specific circumstances.
- Provide meaningful sensitivities and/or ranges of reasonably possible outcomes for significant estimates made in accounting for the business combination.
- Disclose clearly the potential variability in future amounts payable for contingent consideration.
- Make sure business combination related cash flows are correctly classified, with cash flows for acquisition-related costs within operating cash flows in the consolidated accounts.
- Carefully consider what deferred tax balances should be recognised as a result of the combination.
- Explain how transactions not accounted for as part of the business combination have been treated and the line item(s) in the financial statements in which they have been recognised. When contingent payments are linked to continuing employment of personnel they should be excluded from consideration for the business combination and accounted for as post acquisition employment expense.
(FRC. Thematic Review: Business Combinations, 29.09.2022)
FRC: Structured digital reporting – Improving quality and usability
On September 23, 2022 the Financial Reporting Council (FRC) Lab published the results of analysis it has conducted into structured digital reporting which is mandatory for reporting periods starting on or after January 1, 2021 for companies admitted to trading on UK regulated markets. Such companies are required to produce their annual financial report in a structured digital format (‘structured reports’).
DTR 4.1.14R requires companies in scope to produce their annual financial reports in the electronic reporting format specified in the TD ESEF regulation, the UK’s on-shored version of the ESEF Regulatory Technical Standard. With the first mandatory structured reporting year now almost complete, the FRC Lab has analysed a sample of UK filings, using public data and data made available by the Financial Conduct Authority (FCA) and has also gathered feedback from companies, tagging software and service providers, design agencies, assurance providers and other stakeholders.
The FRC Lab’s review builds on an October 2021 early implementation study of voluntary practice. It found that there has been some progress since last year, with many companies rising to the challenge, but much remains to be done as data quality and usability are below the level expected for companies in a leading capital market. The report sets outs some areas of focus for companies and suggestions to optimise reporting to meet the needs of investors and other users in the areas of process, usability and design, and tagging.
Best practice suggestions in each of these three areas are as follows:
- focus on data quality and consider internal or external assurance;
- consider structured reporting as an integral part of the annual reporting process, rather than a bolt-on;
- adopt a continuous improvement mind-set and ensure the annual reporting process is future-proof;
- keep the filings submitted in different jurisdictions as consistent as possible and clearly label the different versions.
The report notes that FCA data shows many submitters needed more than one attempt to successfully file a structured report and that most errors were due to incorrect file naming and structure. The report sets out a few tips for a successful submission and explains how to troubleshoot any errors.
Usability and design:
- minimise the time lag between the results announcement and the filing of the structured report;
- minimise the report loading time;
- go beyond the limits of the paper report and design with digital users in mind;
- ensure the structured report meets accessibility standards.
- start testing text block tagging of the notes now;
- review peers’ tagging;
- voluntarily tag some notes in detail that may be of interest to users;
- respond to relevant taxonomy consultations.
Text block tagging of notes
The report notes that in the first year of mandatory structured reporting, tagging was limited to the primary financial statements and a few mandatory note tags. However, for financial years starting on or after January 1, 2022, companies are also required to tag the notes, including accounting policies. It points out that the requirements for note tagging are different from those for the primary financial statements – notes should be tagged using bigger ‘text blocks’ from a specified list (see Annex II of the TD ESEF regulation). There is no requirement to create extensions for the notes.
The report suggests that companies should test text block tagging well ahead of their year-end. They will need to spend time mapping the mandatory tags to their notes, which will involve judgement. It also suggests companies should test whether their tools can correctly apply text block tagging. In particular, companies should:
- Take into account ESMA’s recent clarification (ESEF manual Guidance 1.9) that a tag from the list of mandatory tags must be applied if a corresponding disclosure is present in a report. This means a single piece of information may need to be tagged with more than one text block tag (‘nested’ tagging) – see example opposite. The FRC Lab suggest companies test how to apply such tagging in their tool.
- Ensure the information contained within a particular tag is complete and not misleading. If one text block tag corresponds to multiple pieces of information in different places in the report, the Inline XBRL continuation or exclusion mechanisms should be used to merge the relevant sections. Companies should test this feature in their tool.
- Make sure that in the machine-readable layer of the report, words are in the same order as in the human readable layer, and that spaces between words are not lost (see ESEF manual Guidance 2.2.6). This may be an issue for tools that rely on PDF-to-XHTML conversion.
- If their report is subject to external assurance, agree their approach to note tagging in advance with their assurance provider.
(FRC Lab, Structured digital reporting – Improving quality and usability, 23.09.2022)