FRC: Thematic Review – Interim reporting
On May 18, 2021 the Financial Reporting Council (FRC) published the results of a thematic review of interim reporting that it has conducted to highlight areas of good practice the FRC have observed in recently published interim reports and to make suggestions for improved reporting to meet the needs of stakeholders.
The FRC comment that overall they were pleased with the quality of interim reports reviewed (those of 20 quoted companies whose interim period ended between June 2020 and September 2020) but make the following observations:
- Companies had heeded the FRC’s recommendations from previous thematic reviews and the guidance given in the FRC’s joint statement with the FCA and the PRA on Covid-19, and enhanced their disclosures particularly in relation to going concern and the statement of cash flows and related notes.
- Management commentaries provided an overview of the key events in the first half of the year and how these had affected operations and results. The best examples differentiated the impact that the various stages of the pandemic had on the financial statements.
- Where necessary, companies gave an update of the risks and uncertainties for the remaining six months of the financial year.
- The FRC were pleased to see that the majority of the companies in their sample provided detailed explanations of their use of Alternative Performance Measures (APMs) and reconciliations to GAAP measures.
- An impairment assessment is required at the half year if there is an indicator of impairment. Impairments of goodwill recognised during an interim period cannot be reversed in the future. Better disclosures of impairments included reasons for the impairments and quantified the key assumptions used in the impairment assessments.
- The best examples of changes in estimates disclosures included an update of the IAS 1 ‘Presentation of Financial Statements’ estimation uncertainty disclosures where relevant, in addition to disclosing the nature and amount of the changes in estimate.
- Better disclosures of significant changes in current and deferred tax balances included a breakdown of the components of the tax charge and the deferred tax balance by category of temporary difference.
- When an event or transaction is significant to an understanding of the changes in financial position and performance of the company since the last annual reporting period, better disclosures followed the disclosure guidance of individual IFRSs to provide updated relevant information.
- There remain, however, opportunities for further improvement, and the FRC encourage preparers to consider carefully the findings of this thematic review when preparing their forthcoming interim reports. The FRC expect companies to communicate material information/disclosures clearly and concisely.
The key areas the FRC focussed on were:
- Management commentary and the use of APMs
- Going concern disclosures
- Cash flow information
- Significant judgements and estimates
- Financial instruments
- Fair value measurements
- Related parties
- Defined benefit obligations
The FRC’s report includes extracts from the limited number of reports and accounts included in the sample reviewed. While the FRC note that the examples will not be relevant for all companies or all circumstances, they state that each demonstrates a characteristic of useful disclosure. The FRC also point out that inclusion of a company’s disclosure should not be seen as an evaluation of that company’s reporting as a whole; nor does it provide any assurance or confirmation of the viability or going concern of that company, and should not be relied upon as such.
(FRC, Thematic review: Interim reports, 18.05.2021)
FRC: Thematic Briefing – The audit of cash flow statements
On May 19, 2021 the Financial Reporting Council (FRC) published a briefing document which highlights the results of the FRC's Constructive Engagement key findings and the steps taken by audit firms to strengthen the audit of cash flow statements.
“Constructive Engagement” is the process whereby the FRC's Audit Firm Supervision team and the Case Examiner work together to identify where audit quality concerns can be appropriately and satisfactory addressed without a full investigation and enforcement action. The FRC note that In recent years, their corporate reporting reviews have frequently found basic errors in cash flow statements, including of FTSE 350 companies, that were evident from a desktop review of the accounts. Most have related to misclassification between operating, investing, and financing activities and the majority led to overstatement of operating cashflows.
This Thematic Briefing shows the results of the FRC’s own analysis from Constructive Engagement key findings and how audit firms have strengthened the audit of cash flow statements. Appendix 1 sets out a summary of historical cash flow statement errors identified in the FRC’s Thematic Review: Cash flow and liquidity disclosures, published in November 2020.
As well as looking at the reasons for the rise in cases involving cash flow statements, a table in the Thematic Briefing records case examples and enhancement actions taken by audit firms arising in cash flow statement cases, as well as a summary of how audit firms have enhanced the audit of cash flow statements.
(FRC, Thematic Briefing – The audit of cash flow statements, 19.05.2021)