The regulator conducted a limited scope desktop review of a selection of 17 interim and annual financial statements with a period end date of March 2020, all of which had a post-UK lockdown period end date.

The FRC said in reviewing interim financial statements, it considered the requirements of IAS 34 and whether the information provided in the interim accounts offered sufficient information to enable a user to understand the impact of Covid-19.

Amongst the sectors represented were some of those hardest hit by the pandemic, including retail, airlines, restaurants and bars, but the sample did not include any banks or insurers as they typically have 31 December year ends.

The review found that although companies provided sufficient information to enable a user to understand the impact Covid-19 had on their performance, position and future prospects, some - particularly interim reports - would have benefited from more extensive disclosure.  

In summary, the FRC said companies should explain the significant judgements and estimates made in preparing their accounts and provide meaningful sensitivity analysis or details of a range of possible outcomes to support any disclosed estimation uncertainty.

Going concern disclosures in both interim and annual financial statements should clearly explain the key assumptions and judgements taken in determining whether a company is able to operate as a going concern.

In particular, any significant judgements taken in determining whether or not there is a material uncertainty in respect of going concern must be clearly documented.

Assumptions used in determining whether the company is a going concern should be compatible with assumptions used in other areas of the financial statements.

The FRC said it expects sensitivity analysis or details of a range of possible outcomes to be provided for areas subject to significant estimation uncertainty, and notes the number of disclosures in this area is likely to increase as a result of Covid-19.

Companies should apply the requirements of IAS 1 to any exceptional or similar items, with income statement sub-totals comprising only items recognised and measured in accordance with IFRS. 

The FRC said it discourages the arbitrary splitting of items such as impairment charges between Covid-19 and non Covid-19 financial statement captions as such allocations are likely to be highly subjective and therefore unreliable. The FRC also expects companies to apply consistently existing accounting policies for exceptional and other similar items to Covid-19 related income and expenditure.

Although IAS 34 ‘Interim Financial Reporting’ has only limited disclosure requirements, the FRC said the review found interim financial statements would benefit from more detailed disclosures explaining the way in which Covid-19 has impacted a company’s reported performance and future prospects.
David Rule, FRC executive director of supervision, said: ‘The impact of the Covid-19 pandemic on businesses is pervasive but also differs across sectors, geographies and individual companies. 
 
‘This review highlights how important it is for company reporting to explain not only how Covid-19 has affected company performance but also how it might affect a company’s future prospects.

‘ Drawing on examples, we provide further guidance and good practice recommendations to support both companies and users of company reporting during this challenging period.’

On 26 March the FRC, along with Financial Conduct Authority (FCA), and Prudential Regulation Authority (PRA) published a joint statement on providing investor information during the Covid-19 crisis, and the FRC has  published guidance for or companies preparing financial statements in the current uncertain environment, and for or audit firms seeking to overcome challenges in obtaining audit evidence.

Covid-19 Thematic Review: Review of financial reporting effects of Covid-19 is here: https://www.frc.org.uk/getattachment/03838acd-facc-4a06-879c-a4682672a6d7/CRR-COVID-19-Thematic-Review-Jul-2020.pdf

FRC Covid-19 Response is here: https://www.frc.org.uk/covid-19-guidance-and-advice

Guidance for auditors and matters to consider where engagements are affected by coronavirus (Covid-19) is here: https://www.frc.org.uk/about-the-frc/covid-19/covid-19-bulletin-march-2020

By Pat Sweet