FRC highlights ‘basic’ cash flow errors in corporate reporting

The Financial Reporting Council (FRC) has criticised companies for failing to tackle ‘basic’ errors in cash flow statements and has published suggestions for improvement

The regulator’s review of corporate reporting in relation to IAS 7 Cash flow statement and the liquidity disclosure requirements in IFRS 7 Financial Instruments: Disclosures also addresses the disclosure of liquidity risk, which the FRC said is a highly topical issue in the current challenging economic environment.

The FRC says it will continue to challenge those companies where there is an apparent material inconsistency between the cash flow statement and the notes, or where cash flows were incorrectly classified.

 In addition, the FRC notes most companies could improve their disclosures of accounting policies and judgements in relation to the cash flow statement, with the review identifying several areas for improvement in the disclosure of accounting policies for the treatment of significant and large one-off transactions in the cash flow statement.

For its thematic review, the FRC selected companies from a range of sectors and industries, including several which are perceived to face greater risks concerning cash flow, liquidity and viability, including general retailers, retail property, and tourism and leisure.

The initial selection was a sample of 20 annual reports and accounts; however, the sample was extended to 30 companies to include a greater number of accounts published since April and the first stage of the pandemic. 

Several companies in the sample published their accounts before the UK lockdown in March and many of these accounts contained only boilerplate disclosures in respect of liquidity risk and related issues.

However, the FRC identified a marked improvement in liquidity risk reporting, including linkage to viability statement and going concern disclosures, in reports and accounts published from April onwards, most notably in smaller listed companies. This is consistent with the findings of another of its reviews on the financial reporting effects of Covid-19.

The majority of companies in the sample that published their accounts from April onwards disclosed key liquidity information such as availability of cash, undrawn borrowing facilities, use of supply chain finance and compliance with covenants.

The FRC did, however, identify that some companies could improve their disclosures of covenant testing, and assumptions and judgements around going concern and viability. 

David Rule, the FRC’s executive director of supervision, said: ‘It is frustrating that we continue to identify basic errors in relation to cash flow reporting which, in most cases, were easily identifiable from a desktop review of the financial statements.

‘We expect companies to perform robust pre-issuance reviews to ensure cash flow statements and related notes comply with the requirements of IAS 7 and are free from errors.

‘Given investors’ focus on cash management in this uncertain economic climate, we were pleased to see improved liquidity risk reporting following the UK lockdown in March.’

Useful link:

Thematic review: Cash flow and liquidity disclosures

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