The Financial Reporting Council (FRC) has published its annual letter setting out its reporting expectations for preparers of reports and accounts for the year ahead
Writing to CEOs, CFOs and audit committee chairs, the regulator said the end of year letter is of particular significance given the continuing backdrop of economic uncertainty and the impact of Covid-19 on the scope and timing of company reporting, while companies are also dealing with commercial and operational change associated with Brexit.
The letter covers what disclosures should be made to understand the impact of particular events on the company’s position and financial performance, as well as any judgements involving significant estimation uncertainty.
The FRC said it expects increased disclosure of relevant sensitivities or ranges of possible outcomes to help users understand the assumptions underlying those estimates and the extent of the changes that might be reasonably possible in the next twelve months.
Given that public health measures taken in response to Covid-19 are likely to continue into the first quarter of 2021, it is clear these will present ongoing challenges for both finance teams and auditors. Therefore, the FRC is encouraging boards to carefully consider whether they should lengthen their reporting timetables for 2021, making use of the extensions to reporting deadlines which remain in place.
On the topic of disclosures relating to the pandemic, the FRC says it strongly discourages the arbitrary splitting of items between Covid-19 and non-Covid-19 financial statement captions, arguing that such allocations are likely to be highly subjective and, therefore, unreliable.
Companies should also apply existing accounting policies for exceptional and other similar items consistently to Covid-19-related income and expenditure. Those using alternative performance measures (APMs) should continue to apply the European Securities and Markets Authority (ESMA) Guidelines, notwithstanding the UK’s exit from the EU.
The FRC expects companies to articulate clearly the impact of Covid-19 on their business models and strategies, and how the changes are compatible with future forecasting assumptions used in other areas of the financial statements (for example, going concern, viability, impairment testing and recognition of deferred tax assets).
In particular, the regulator expects any significant judgements made in determining whether or not there is a material uncertainty in relation to going concern to be disclosed and explained.
Regarding the impact of the UK’s EU exit, the FRC expects companies to explain company-specific risks and uncertainties, including the potential impacts on different parts of their business and effects on the financial statements.
The FRC also outlines its expectations of companies’ climate disclosures including the impact of climate change on their activities, their own environmental impact as well as explanations of how directors are discharging their section 172 duties.
Other topics covered in the letter include the tenure of the audit committee chair, future endorsement of IFRS standards in the UK, and the requirement to consider new IFRS standards including interest rate benchmark reform and amendments to IFRS 16 for Covid-19-related rent concessions.
Sir Jon Thompson, FRC CEO, said: ‘The economic uncertainty caused by the Covid-19 pandemic has only heightened the need for companies to provide clear disclosures that allow users of accounts to properly understand a company’s position, financial performance and outlook.
‘The FRC’s annual letter is designed to help companies and their auditors meet these expectations and deliver high quality reporting for all of their stakeholders.’