FRC seeks revenue and leases reporting improvements

The Financial Reporting Council (FRC) is warning companies they need to improve their reporting of revenue and leases, after reviewing a sample of disclosures in annual and interim reports

These reviews covered current reporting on IFRS 15 Revenue from Contracts with Customers, and reporting on IFRS 16 Leases and following the first year of its application.

IFRS 15 sets the principles to apply when a company reports information about the nature, amount, timing and uncertainty of revenue or cash flows from a contract with a customer. 

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.

The review of reporting under IFRS 15, the FRC’s third, focused on those areas that have previously provided the greatest cause for concern. Although there has been some progress, the FRC said disclosures by many companies still do not meet its quality threshold.

It is now calling for companies to critically review their revenue-related disclosures to ensure they provide a clear understanding of how they have applied the requirements of the standard to their specific circumstances. 

In particular, the FRC expects companies to provide clear descriptions of performance obligations, the timing of revenue recognition and explanations of any significant judgements made by management.

Companies must identify, and explain significant movements in, contract balances.

They should also ensure there is consistency between revenue-related information in the strategic report and information in the financial statements, including, for example, details about significant contracts and disclosures of disaggregated revenue; and specify the types of any variable consideration that exist within contracts and how they are both estimated and constrained.

The FRC’s report includes examples of both inadequate and better disclosures against which companies can benchmark their own draft disclosures. The regulator says it will challenge companies whose future disclosures do not meet its expectations.

The FRC found that most companies provided a good explanation of the impact of adopting IFRS 16, which applies for the first time this year, but wants to see improvements in future reporting. The FRC expects companies to tailor the descriptions of their leasing accounting policies to match their particular circumstances and to cover all material areas.

Companies must provide detailed information about the significant judgements affecting their accounting for leases; and include sufficient detail to enable a good understanding of the financial reporting effects of their leasing arrangements on their financial position, financial performance and cash flows.

A link to the two thematic reviews can be found here:

IFRS 15 ‘Revenue from Contracts with Customers’ A follow-up thematic review
IFRS 16 ‘Leases’ A thematic review of disclosures in the first year of application

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