FRC slates quality of IFRS 15 revenue recognition disclosure

Companies need to improve the quality of their reporting under newly introduced IFRS for revenue recognition and financial instruments, according to a Financial Reporting Council (FRC) review

The FRC review was critical of the way companies are reporting under the new International Financial Reporting Standards (IFRS) after  thematic reviews of their first year of operation, which revealed considerable scope to improve the quality of disclosures.

The regulator says the implementation of IFRSs 9 Financial Instruments and  IFRS 15 Revenue from Contracts with Customers, which applied for the first time to 2018 year-ends, represented significant challenge and change for many companies, following a period of relative stability in terms of financial reporting requirements. 

The review of implementation of IFRS 15 identified a need for companies to improve explanations of accounting policies such as the specific nature of performance obligations and when they are satisfied, including whether a company is acting as agent in providing any goods and services.

The link between policies and information in the segmental reporting note and strategic report was sometimes not clear, while information about significant judgements relating to revenue was variable. Quantitative disclosure, such as sensitivities or ranges of potential outcomes, were often not provided for judgements involving estimation uncertainty.

The FRC review of IFRS 9 Financial Instruments implementation identified instances of better practice across the sample of companies reviewed, with the quality of the disclosure high among the larger banks. However, it also identified that there was still room for companies to improve disclosures by analysing the credit quality of trade receivables by non-banking companies; and by providing details of the indicators of a significant increase in credit risk particularly by the smaller banks.

As regards reporting of impairment of non-financial assets, while the review identified instances of better practice across all key aspects of disclosure, it also identified a number of common disclosure omissions and opportunities to clarify and enhance disclosures.

Specifically, the FRC is encouraging companies to pay greater attention to providing relevant information around significant judgements and key assumptions made in estimating the recoverable amount of assets and cash-generating units. They should also seek to explain the sensitivity to changes in key assumptions, where reasonably possible changes could give rise to impairment of goodwill or material further adjustments to already-impaired assets.

IFRS 15 thematic review https://www.frc.org.uk/getattachment/498aa4b3-85b2-4d4c-8f5a-3d0d28db9237/IFRS-15-thematic-PDF.pdf

IFRS 9 thematic review is here: https://www.frc.org.uk/getattachment/4998f20e-30e1-47a8-a9e7-f15654fa0e03/IFRS-9-thematic-final.pdf

Thematic review of impairment of non-financial assets  https://www.frc.org.uk/getattachment/4daee650-59fe-43b0-904c-ba9abfb12245/CRR-Thematic-Review-Impairment-of-Non-financial-Assets-final.pdf

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