FRC publishes year-end advice to Audit Committee Chairs and Finance Directors in advance of the 2020/21 reporting season

14 November 2020

The Financial Reporting Council (FRC) has published a letter to Audit Committee Chairs and Finance Directors, in advance of the 2020/21 reporting season, setting out its expectations for preparers of reports and accounts for the coming year.

The year-end advice letter covers the following key areas:

2020 year-end reporting environment

COVID-19 and its impact on corporate reporting

The effects of COVID-19 present challenges to businesses of providing clear and transparent information that focuses on issues most relevant to users. To assist preparers in reporting in a COVID-19 environment, the letter draws the reader’s attention to the FRC guides published during the year in relation to Covid-19:

The Joint statement issued by the FRC, FCA and PRA and subsequent updates.
The FRC’s thematic review on the financial reporting effects of COVID-19.
The FRC’s Lab reports on 'Going Concern, Risk and Viability' and 'Resources, action, the future', issued in June which highlight the information that investors indicate they find most critical to understand the impact of COVID-19 on a company.
The FRC’s updates to the June Lab reports, issued in October.

The FRC highlights that a thematic review on cash flow and liquidity, due to be published shortly, and which provides guidance on the disclosure of liquidity risk, going concern and viability, may also provide a useful reference.

The letter highlights that the FRC expects preparers:

To consider the principles contained in IAS 1 Presentation of Financial Statements and provide disclosures that allow users to understand the impact of events and conditions on a company’s position and financial performance. These should, where possible, quantify the impact of COVID-19 on a company’s performance, position and prospects.
To increase disclosure of relevant sensitivities or ranges of possible outcomes where judgements are made on significant estimation uncertainties.
To quantify the historical effect of COVID-19 in narrative reporting in the strategic report. However companies are ‘strongly encouraged’ not to make arbitrary splits of items between COVID-19 and non-COVID-19 financial statement captions as such allocations are likely to be highly subjective and therefore unreliable. Companies are also expected to apply their existing accounting policies for exceptional and other similar items consistently to COVID-19-related income and expenditure.
To clearly articulate the impact of COVID-19 on their business and strategies and how the changes are compatible with future forecasting assumptions used in other areas of the financial statements such as going concern, viability, impairment testing and recognition of deferred tax assets. Specifically the FRC 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.
To describe and explain any other significant judgements and estimates made especially with regards impairment reviews. Disclosures are expected to describe the approach used to determine key impairment assumptions and explain significant year-on-year changes, including any changes due to COVID-19.

In light of the light of the impacts of COVID-19, the FRC has encouraged boards to carefully consider whether they should lengthen their reporting timetables for 2021, making use of the extensions to reporting deadlines.

Impact of Brexit

The FRC expects company reports to explain company-specific risks and uncertainties arising as a result of Brexit. This should include the impacts on different parts of the business and any effects on the financial statements including major sources of estimation uncertainty, amounts at risk and ranges of potential outcomes.

Insights and observations from the FRC’s monitoring work

The FRC makes reference to its latest Annual Review of Corporate Reporting which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team. The report sets out the FRC’s expectations of areas of corporate reporting that require improvement and what it expects companies to focus on in the coming reporting season. The key areas of focus, included in the letter, have been drawn from, and are consistent with, the findings included in the FRC’s Annual Review of Corporate Governance and Reporting.

Specifically the FRC highlights frequent challenges around disclosure of judgements and estimates, impairment of non-financial assets and working capital finance arrangements such as reverse factoring. Preparers should consider these findings during the year-end reporting process.

Insights and observations from thematic reviews

The letter summarises key points identified from thematic reviews carried out during the year. Specifically it focuses the reader’s attention on:

Climate change – the FRC indicates that "users expect companies to provide full information about the future impact of climate change on the business and how the company’s activities affect the environment". Its climate change thematic review provides key findings and FRC expectations.
IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases - Recently the FRC published the results of two thematic reviews covering the current reporting on IFRS 15 and IFRS 16. The reviews identified a number of areas where companies need to improve their reporting.
Cash flow and liquidity – the FRC’s forthcoming thematic review which looks at how companies reported cash flows and liquidity risk sets out the following expectations in this area:
- Companies should provide a clear explanation of the matters considered in assessing going concern, viability and liquidity.
- Company disclosure should include the methods, assumptions and judgements made in assessing going concern and viability.
- There should be consistency in the amounts and descriptions of items in the cash flow statement, and other areas of the annual report, including: the strategic report, other primary statements, disclosures of changes in financing liabilities and other notes.
- Company disclosures should include accounting policies and judgements in relation to the cash flow statement, particularly for large, one-off transactions.
- Companies are expected to address what the FRC calls as 'basic errors' in the preparation of their cash flow statements by performing robust pre-issuance reviews of the cash flow statement.

Narrative reporting and corporate governance matters

Section 172 statement and reporting on workforce engagement

The FRC indicate that many companies are failing to explain how their directors discharged their section 172 duty and in particular the responsibility to have regard to the consequences of decisions in the long term. Additionally whilst companies are reporting on the methods of engagement with stakeholders they are not reflecting how the feedback affected decision making. Some companies are treating the statement as one of compliance.

The letter draws attention to the recent s172 review by the Financial Reporting Lab of the Financial Reporting Council (FRC) which provides a set of tips intended to help companies consider what content to include in a Section 172 statement, how to present it and how to facilitate the process of preparing the statement.

The letter also highlights the FRC’s expectations around reporting on workforce engagement and indicates that reporting should improve in that area. The FRC draws attention to its Lab report on workforce reporting in January 2020 to assist in this area.

Other areas covered

Other areas covered in the letter include:

Chair tenure
Future endorsement of IFRS Standards in the UK
The requirement to consider new IFRS Standards including Interest Rate Benchmark Reform and amendments to IFRS 16 for COVID-19-Related rent concessions.

The press release and full letter are available on the FRC website.