Financial instruments continue to form part of the Financial Reporting Council's (FRC's) top-ten areas of challenge as evidenced in its Annual Review of Corporate Reporting 2022/23.  

Similar to the prior year, the FRC raised questions about expected credit loss (ECL) provisions, with most queries relating to smaller financial institutions. Other challenges related to unclear accounting treatment and policies and the basis on which cash and overdraft balances were offset.

For their forthcoming reporting the FRC expects companies to ensure that:

• the nature and extent of material risks arising from financial instruments (including inflation and rising interest rates) and related risk management are adequately disclosed, including:
  • the methods used to measure exposure to risks and any changes from the previous period.
  • any hedging arrangements put in place to fix interest rates or hedge against the effects of inflation.
• the approach and significant assumptions applied in the measurement of ECL, and concentrations of risks, where material, are disclosed.
• in making ECL assessments, historical default rates are reviewed and adjusted for forecast future economic conditions.
• accounting policies are provided for all material financing (including factoring and reverse factoring) and hedging arrangements, and any changes in the arrangements.
• the effect of refinancing and changes to covenant arrangements is explained.
• cash and overdraft balances have been offset only when the qualifying criteria have been met. 
• information about banking covenants is provided unless the likelihood of any breach is considered remote.

This page tracks all of our news items relating to IFRS 9.