Thematic reviews supplement the FRC’s Corporate Reporting Review (CRR) function’s monitoring of company reports and accounts for compliance with the Companies Act 2006, applicable accounting standards and other reporting requirements. The aim of these reviews is to identify and share examples of good practice reporting and highlight areas where improvements can be made.

The thematic reviews cover three areas that the FRC has identified are “acknowledged areas of difficulty” for preparers – judgements and estimates, pension disclosures and alternative performance measures.

Judgements and estimates

The FRC reviewed the significant accounting judgements and sources of estimation uncertainty disclosures of 19 FTSE companies (three FTSE 100, 12 FTSE 250 and four smaller listed entities) and one company from the AIM market, having informed them of this in December 2016. The objective of the review was to “encourage better quality reporting that enables readers to assess the quality of management’s decisions and to identify better practices”.

The report indicates that the FRC were “encouraged” to see that most of the companies in the sample had responded to the advance warning of the review by making improvements to their disclosures. Although not as significant as in their other thematic reviews, the FRC indicates that the improvements showed signs that “companies were focusing on the right areas”. Improvements identified included:

• Companies clearly distinguishing between judgements and estimates.
• Better quality reports identifying a fewer number of judgements and estimates but, for those, providing detailed information regarding supporting assumptions and changes from prior year. The FRC indicates that “users of these reports would have a clearer picture of which decisions taken by the board had a significant impact on the company’s performance”.
• Companies focussing on genuinely critical judgements where management decisions had a significant impact on results.
• Many companies improving the granularity and level of detail of disclosures but still keeping them clear and concise.

The report includes more detailed findings by the CRR team and contains examples of good practice. It also identifies that “there is clear scope for further improvement” in this area”. Going forward, the FRC has indicated that it will continue to challenge companies where it does not see (taken directly from the report): 

• clear differentiation of estimates from judgements;
• detailed disclosures of the judgements that have the most significant effect on amounts recognised;
• distinction made between estimates that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next year, and other estimates such as those that may affect carrying amounts in the longer-term;
• company-specific disclosures that pinpoint the areas of estimation uncertainty and provide useful additional information, avoiding the use of boilerplate;
• quantification of the specific amounts of estimates at risk of material adjustment within the next year;
• quantification of assumptions underlying estimates, where necessary; and
• sensitivity analysis or disclosure of the range of reasonably possible outcomes.

The full thematic review is available on the FRC website.

Pension disclosures

The FRC report shares the results of its targeted review of certain aspects of pension obligation reporting. The FRC wrote to 20 companies informing them that its CRR team would review the pension disclosures in their next annual report and accounts. Pensions accounting was an area that the CRR team identified where there was a “general need for increased transparency of the relationship between a company and its pension plans”. The sample comprised four FTSE 100 companies, one FTSE 250 company, 13 smaller listed entities, one listed bond holder and an unlisted company.

The report indicates that “most companies responded positively to advance notification” of the review and certain aspects of their pension disclosures improved. Such improvements included:

• Improved pension disclosures in the strategic report including companies who provided more information about risks and uncertainties arising from their pension schemes.
• Disclosures about contributions expected to be paid for several years into the future which is helpful to investors as it provides an indication of the likely future cash payments that a company expects to make to its pension scheme.
• Companies providing more informative disclosure about the assets held by their pension schemes by disaggregating the analysis of quoted and unquoted assets into further sub-classes.
• Disclosures as to why companies with material net pension assets consider the asset to be recoverable.

The report includes more detailed findings by the CRR team and contains examples of good practice. Going forward, the FRC has indicated that it will continue to challenge companies where (taken directly from the report):

• information in addition to that required by the standard has not been provided but is necessary to understand the risks associated with their pension schemes and how they may affect the amount, timing and uncertainty of the companies’ future cash flows;
• a net pension asset has been recognised, or it appears that required future contributions may create a surplus, but there is no explanation of the judgements made when assessing trustee’s rights;
• there appears to be an asset-liability matching strategy but it has not been adequately described;
• the strategic report does not refer to the pension scheme but it appears appropriate to do so;
• plan assets of different nature and risk have been aggregated into classes; and
• it is not clear how unquoted plan assets have been valued.

The full thematic review is available on the FRC website.

Alternative Performance Measures (APMs)

The FRC report shares the results of its targeted review of certain aspects of companies’ APM disclosures. The FRC wrote to 20 companies informing them that its CRR team would review the APM disclosures in their next annual report and accounts. The review aimed to establish the extent to which the companies’ reports and accounts were consistent with the European Securities and Markets Authority (ESMA) Guidelines on Alternative Performance Measures (“the Guidelines”). In carrying out the review, the FRC took into consideration those areas of concern identified from an earlier review of a sample of interim reports in 2016. By comparing company reports with those of the previous year, the FRC was also able to identify steps companies had taken to achieve greater consistency with the Guidelines.

The sample comprised eight FTSE 100 companies, nine FTSE 250 company, two smaller listed entities and one company from the AIM market.

The report indicates that “compliance with the Guidelines was generally good across the sample”. Improvements identified included:

• All companies providing definitions for their APMs which “conveyed an accurate description of each APM” and explanations for the use of APMs was given by all companies. Fewer companies used boilerplate wording.
• All companies providing reconciliations but not for all APMs.
• The majority of companies in the sample giving equal prominence to APMs and IFRS measures. The FRC did, however, identify that equal prominence was more of an issue in areas such as the Chairman’s statement.

The report indicates that the greatest concern was companies using the terms such as “non-recurring”, “unusual”, “infrequent” and “one-off” in connection with items such as restructuring costs and impairment charges. The FRC indicates that “for larger companies in particular, there will be few occasions when there is only one event in a period of years which drives such charges”. The FRC recommends that companies remove such descriptions from their definitions and “select more accurate labels”.

The report includes more detailed findings by the CRR team and contains examples of good practice. Going forward, the FRC has indicated that it will continue to challenge companies where (taken directly from the report):

• definitions are not given for all APMs used;
• a term such as non-recurring is used and that description does not appear to apply in the circumstances;
• good explanations for the use of APMs are not provided;
• a reconciliation to amounts appearing in the financial statements for each APM is not disclosed;
• APMs are displayed with greater prominence than measures directly stemming from the financial statements;
• there is no discussion of either the IFRS results themselves or of the adjustments made to those results to arrive at adjusted profit;
• the IFRS results are not highlighted at an early point in the narrative section of the report and accounts;
• no explanation is given for changes made in the APMs used;
• explanations are not presented of why items have been excluded from adjusted profit; and
• items are excluded on the basis that removing them better reflects the underlying performance of the business and it is unclear why this is the case; for example, share based payments.

The full thematic review is available on the FRC website.

The press release is available on the FRC website.