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FRC reminds Boards of companies in the construction and business support services sectors of their reporting obligations

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30 Jan 2018

The Financial Reporting Council (FRC) has published reminders to Boards of companies in the construction and business support services sectors of their reporting obligations. Although the FRC guidance is directed at one sector, in the light of the collapse of Carillion, the FRC states it is also relevant to other companies.

The FRC comments:

The annual report and accounts must provide sufficient, clear and relevant information, segmented between business lines where necessary.  Users must be able to:

  • understand the company’s performance, financial position and prospects;
  • assess its going concern status; and
  • assess its longer term viability.

The accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss. The analysis presented in the strategic report must be fair, balanced and comprehensive. Boards of companies applying the UK Corporate Governance Code must ensure the annual report and accounts are fair, balanced and understandable. These requirements require careful consideration of the content and clarity of the disclosures provided.

The guidance covers the following areas: 

  • the going concern basis of accounting. The FRC draws attention to its guidance Risk Management, Internal Control and Related Financial and Business Reporting and notes that where the directors decide that no material uncertainties relating to application of the going concern basis need to be disclosed, but that decision involved significant judgement, the Board should consider whether further disclosure is necessary to meet the requirements of IAS 1 Presentation of Financial Statements para 122 in relation to key judgements;
  • the Strategic Report, risk and viability reporting. The FRC draws attention to its 2017 Annual Review of Corporate Reporting that highlighted the need for all companies to provide clear and detailed descriptions of their principal risks and uncertainties, and the judgements made by directors in their identification of these. It indicates that in the construction and business service support sectors, the strategic report will likely require an explanation of the factors that are most important to the outcome of key contracts and thereby the continued success of the company.  It also attention to the Financial Reporting Lab’s report on risk and viability reporting which highlights that companies should consider how the principal risks link to other parts of the annual report and accounts, indicates the need to provide a good understanding of how management is addressing these risks and encourages Boards to enhance their disclosures supporting the viability statement;
  • judgements and estimates applied in preparing the financial statements. The FRC observes that measurement of revenue and recognition of profits over time is dependent on reliable estimates of contract outcomes. They also note that the impact of a company’s judgements as to which costs can be spread over the life of a contract and which costs should be expensed as incurred can be material. The FRC draws attention to its recent thematic report on judgements and estimates that sets out clear expectations of the disclosures required in this area. It also indicates that companies should consider the impact of IFRS 15 Revenue from Contracts with Customers and where known or reasonably estimable, should provide detailed quantitative disclosures of the effects of adopting the standard along with explanations of how accounting policies will change in the last accounts before first time adoption. The FRC also indicates that boiler plate and generic disclosures should be avoided;
  • cash flow and net debt indicators. The FRC draws attention to its recent letter to Audit Committee Chairs and Financial Directors which indicated the importance of clear information on the levels of debt, cash flows and the conversion of operating profits into cash. The FRC also draws attention to the amendments to IAS 7 Statement of Cash Flows which require an explanation of changes in a company’s financing obligations over the period and provide an opportunity for improved disclosure in this area.  The FRC observes that it is sometimes unclear whether operating cash flows recorded represent cash receipts from customers and payments to suppliers or cash flows with third party finance providers. The FRC notes that the new disclosure requirements provide an opportunity to improve the clarity of their disclosures, e.g. around financing facilities such as invoice discounting and reverse factoring. The FRC also comments that lack of disclosure around non-recourse arrangements may hide reliance on such facilities and they strongly encourage companies to explain their reliance on these facilities;
  • complex employee pension arrangements. The FRC observes that the complexity of defined benefit obligations in the business services support sector can make it difficult for users to fully assess associated risks and the company’s ability to meet its obligations. The FRC reminds Boards of the disclosure requirements under IAS 19 Employee Benefits and the need to explain, in the strategic report, any principal risks and uncertainties identified with respect to pension arrangements;
  • the role of auditors in particular in relation to the going concern basis and the need to remain alert to any events or conditions that may cast significant doubt on the company’s ability to adopt the going concern basis of accounting throughout the audit; and
  • the role of Audit Committees including their role in challenging accounting policies, judgements and estimates, principal risks and uncertainties and management’s assessment on going concern.

The FRC’s full guidance is available on the FRC website.

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