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FRC publishes the results of IFRS 9 and 15 thematic reviews

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05 Nov 2018

The Financial Reporting Council (FRC) has published the results of its thematic reviews looking at the disclosures made by companies on the impact of IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’ in their June 2018 interim reports.

It is hoped that the results of the thematic reviews will help companies improve the quality of their corporate reporting in relation to the new accounting standards. By using the better practice examples companies will also be able to benchmark the quality of their own disclosures in their upcoming annual reports and accounts.

IFRS 15 thematic review

The FRC’s review consisted of a limited scope desktop review of the interim financial statements of a sample of companies. The sample was skewed towards those industries which the FRC considered the impact of IFRS 15 would be felt most – telecommunications, aerospace and defence and software industries. The FRC assessed the adequacy of disclosures regarding the effect of the transition to IFRS 15 in the first year of adoption.

The FRC’s review identified a number of areas where disclosure could be improved especially with respect to explanations of the impact of adoption of IFRS 15. It highlights that the best disclosures were those that were specific to the company and that provided additional detail for the benefit of providing a relevant and robust explanation of the impact of IFRS 15. The FRC indicates that it expects much improved disclosures in December 2018 year-end reports.

Companies are encouraged to invest sufficient time during their year-end preparation to ensure that:

  • explanations of the impact of transition are comprehensive and linked to other relevant information in the annual report and accounts;
  • changes to revenue policies are clearly described and explained, reflecting company specific information – as are any associated management judgements;
  • performance obligations are identified and explained, with a focus on how they have been determined and the timing of delivery to the customer; and
  • the impact of the standard on the balance sheet is also addressed, including accounting policies for contract assets and liabilities.

IFRS 9 thematic review

The FRC’s review consisted of a limited scope desktop review of the interim financial statements of a sample of companies. The sample was skewed towards banking entities including one building society and also one life insurance company who had adopted the deferral method.

The main impact of IFRS 9 will be felt by banks and the FRC thematic review focused on the adequacy of disclosures regarding the effect of the transition to IFRS 9 in the first year of adoption.

The FRC review highlights some areas where disclosure could be improved and some areas where no disclosure had been provided at all. In particular, the FRC highlights that some smaller banks did not sufficiently explain the impact of adopting IFRS 9. As with IFRS 15, the FRC expects much improved disclosures in December 2018 year-end reports.

Companies are encouraged to invest sufficient time during their year-end preparation to ensure that:

  • explanations of the impact of transition are comprehensive, and are linked to other information disclosed in the annual report;
  • changes made to accounting policies (including the reasons for these changes and associated judgements) are clearly articulated and convey company-specific information;
  • disclosures are sufficiently granular to enable users to understand the impact on the business and key portfolios; and
  • there is clear linkage to the business model and risk management strategy which underpin the classification and hedging requirements of IFRS 9.

The FRC has indicated that it will challenge companies who do not provide an adequate level of disclosure about the impact of new standards through its regular accounts review process next year. It will also perform follow up reviews on companies’ disclosures around IFRS 9 and IFRS 15 and their impact in a sample of annual reports where compliance will be assessed against the more extensive set of year end disclosure requirements.

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