FRC publishes the results of its thematic review of reporting by smaller listed and AIM quoted companies

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07 Nov, 2018

The Financial Reporting Council (FRC) has published the results of its thematic review of reporting by smaller listed and AIM quoted companies. Whilst the FRC identified improvement in the quality of reporting, principally by those larger companies within the sample, it highlights that “there is clearly scope for further improvement”.

The FRC undertook a targeted review of 40 smaller listed and AIM quoted companies’ disclosures focusing specifically on Alternative Performance Measures (APM’s) and strategic reports, pension disclosures, accounting policies, including critical judgements and estimates, cash flow statements and tax disclosures. The sample included 22 listed companies outside the FTSE 350 and 18 AIM quoted companies with year-ends ranging from 31 December 2017 to 31 March 2018.

The most frequently improved disclosures related to APMs and judgements and estimates. The FRC were also “pleased” to see that some companies were prompted to enhance their strategic report to provide commentary on all significant matters, including tax, pensions and cash flows.

Further identified improvements included:

APMs and strategic report

  • Companies providing more balanced disclosure between APMs and IFRS measures than seen in previous years. Improvements included adding IFRS information to the APMs in the highlights section and more companies ensuring that any commentary in the strategic report that focused on APMs was immediately followed by commentary on corresponding IFRS measures.
  • Companies highlighting the limitations of APMs, better explaining individual adjustments and providing previously omitted reconciliations of APMs to corresponding IFRS measures.

Tax disclosures

  • Companies providing more informative disclosures in relation to tax provision estimation uncertainties and tax reconciliations characterised by clear explanations of the matters requiring estimation and the sources of uncertainty affecting them with the relevant amounts quantified. Better reconciliations included specific descriptions of reconciling items which distinguished between items with recurring and on-off impacts on the effective tax rate.

Pension disclosures

  • Good examples of disclosures on pension risks which explained the nature of each risk and how any changes would impact the scheme assets and/or scheme obligations.
  • Some companies also providing additional disclosures not strictly mandated by IAS 19 Employee Benefits. These included details of amounts owed to deferred, active and retired members, valuations on a funding basis and amounts of future deficit repair contributions.

Accounting Policies including critical judgements and estimates

  • Companies improving the explanations of the nature of the judgements made and relevant impacts.
  • Companies also providing tailored explanations for more complex accounting and company-specific treatments.

Cash flow statements

  • Most companies appeared to have correctly classified cash flows arising from operating, investing or financing activities. However apparent inconsistencies were noted as indicated below.
  • Two-thirds of companies disclosed the amounts of undrawn credit.

Notwithstanding the above improvements, the thematic review highlights that “there is still clear scope for further improvement in reporting by smaller companies”. The thematic review identified areas for disclosure improvement spanning all companies within the sample. Key findings and the FRC’s expectations, which companies of all sizes to are expected to follow when preparing their next annual report and accounts are highlighted below.

FRC expectations

Key findings

What to include

Strategic reports

  • Should contain a fair review of the business. The review should be a balanced and comprehensive analysis of performance and the position at the end of the year.
  • Many companies did not use their strategic reports to provide a sufficiently comprehensive analysis of their accounts. For example the reports did not fully discuss the effect of significant items on cash flows or items affecting the effective tax rate.
  • Commentary on the income statement, balance sheet and cash flow statement
  • Information on funding arrangements and committed pension contributions.
  • Commentary on the effective tax rate or material differences between the tax charge and tax paid.
  • Principal Risks and Uncertainties classified according to likelihood and potential impact.
  • Information required by the EU Non Financial Reporting (EU NFR) regulations where relevant (for example, policies, due diligence and outcomes).

Presentation of APMs

  • Should be transparent, reliable and understandable. APMs should not distract from the presentation of measures directly stemming from financial statements.
  • There were some examples of APMs given more prominence than IFRS measures in the Chairman’s Statements and CEO review.
  • Companies provided varying degrees of granularity in their explanations for presenting APMs. Only a few companies provided specific rather than general disclosures to explain their rationale for excluding certain items from an APM.
  • Some items were disclosed as one-off when circumstances indicated that they may recur in the future or had occurred in the recent past.



  • Balanced presentation and discussion of APMs and IFRS measures within the Chairman’s Statement and CEO’s Review.
  • Clear signposting of APMs versus IFRS measures when discussing financial performance and position.
  • Definitions, reconciliations and explanations for all APMs; remember financial ratios.
  • Specific explanations for individual adjusting items.
  • Items labelled as ‘non-recurring’ only in the rare situations when items will genuinely not recur.

Pension disclosures

  • Should enable users to understand the relationship between the pension expense, cash payments to the scheme and the surplus or deficit. They should also enable investors to appreciate the nature of scheme assets, the scheme’s investment strategy, the extent of its liabilities and associated risks.
  • Many companies did not explain how minimum funding requirements and trustees’ rights affected amounts recognised in accordance with IFRIC 14 IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction
  • Some pension disclosures required by IAS 19 were omitted
  • Companies which disclosed key valuation assumptions did not always provide the required sensitivity analyses.
  • Explanations of pension risk, potential impacts and risk mitigation strategies.
  • Plan assets categorised into sub-classes with differing characteristics.
  • Explanation of impact of trustees’ rights on recognition of pension assets and on recognition of additional liabilities.
  • Disclose quoted and unquoted scheme assets and explain their valuation.
  • Clear link between key assumptions and sensitivity analyses of those assumptions.
  • Pension accounting policies based on current version of IAS 19.

Accounting Policies

  • Should explain the application of the principles set out by relevant standards to the entity’s specific circumstances.
  • For those companies with material tax provisions, the disclosures relating to uncertainty of detection risk and accounting policies for penalties and interest on overdue tax were omitted.
  • Revenue recognition policies that align with the business model, covering all material sources of revenue.
  • Removal of redundant policies as soon as they cease to be relevant.
  • Prompt inclusion of new policies to cover new circumstances.

Judgements and estimates

  • Disclosure of judgements should provide an understanding of complex judgements made in applying accounting policies and enable a comparison of judgements made by different companies.
  • Disclosure of assumptions and sources of estimation uncertainty (‘estimates’) should enable users to understand the potential impact of any changes on reported results.
  • Few companies provided sensitivity analyses or quantified ranges of possible outcomes when describing sources of estimation uncertainty.
  • Companies did not always make it clear whether their estimation uncertainties presented significant risk of a material adjustment to carrying amounts specifically in the next financial year or over a longer period.
  • Clear distinction between judgements and estimates, with relevant disclosures for each category
  • Clear identification of those estimates with a significant risk of a material adjustment in the next year, with quantification of the relevant amounts.
  • Explanation of why any other estimates have been disclosed; for example those where a longer-term impact is possible.
  • Quantified disclosures around ranges of outcomes or sensitivity analyses.
  • Specific explanations of the judgements made by the company – not just a statement that a judgement exists.
  • Explanations for changes to previously disclosed judgements and estimates where this would be helpful.

Cash flow statements

  • Should separately present operating, investing and financing activities to allow users to assess their impact on the financial position of the entity and the amount of its cash and cash equivalents.
  • Errors were identified including apparent inconsistencies in the classification of cash flows between operating, investing and financing.
  • Not all companies included a commentary of cash and related matters in the strategic report
  • Most companies that disclosed ‘exceptional items’ did not specify the cash flow effect of them.
  • Cash flows should only be presented as investing activities where they result in a recognised asset.
  • Cash flows should only be presented as financing activities when they result in changes in the company’s equity and borrowings.
  • Cash flows from operating activities should include those that do not meet the definition of investing and financing activities.
  • Information on available undrawn credit facilities.
  • Cash effect of exceptional items should be disclosed.
  • Information on changes in liabilities arising from financing activities, as required by IAS 7, paragraph 44A.

Tax disclosures

  • Should show the current and future tax consequences of the recovery (settlement) of the carrying amount of recognised assets (liabilities), as well as the current and future tax consequences of current period transactions and other events.
  • There were examples where significant amounts of deferred tax assets and liabilities were disclosed as ‘other’ temporary differences, potentially concealing significant individual items that would require separate disclosure in the balance sheet notes.
  • There was little discussion of the future tax charges of issues such as restricted relief for interest expenses, US tax reform and the European Commission’s investigations into illegal state aid.
  • Explanation of the reported and future effective tax rates.
  • Effective tax rate reconciliations with informative labelling. Additional narrative on material reconciling items may be helpful.
  • The tax reconciliation should apply the most appropriate tax rate to pre-tax profit. This may not be the UK statutory rate for a company with overseas operations.
  • Explanations for the recognition of deferred tax assets where there is a history of losses.
  • Disclosure of tax on items in other comprehensive income and equity.

Further thematic reviews on impairment of non-financial assets, the effect of IFRS 16 Leases in companies’ 2019 interim accounts and the effects of the decision to leave the EU on companies’ disclosures have also been announced by the FRC to be undertaken in 2019/20. This is in addition to follow up thematic reviews on companies’ disclosures around IFRS 9 and IFRS 15 announced on 5 November.

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