The update reports on the EFRAG Board webcast meeting on 21 April, the EFRAG webcast meetings on 6, 8 and 29 April, the EFRAG TEG webcast meeting on 16 April and the meeting of the European Lab Steering Group on 22 April.

The update also lists EFRAG publications issued in April:

• EFRAG's draft comment letter and a preparatory draft of the endorsement advice on the IASB Exposure Draft ED/2020/2 Covid-19 - Related Rent Concessions (amendment to IFRS 16);
• EFRAG's draft comment letter in response to the IASB Exposure Draft ED/2020/1 Interest Rate Benchmark Reform - Phase 2 (proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16); and
• EFRAG's feedback statement on its Discussion Paper Accounting for Pension Plans with an Asset-Return Promise.

Please click to download the April EFRAG Update from the EFRAG website.

The statement highlights:

• the importance of providing relevant and reliable information, which may require issuers to make use of the time allowed by national law to publish half-yearly financial reports while not unduly delaying the timing of publication;
• the importance of updating the information included in the latest annual accounts to adequately inform stakeholders of the impacts of COVID-19, in particular in relation to significant uncertainties and risks, going concern, impairment of non-financial assets and presentation in the statement of profit or loss; and
• the need for entity-specific information on the past and expected future impact of COVID-19 on the strategic orientation and targets, operations, performance of issuers as well as any mitigating actions put in place to address the effects of the pandemic.

ESMA also notes that the statement is also applicable to financial statements in other interim periods when IAS 34 Interim Financial Reporting is applied.

Please click to access the statement on the ESMA website.

The temporary relief, which follows the announcement in March for annual reports, will permit listed companies an additional month in which to publish their half yearly financial reports. Currently, under the Transparency Directive, listed companies are required to publish half yearly financial reports no later than 3 months from the end of the period to which the report relates.

The FCA has indicated that the temporary extension will be kept under review and, at a suitable time, will announce how the policy will be removed in a fair, orderly and transparent way.

The full bulletin is available on the FCA website.

The newsletter provides an update of the Lab's current projects and a brief overview of its other activities.  Some highlights include:

• that the Lab's work on business models is being paused with a greater focus on those areas where investors are currently demanding more information.  To feed into this work the Lab have launched a survey on what information investors might want and need.
• the release, in January, of the Lab's workforce reporting report.
• flagging guidance issued by the FRC on COVID-19.

The full newsletter is available on the FRC website here.

Amendments have been made to the standard to improve the consistency of the disclosure exemptions in relation to the statement of cash flows and related disclosures.

The amendments to FRS 101 provide an exemption from the disclosure of cash flows required by paragraph 24(b) of IFRS 6 Exploration for and Evaluation of Mineral Resources. A similar amendment has been made to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland for qualifying entities.

An amendment has also been made to the exemption from paragraph 33(c) of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, removing the condition that this exemption is only available when equivalent disclosures are made in the relevant consolidated financial statements of the group in which the entity is consolidated. This is for consistency with the exemption from the presentation of a statement of cash flows.

A press release and the amendments are available on the FRC website.

In response to questions received around the applicability of the section 172 reporting requirements to medium-sized companies, the FRC identified a few areas where the appendices in the Guidance on the Strategic Report would benefit from clarification.  As a result it has issued editorial amendments which primarily relate to the scope of the new requirements which are effective for annual reporting periods beginning on or after 1 January 2019. The editorial amendments have been made to:

• Clarify the scope of the section 172(1) statement in the Strategic Report including a clarification that all public companies (including AIM companies) must include a section 172(1) statement in their Strategic Report, even if they meet the medium sized company size criteria.  For non-public companies, the clarifications indicate that the requirements only apply to large companies (as defined in s465 to 467 of the Act). 
• Clarify that when determining whether a company has to disclose matters regarding employee engagement under Schedule 7.11(1) of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, in the Directors' Report, consideration must be given to the number of UK based employees in both the current and preceding year, unless a company is in the first year of operation. 
• Remove Public Interest Entities from the scope of the requirement to disclose trends and factors in the Strategic Report.  The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, removed this requirement for Public Interest Entities (PIEs).  The requirement still remains in place for quoted companies with less than 500 employees.

A press release, including a summary of the amendments are available on the FRC website. 

Our related Need to know publications on the The Companies (Miscellaneous reporting) Regulations 2018 and the revised 2018 guidance on the strategic report are available on this website.  

Interest rate benchmarks such as the London Interbank Offered Rate (LIBOR) are being reformed, and it is anticipated that LIBOR will not be available after 2021. There is increasing uncertainty about the long-term viability of some interest rate benchmarks and this gives rise to issues affecting financial reporting in the period before the reform, particularly in relation to hedge accounting.

In response to the uncertainty, the FRC amended specific hedge accounting requirements in Section 12 of FRS 102 in December 2019, to provide relief that will avoid unnecessary discontinuation of hedge accounting as interest rate benchmarks are reformed.

The amendments in 2019 focussed on financial reporting issues arising before the reform of an interest rate benchmark. Further issues might affect financial reporting during the reform of an interest rate benchmark in respect of modifications to financial instruments, changes to hedging relationships and modifications to leases. FRED 74, which represents a second phase of amendments, focusses on these issues.

FRED 74 proposes amendments to the accounting requirements in Section 11 Basic Financial Instruments, Section 12 Other Financial Instruments Issues and Section 20 Leases to provide relief to minimise discontinuities in the accounting for financial instruments and leases, minimise reporting costs, assist entities in providing useful information to users of financial statements and avoid unnecessary discontinuation of hedge accounting as agreements are modified in order to transition to alternative benchmark rates. Entities will account for modifications as if they result from periodic re-estimations of cash flows to reflect changes in market rates of interest.

It is proposed that the amendments are effective for accounting periods beginning on or after 1 January 2021, with early application permitted. Comments are requested by 30 September 2020.

A press release and the draft amendments are available on the FRC website.

The FRC previously issued guidance for companies in March 2020. The updated guidance still covers those areas included in that earlier guidance which include:

• Key areas of focus for boards in maintaining strong corporate governance and high-level guidance on some of the most pervasive issues that should be considered when preparing annual reports and other corporate reporting.
• Management information
• Risk management and internal controls systems
• Dividends and capital maintenance
• Corporate reporting
• Strategic Report and Viability Statement
• Financial statements – going concern and material uncertainties, significant judgements and estimation uncertainty and events after the reporting date.

For interim reports the guidance indicates that directors will need to exercise judgment about the nature and extent of the procedures that they apply to assess the going concern assumption at the half‐yearly date. The FRC indicates that this might include disclosure of:

• any material uncertainties to going concern;
• assumptions made about the future path of COVID-19 and the public health responses;
• the projected impact on business activities;
• use of government support measures; and
• access to bank and other financing.

The guidance provides a number of scenarios which may trigger a need to re‐examine the going concern assumption and going concern and liquidity risk disclosures including:

• a significant adverse variation in operating cash flows between prior budgets and forecasts and the outturn in the first half of the year;
• a significant reduction in projected revenues for the second half of the year based on plausible scenarios for the COVID-19 pandemic and public health responses, and taking into account government support measures;
• a failure to obtain renewal or extension of committed financing facilities; and
• a failure to sell capital assets for their expected amounts or within previously forecast time‐frames.

If going concern has become a significant issue since the previous annual financial statements, the guidance indicates that directors should undertake procedures similar to those that they would have carried out for annual financial statements to ensure that all relevant issues have been identified and considered.

The updated guidance for companies is available on the FRC website.

The FRC previously updated its guidance for companies in May 2020 to include going concern considerations for interim reporters. This second May update still covers those areas included in that earlier guidance which include:

• Key areas of focus for boards in maintaining strong corporate governance and high-level guidance on some of the most pervasive issues that should be considered when preparing annual reports and other corporate reporting.
• Management information
• Risk management and internal controls systems
• Dividends and capital maintenance
• Corporate reporting
• Strategic Report and Viability Statement
• Financial statements – going concern and material uncertainties, significant judgements and estimation uncertainty and events after the reporting date.
• Interim reporting considerations

Exceptional items

The FRC indicates that companies will need to consider whether any additional items of income and expenditure arising from COVID-19 should be separately disclosed as ‘exceptional’ items in accordance with their existing policies. These might include restructuring costs, impairment charges, incremental health and safety costs and the costs of onerous contracts.  When making such disclosures the FRC highlights that companies should:

• be even-handed in identifying any gains as well as losses;
• not describe amounts as ‘non-recurring’ or ‘one-off’ if they are also expected to arise in future periods;
• not disclose costs (sometimes described as ‘stranded’, ‘sunk’ or ‘excess’) as exceptional solely because of a reduction in, or elimination of, the related revenue streams due to Covid-19; and
• not identify incremental costs as exceptional if they result in incremental revenue that is not also described as exceptional; for example, additional staff costs related to managing unusually high levels of sales of in-demand items.

Additionally the FRC highlights that where the impacts of COVID-19 are so pervasive and therefore difficult to quantify, additional narrative disclosures should be provided. Companies are discouraged from providing disclosures attempting to quantity the effect of COVID-19 where a split of discrete items has been made on an arbitrary basis. Companies should also consider the requirements of IAS 1 when presenting sub totals on the face of the income statement. Sub-totals based on a hypothetical or ‘pro-forma’ basis (for example adding back an estimate of ‘lost’ revenue) shown as either a line item or in a ‘third column’ would be inconsistent with the requirements of IAS 1.   

Alternative Performance Measures

With respect to APMs the FRC indicates that they should:

• have clear and accurate labelling;
• have an explanation of their relevance and use;
• be reconciled to the closest IFRS measure;
• not be given more prominence than the equivalent IFRS measures; and
• be presented consistently year on year.

Where the effects of COVID-19 have led to a change in APMs the FRC highlights that sufficient disclosure should be provided to inform the reader of the change and why the new measures provide more relevant and more reliable information. The FRC warns that it does not expect to see companies disclosing APMs which attempt to provide a measure of ‘normalised’ or ‘pro-forma’ results, excluding the impact of COVID-19 due to their high subjectivity and therefore unreliability.

The updated guidance for companies is available on the FRC website.

In doing so, HM Treasury has specified, in an Addendum, minimum reporting requirements as per the Financial Reporting Manual (FReM). Although specifying minimum requirements HM Treasury notes that such requirements do not replace the FReM but rather set out minimum financial reporting requirements. Entities may go beyond the minimum requirements where they are able to.  

There are reduced reporting requirements in the performance report including the option of only producing the summary information in the performance overview as set out in paragraph 5.28 of the FReM. This is instead of providing the performance analysis as set out in paragraphs 5.2.6 and 5.2.9-5.2.10 of the 2019-2020 FReM.

Within the accountability report, the only optional requirements relate to the Statement of Parliamentary Supply (SoPS). Entities applying the FReM are no longer required to adhere to the comply or explain requirement in paragraph 3.1.7(b) of the 2019-20 FReM, that SoPS disclosures must follow the form of the illustrative disclosures. Entities are also permitted to omit the requirements set out in 3.1.8 (a) and (b) in relation to supporting text and the presentation of figures in thousands in the SoPS.

There will be no change to the format and content of the financial statements which should continue to be published in line with the requirements of the 2019-20 FReM.

The Addendum is available on the HM Treasury website.