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FRC updates its COVID-19 guidance for companies to include reporting of exceptional items and APMs

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20 May 2020

The Financial Reporting Council (FRC) has updated its COVID-19 guidance for companies to explain how they should report exceptional items and alternative performance measures (APMs) in their reports and accounts in light of COVID-19.

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.

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