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FRC highlights continued errors in the preparation of cash flow statements

  • FRC Image

20 Nov 2020

The Financial Reporting Council (FRC) has published the results of its thematic review of corporate reporting in relation to IAS 7 ‘Statement of Cash Flows’ and the liquidity disclosure requirements in IFRS 7 ‘Financial Instruments: Disclosures’.

The FRC continues to identify errors in cash flow statements. The objective of its thematic review was to explore in more detail issues related to the preparation of the cash flow statement identified in its routine work as well as to consider some of the themes from the FRC Lab’s project: Disclosures on the sources and uses of cash. The thematic review provides insights into how the quality of cash flow statements can be improved.

The thematic review looked at companies from a range of sectors and industries, including general retailers, retail property, and tourism and leisure. The review covered companies reporting both before and after the UK lockdown from March. In total 30 companies were reviewed.

Cash flow statement

Whilst majority of the companies presented their cash flow statements in line with the requirements of IAS 7, the FRC did identify areas where requirements did not appear to have been met. It will continue challenge companies where there are:

  • Material inconsistencies between items in the cash flow statement and the notes.
  • Missing or incorrectly classified cash flows.
  • Inconsistencies between financing cash flows and the reconciliation of changes in liabilities arising from financing activities in the notes.

The FRC also notes that disclosures of accounting policies and judgements in relation to the cash flow statement could be improved by most companies.

Liquidity risk

The FRC’s review provides recent examples of good reporting and supplements the July thematic review of the financial reporting effects of COVID-19 and the Financial Reporting Lab’s reports on Going Concern, Risk and Viability’ and Resources, action, the future published in June.

The FRC found that whilst those companies that had published their accounts before the UK lockdown in March only provided boiler plate disclosures of liquidity risk and related issues, there was a significant improvement in going concern, viability and liquidity disclosures for those published since April; a finding consistent with the July thematic review. This was most notable for smaller listed companies. These companies provided key liquidity information such as availability of cash, undrawn borrowing facilities and compliance with covenants.

Whilst there was improvement in reporting, the FRC does indicate that better disclosures should be made of covenant testing and assumptions and judgements around going concern and viability.

A press release and the full thematic review are available on the FRC website.

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