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FRC publishes the results of its interim reporting thematic review

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24 May 2021

The Financial Reporting Council (FRC) has published the results of its thematic review of interim reporting. The purpose of the review was to highlight areas of good practice in companies’ interim reporting and to make suggestions for improved reporting to meet the needs of stakeholders. The FRC encourages preparers to consider carefully the findings of the thematic when preparing their forthcoming interim reports.

The review, which was conducted against the backdrop of COVID-19, analysed the reports of 20 companies listed on the main market of the London Stock Exchange, whose interim period ended between June 2020 and September 2020.  The sample of companies selected was across a range of industries, consistent with the FRC’s priority areas.  The thematic review includes extracts from those reports and accounts sampled to highlight useful disclosures.  The key areas of focus for the review were:

  • Management commentary and the use of APMs
  • Going concern disclosures
  • Impairments
  • Cash flow information
  • Significant judgements and estimates
  • Financial instruments
  • Fair value measurements
  • Related parties
  • Defined benefit obligations

Overall, the FRC was pleased with the quality of interim reports, with most companies taking into account the FRC COVID-19 recommendations to enhance their disclosures, particularly in relation to going concern and the statement of cash flows and related notes. However, an area of improvement was identified with regards to providing better explanations on balance sheet movements.

The thematic review’s key observations show that:

  • Management commentaries provided an overview of the key events in the first half of the year and how these had affected operations and results. The best examples differentiated the impact that the various stages of the COVID-19 pandemic had on the financial statements.  However, explanations of significant balance sheet movements were not provided in all cases (for example, net pension obligations and lease liabilities). The FRC has noted this as an area of improvement for companies.
  • Where necessary, companies provided an update of the risks and uncertainties for the remaining six months of the financial year.
  • The majority of the companies in the sample provided detailed explanations for their use of Alternative Performance Measures (APMs) and reconciliations to GAAP measures.  However, whilst some companies gave such explanations, a number of companies had not updated their definitions from the annual report and did not explain why some items were treated as exceptional whilst other similar items were not, for example, the impairment of assets.  The FRC expects to see companies provide specific, rather than general, explanations for all material classes of adjusting or exceptional items.
  • Better disclosures of impairments included reasons for the impairments and quantified the key assumptions used in the impairment assessments. In line with the expectation set out in the FRC’s COVID-19 thematic review, several companies considered COVID-19 to be an indicator of impairment at the half year because of the adverse effect it had had on their businesses, market capitalisation and the markets in which they operated within.  However the FRC indicated that in some companies’ interim accounts unclear information was provided around whether an impairment assessment had been conducted or the reason for the impairment.  The FRC expects companies to provide an explanation of material impairments or reversals of impairments recognised in the interim period.  Good explanations include sufficient information about the events and circumstances that lead to the impairment and its impact on the company’s financial position and performance. 
  • The best examples of changes in estimates disclosures included an update of the IAS 1 ‘Presentation of Financial Statements’ estimation uncertainty disclosures where relevant, in addition to disclosing the nature and amount of the changes in estimate.
  • Better disclosures of significant changes in current and deferred tax balances included a breakdown of the components of the tax charge and the deferred tax balance by category of temporary difference.  However, in some instances it was noted that explanations disclosed by companies of the treatment of tax events were unclear, in particular around annual expected tax credits, one-off tax events taking place during the interim period and the utilisation of unrecognised tax losses carried forward.
  • When an event or transaction is significant to an understanding of the changes in financial position and performance of the company since the last annual reporting period, better disclosures followed the disclosure guidance of individual IFRSs to provide updated relevant information.
  • Where directors and other members of senior management had waived fees, or agreed to a pay reduction in light of the COVID-19 pandemic, the impact of these was typically not disclosed in the related party section of the financial statements, despite directors and possibly senior management being classed as a related party by virtue of being key management personnel as defined in IAS 24 ‘Related Party Disclosures’.

Whilst the FRC saw many examples of good disclosure, it highlights that there is still room for improvement.   For the 2021 interim reporting season, the FRC highlights that a good interim report should:

  • Ensure that management commentaries detail important events that have occurred during the first six months of the financial year, and their impact on the financial statements.
  • Provide a comprehensive update of the principal risks and uncertainties for the remaining six months of the financial year.
  • Make sure APMs are explained, reconciled to IFRS measures and not given undue prominence.
  • Give going concern disclosures that explain the basis of any significant judgements, including whether there are any associated material uncertainties, and the matters considered when confirming the preparation of the financial statements on a going concern basis.
  • Detail changes to key judgements and estimates with reasons that enable users to understand management’s views about the future, and their impact on the interim financial statements.
  • Explain in sufficient detail, events and transactions that have a material impact on the financial position and performance of the company, such as impairments. Better disclosures update relevant information disclosed in the last annual report by following the applicable disclosure guidance of individual IFRSs, such as IAS 36 for impairment disclosures.
  • Focus on providing material disclosures that are clear and concise.

The press release and thematic review are on the FRC website.  A webinar on the thematic review will be held on 16 June.  Further information and details of how to register are available on the FRC website here.

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