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FRC publishes thematic review findings on IAS 37

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14 Oct 2021

The Financial Reporting Council (FRC) has published the results of its thematic review into IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'. The review identifies areas of good practice, opportunities for improvement and outlines the FRC's expectations for future reporting.

A sample of 20 companies' annual reports from a range of industry sectors were reviewed to determine how effectively they met the disclosure requirements and provided other relevant information.  Whilst the FRC found a number of instances of good reporting , it highlights that there is still room for improvement in several areas, in particular in:

  • The disclosure of quantitative information on expected timing of future economic outflows (i.e the phasing of outflows that companies expect to see as they utilise their provisions), the key assumptions used to estimate those outflows, and the associated uncertainties.
  • Describing the nature of the costs included in certain types of provision, for example acquisition and integration provisions.
  • Disclosure of more specific accounting policies to include, for example the approach to recognising and measuring different provision classes.
  • The provision of more quantitative information about contingent liabilities, for example giving an indication of both the timescale for obtaining greater certainty and the level of confidence that an economic outflow was less than probable but more than remote.

The FRC expects companies to consider the better disclosures in the report in the forthcoming reporting season.  It has identified that good disclosure should include all of the following, where material and relevant to the company's financial reporting:

  • Concise and entity specific descriptions of the significant accounting policies adopted in respect of provisions and contingencies.
  • Clear and specific descriptions of the nature of each material exposure, the timeframe over which it is expected to crystallise and the basis for determining the best estimate of the probable or possible outflow.
  • Quantitative information about expected or maximum exposures to contingent liabilities, or a clear and justified statement that it is not practicable to provide an estimate of the financial effect; negative confirmation can be helpful where users may otherwise expect the company to report an exposure.
  • ‘Indications of uncertainty’ in timing and/or amount that help users understand the potential financial effect (which may arise beyond the next financial year) of additional or reduced costs and/or earlier or later timing of outflows.
  • Explanation of significant judgement exercised by management in determining the recognition and measurement of provisions, setting out the rationale for management’s conclusion and the effect on the financial statements of taking an alternative view.
  • Quantitative and qualitative information about critical estimation uncertainty affecting the next financial year, including disclosure of key assumptions and sensitivities.
  • Management commentary on significant year end balances and unrecognised exposures, and on significant movements recognised during the period (whether additions, new provisions, utilisations or reversals).

A press release and the full publication are available on the FRC website.  A webinar to discuss the report will be held on October 20.  A press release including details of how to register for the webinar is available on the FRC website.  

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