In light of the challenging economic environment and the risks posed by climate change, the degree of estimation uncertainty and management judgement is likely to increase.  As a result, all companies must ensure that they provide clear and transparent disclosures about the uncertainties, risks and significant assumptions underlying fair value measurements reported in the financial statements.

Through the use of examples illustrating better practice, the FRC‘s review seeks to improve disclosure in this area.  Whilst the FRC was generally satisfied with the application of IFRS 13 by larger companies and those in specific sectors such as banking, insurance and real estate, it identified that application of the standard by smaller companies continues to be a challenge. The thematic identifies a number of areas where the FRC expects improvements to be made:

• Ensuring that fair value measurements represent market participant, rather than company-specific, assumptions and reflect the characteristics of the relevant assets, liabilities or equity instruments subject to the fair value measurements.
• Ensuring that information on fair value measurements is consistent across the annual report and accounts and reflects the significant risks facing the business, including management commentary necessary to complement and further explain fair value measurements.
• Considering obtaining specialist third party advice, when the fair valuation is likely to be material and where no internal expertise exists.
• Disclosing any significant estimation uncertainty in relation to fair value measurements.
• As a minimum, providing disclosures required by the standard, including the following information for recurring Level 3 measurements: quantitative information about significant unobservable inputs and adjustments, quantitative sensitivity for financial instruments and a reconciliation of movements in fair value.
• Providing additional information beyond the specific disclosure requirements where this is necessary to meet the overall disclosure objective of the standard, and avoiding boilerplate and immaterial information.
• Explaining how management considered climate-related matters in fair value measurements where this information is material.
• Ensuring that the level of aggregation of information on fair value measurements results in useful disclosures.

The FRC encourages companies to consider the findings in their future reporting.  As well as providing examples of better disclosure, the review also includes two case studies to highlight measurement issues the FRC found in its routine monitoring of corporate reporting. 

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