Provisions and contingent liabilities reporting is of particular importance to investors owing to the forward-looking information it can provide about a company’s exposures. The issues giving rise to provisions and contingent liabilities are often long-term in nature, such as climate change and other environmental obligations, or significant to the assessment of future business performance, for example, onerous contracts and regulatory penalties or compensation.

The FRC’s review, which considered a sample of 20 companies’ annual reports and the relevant reporting requirements, found scope for improvements in several areas, in particular in regarding the following aspects:

• explaining how the amounts of expected outflows have been estimated, identifying the key assumptions applied and describing the associated uncertainties;
• disclosing the phasing of outflows companies expect to see as they utilise their provisions; and
• describing the underlying costs for which companies make provisions.

The report outlines the FRC's expectations for future disclosures and identifies examples of good practice, especially in the context of disclosure of entity-specific accounting policies and the provision of more quantitative information about contingent liabilities.

For access to the report, please see the FRC website.