The UK’s Financial Reporting Council (FRC) this week set out guidance for companies when preparing annual reports and other corporate reporting, and the International Accounting Standards Board (IASB) issued a set of small amendments to International Financial Reporting Standards (IFRS).
The FRC also highlighted key areas of focus for boards to maintain strong corporate governance while the uncertainty caused by the coronavirus continues. These areas include management information, risk management and internal controls systems, and dividends and capital maintenance.
The FRC’s guidance on reporting includes:
Strategic report and viability statement
Companies’ strategic report should always be forward looking, and especially so during the current crisis, the FRC said. When setting out principal risks and uncertainties, “[a]ll stakeholders, including investors, are concerned about companies’ workforces and seek an understanding of how they are being retained and supported”, it added.
Directors should consider the following when making the viability statement:
- Boards are required to have a “reasonable expectation” of the company’s viability over the period of assessment — during the current emergency and unprecedented pace of change, any reasonable level of expectation would naturally carry a much lower level of confidence;
- Being clear on the company’s specific circumstances and the degree of uncertainty about the future is important information; and
- The board should draw attention to any necessary qualifications or assumptions when presenting a company’s viability statement.
Going concern and material uncertainties. When assessing whether material uncertainties exist, boards should consider both the uncertainty and the likely success of any realistically possible response to mitigate this uncertainty.
The FRC’s advice includes:
- Encouraging boards to consider the impact of different potential scenarios (eg, consideration of different time periods for the continuation of social distancing) on their company’s revenues, costs (both fixed and variable), and cash flow requirements.
- If a material uncertainty does exist, then the company should disclose it in terms that are as specific to the entity as possible.
- If the board concludes that there is not a material uncertainty that meets the criteria for disclosure, but this conclusion required the application of significant judgement, then this judgement should be disclosed in accordance with paragraph 122 of International Accounting Standard (IAS) 1, Presentation of Financial Statements.
Significant judgements and estimation uncertainty. As a result of the current uncertainty, companies cannot be expected to apply consistent assumptions, the FRC said. This makes the need for full disclosure of judgements, assumptions, and sensitive estimates significantly more important than usual.
Events after the reporting date. The FRC said there is consensus that the outbreak of COVID-19 in 2020 was “a non-adjusting event” for the vast majority of UK companies preparing financial statements for periods ended 31 December 2019.
It added: “Companies will need to judge how much of the impact of COVID-19 should be considered to arise from non-adjusting events for subsequent reporting dates.”
Interim reports. Directors will need to exercise judgement about the nature and extent of the procedures that they apply to assess the going concern assumption at the half‐yearly date.
The FRC identified the following issues that might trigger a need to re‐examine the going concern assumption and going concern and liquidity risk disclosures:
- A significant adverse variation in operating cash flows between prior budgets and forecasts and the outturn in the first half of the year;
- A significant reduction in projected revenues for the second half of the year based on plausible scenarios for the COVID-19 pandemic and public health responses, and taking into account government support measures;
- A failure to obtain renewal or extension of committed financing facilities; and
- A failure to sell capital assets for their expected amounts or within previously forecast timeframes.
The IASB set out on Thursday changes to three standards:
- IFRS 3, Business Combinations. The changes update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations.
- IAS 16, Property, Plant and Equipment. The changes prohibit a company from deducting from the cost of property, plant, and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss.
- IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The changes specify which costs a company includes when assessing whether a contract will be loss-making.
In addition, the IASB issued Annual Improvements to make minor amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards; IFRS 9, Financial Instruments; IAS 41, Agriculture; and the Illustrative Examples accompanying IFRS 16, Leases.
All of these amendments are effective 1 January 2022.
For more news and reporting on the coronavirus and how management accountants can handle challenges related to the pandemic, visit FM’s coronavirus resources page.
— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.