FRC provides guidance on cash flow and liquidity disclosures

The UK’s Financial Reporting Council (FRC) published Tuesday a review aimed at improving the quality of cash flow statements.

Its Thematic Review: Cash Flow and Liquidity Disclosures relates to IAS 7, Statement of Cash Flows, and the liquidity disclosure requirements in IFRS 7, Financial Instruments: Disclosures. The review also considered companies’ strategic reports, including the use of cash- and liquidity-based alternative performance measures (APMs), viability statements, and going concern assessments.

While “the majority of companies complied with the requirements of IAS 7 in the presentation of the cash flow statement”, the FRC identified instances of:

• Material inconsistencies between items in the cash flow statement and the notes.
• Missing or incorrectly classified cash flows.
• Inconsistencies between financing cash flows and the reconciliation of changes in liabilities arising from financing activities in the notes.

The regulator also highlighted several areas for improvement in the “disclosure of accounting policies for the treatment of significant and large one-off transactions in the cash flow statement”.

Liquidity information

On liquidity, the FRC said the majority of companies in its sample that published their accounts from April onwards disclosed key liquidity information such as availability of cash, undrawn borrowing facilities, and compliance with covenants.

However, the regulator identified that some companies “could improve their disclosures of covenant testing, and assumptions and judgements around going concern and viability”.

David Rule, the FRC’s executive director of supervision, said the regulator continued to identify basic errors in relation to cash flow reporting. These, he said, in most cases were “easily identifiable from a desktop review of the financial statements”.

He added: “We expect companies to perform robust pre-issuance reviews to ensure cash flow statements and related notes comply with the requirements of IAS 7 and are free from errors.”

However, Rule said the FRC had seen improved liquidity risk reporting following the UK lockdown in March as investors focused on cash management “in this uncertain economic climate”.

For its review, the regulator looked at the annual reports and accounts of 30 entities.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.