UK regulator the Financial Reporting Council (FRC) published Tuesday its thematic review of judgements and estimates update, identifying areas where the overall quality of judgement and estimate disclosures had improved — and where further change is needed.
Companies are required to disclose more complex accounting judgements and the most significant sources of estimation uncertainty.
"These disclosures allow readers to assess how the accounting policies applied have been affected by the judgements taken by management," according to the report. "They facilitate a better understanding of assumptions made about the future and the extent to which changes to those assumptions may affect a company's future position."
The FRC identified four areas where there is room for improvement:
- Companies should explicitly state whether estimates have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
- Sensitivity disclosures should be provided more frequently and in the way that is most meaningful to readers.
- Companies should assess whether disclosure of climate-related significant judgements or assumptions and sources of estimation uncertainty are required by paragraph 122 or 125 of IAS 1, Presentation of Financial Statements, and consider whether information about assumptions with a longer-term effect is required.
- Where additional estimate disclosures are provided, such as those carrying lower risk, having smaller impact, or crystallising over a longer timeframe, they should be clearly distinguished from those with a short-term effect.
The FRC's first thematic report on the topic of judgement and estimation uncertainty disclosures was published in November 2017.
To encourage improvement in the general quality of company disclosures, the review includes examples of good practice, including:
- Quantified assumptions and amounts at risk of material adjustment;
- Detailed explanations of management's judgements and the nature of the uncertainties relating to significant estimates; and
- Discussion of the effects of climate change on estimates.
— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.