FRC wants better balance and tax transparency in reporting

The Financial Reporting Council is calling for companies to inject more balance into their reporting of their performance, and says the level of tax disclosures remains ‘disappointingly’ below best practice

The regulator assessed the reports of 192 companies for its annual review of corporate reporting by the financial reporting review panel (FRRP) based on its monitoring work for the year to 31 March 2016. It raised queries with around a third, none of which was deemed sufficiently serious to warrant a press notice or other sanction.

Only two companies were required to publish details of the FRC’s intervention. Inland Homes restated the comparative amounts in its 2015 account to consolidate a subsidiary it controlled through a contract, and Flybe Group corrected an error in the cash flow statement presented in its parent company accounts.

Despite improvements in reporting quality overall, the report calls for companies to be more balanced in their reporting of their performance. The FRC highlights concerns about companies’ failure to acknowledge when things have not gone so well, as well as the excessive use of underlying profit figures or inappropriate use of alternative performance measures.

The report states: ‘We find too many examples of generic references to judgements and estimates that could be replaced by more concise explanations of how particular decisions or assumptions affect results. Companies should provide quantified information on how changes to estimates could affect the following year’s results, such as sensitivities or ranges of potential outcomes.’

The FRC says many companies also still need to provide more specific granular accounting policies, especially around revenue recognition.

This year, a number of cases were focused on how companies, and in particular those providing outsourcing services, applied the percentage-of-completion basis to long-term contracts. The basis for recognising revenue from claims and variations as well as the capitalisation of bid and mobilisation costs was challenged and improvements to policy disclosures were required, the FRC reported.

A number of companies were also reminded about the requirement to give fair value disclosures for assets and liabilities held at amortised cost.

There continue to be examples of companies giving too much emphasis to alternative performance measures or proforma information prepared on a non- International Financial Reporting Standards (IFRS) basis and failings to adequately discuss their IFRS results.

To improve performance in this area, the FRC says it is undertaking a thematic review on the use of alternative performance measures in companies’ interim financial reports and will report its findings in November 2016.

Overall, the FRC’s reviews identified examples of reports that focused too much on financial performance but omitted relevant balance sheet and cash flow information. These reports tended to be produced by smaller companies.

It says there is scope for companies to articulate better how they account for tax uncertainties by explaining the bases for recognition and measurement. The FRC says it will continue to challenge companies who do not disclose the amount of uncertain tax provisions when these are subject to risk of material change in the following year.

Another area of increasing public focus is companies’ tax arrangements, which can give rise to significant risk. Companies need to respond to increasing stakeholder scrutiny of their tax strategies, including where they pay tax, and consider carefully whether they are sustainable, ensuring that any material risks to which they give rise are clearly described in the report and accounts.

This year, the FRC wrote to 33 companies to alert them it would review their tax disclosures in their next annual report and accounts in order to encourage more transparency, but says that ‘disappointingly’ no FTSE 100 company reviewed stood out as a role model in this area of reporting. It is to publish more details of this element of the review in a separate report later this year.

The FRC has also reviewed nearly 100 FTSE 350 viability statements. While it intends to report more fully as part of the 2017 Developments in Corporate Governance and Stewardship report, analysis has shown that some 75% of companies chose to use a three-year time horizon for their consideration of viability. While there are ‘good examples’ of why a three-year period was chosen, the regulator cautions that this 'should not become the default.’

Brexit could have significant implications for the adoption of IFRS depending on the exit arrangements negotiated by the government.

Paul George, executive director for corporate governance and reporting at the FRC, said: ‘The FRC continues to support the application of a single set of high quality global financial reporting standards for listed companies. Investors have told us they want comparability when reading company accounts.’

The FRC’s annual review points out that the UK may, in future, assess international standards for adoption itself. This is currently undertaken by the EU, including for EEA members. It states: ‘However, support for IFRS is contingent on the standards being of the requisite quality and capable of implementation at an appropriate cost. The UK should continue to be influential in their development post exit from the EU to ensure they can be adopted in the UK.’

The FRC’s annual review of corporation reporting 2016 is here.

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