Judgements and estimates in FRC’s spotlight
November saw the Financial Reporting Council issue a raft of thematic reviews on areas such as judgement and estimates that aim to improve disclosures and avoid boilerplate reports, says Julia Penny.
As we begin the reporting season for the 2017 December year-end, it is well worth noting the raft of FRC thematic reviews which were issued in November. These reviews highlight the findings of the regulator in this area, but more importantly point out examples of best practice.
The report on judgements and estimates discussed below is just one of a series, which can be found on the FRC website.
Thematic review on judgements and estimates
This report is a further attempt to improve the disclosures given about estimates and judgements in the accounts. While it is based on IFRS accounts, as similar disclosures are required under FRS 102 it will also be useful for preparers and auditors of UK GAAP accounts.
The area of most concern is the use of boilerplate language. The aim of the requirements is to understand the specific estimates and judgements that have affected the accounts. But the FRC do not want to see huge lists of things, but a focused list actually dealing with those that have the most significant impact on accounts.
Judgements do not always involve estimates. For instance, a judgement about whether you have retained or transferred the significant risks and rewards of ownership does not include an estimate. The report gives further examples of judgements, which is helpful to understand, as the disclosures for these are slightly different to those for estimates.
The disclosures needed for estimates are for those that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Often it is the failure to identify which are the significant estimates in the first place which can lead to poor disclosures, as clutter is added.
Overall, the FRC expect judgements and estimates to be separated out in disclosures and some examples of good practice are included. This can be a challenging area to get right, often with vague over-disclosure the main issue. Instead, it is necessary to focus on what the significant judgements and estimates are and to give properly detailed disclosures about the risks presented by these.
Julia Penny is Technical Director at SWAT UK, and London member of ICAEW Council. You can follow her on twitter @JSPenny
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