2020/21 Reporting Season: ‘significant improvement’ required for cashflow statements
19 November 2020: FRC’s recent thematic review into IAS7 finds frequent errors in cashflow statements.
In its recent letter setting out expectations for the 2020/21 reporting season, the FRC emphasised the importance of information on cashflow and liquidity in light of the coronavirus pandemic. Its October annual review of corporate reporting again highlighted basic errors in the preparation of cashflow statements as one of its ‘top ten issues’.
The FRC’s latest thematic review on cashflows and liquidity disclosures identifies three areas in which some cashflow statements failed to meet requirements due to:
- Material inconsistencies between items in the cashflow statement and the notes
- Missing or incorrectly classified cashflows
- Inconsistencies between financing cashflows and the reconciliation of changes in liabilities arising from financing activities in the notes.
It also highlighted several areas of improvement in the disclosure of accounting policies for the treatment of significant and large one-off transactions in the cashflow statement.
The FRC highlights steps it would like to see companies take. These include evidence of robust pre-issuance reviews to ensure cashflow statements and related notes are compliant with the requirements and free from basic errors; consistency between the amounts and descriptions of items in the cashflow statement and other areas of the annual report; and disclosure of any judgments relating to the cashflow statement, particularly for large, one-off transactions.
Historically, the FRC has found many accounts include only boilerplate disclosures in respect of liquidity risk and related issues but the watchdog has seen some improvements in accounts published since April. It nonetheless identifies that some companies could improve their disclosures of covenant testing, and assumptions and judgments around going concern and viability.
“It is frustrating that we continue to identify basic errors in relation to cashflow reporting which, in most cases, were easily identifiable from a desktop review of the financial statements,” said the FRC’s Executive Director of Supervision, David Rule. “We expect companies to perform robust pre-issuance reviews to ensure cashflow statements and related notes comply with the requirements of IAS 7 and are free from errors. Given investors’ focus on cash management in this uncertain economic climate, we were pleased to see improved liquidity risk reporting following the UK lockdown in March.”
Read the full FRC letter here.