Provisions and contingent liabilities reporting is of particular importance to investors, owing to the forward-looking information it can provide about a company’s exposures. The issues giving rise to provisions and contingent liabilities are often long-term in nature, such as climate change and other environmental obligations, or significant to the assessment of future business performance, for example, onerous contracts and regulatory penalties or compensation.

“The reporting of provisions and contingent liabilities is of particular importance to investors and other users of accounts in understanding the longer-term financial effects of climate change and other risks to companies’ prospects,” commented Carol Page, the Financial Reporting Council’s (FRC) Corporate Reporting Review Director.

“Companies should carefully consider the findings of our review and take appropriate steps to improve their reporting, consistent with our expectations.”

The FRC’s review considered how a sample of 20 companies’ annual reports had met relevant reporting requirements, identified examples of good practice and outlined its expectations for future disclosures.

Issues relating to compliance with IAS 37 ‘Provisions, Contingent Liabilities and

Contingent Assets’ have featured in the FRC’s ‘top ten’ findings for several years. The FRC continues, however, to find room for improvement despite drawing attention in previous publications to matters such as lack of disclosure of the uncertainties about the amount or timing of cash outflows, or the financial effect of contingent liabilities.

“The FRC’s thematic review includes specific pointers as to how companies can improve their disclosures so users of accounts might have a better understanding of the potential impact of provisions and contingencies on future performance”, said Marianne Mau, ICAEW’s Technical Lead, Financial Reporting. “The report also reminds companies of the importance of consistency of information between the strategic report and the financial statements, and using cross referencing as appropriate to cut clutter in the accounts”.

The review found numerous instances of good practice across each individual aspect of disclosure. However, there was general scope for improvement in several areas including: the disclosure of quantitative information on expected timing of future economic outflows, the key assumptions used to estimate those outflows, and the associated uncertainties. The review also identified opportunities to clarify the nature of the costs included in certain types of provision, to disclose more specific accounting policies and to provide more quantitative information about contingent liabilities.

The FRC also encourages companies to disclose entity-specific accounting policies and to provide more quantitative information about contingent liabilities.

The full report on IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ is available here.

More information and resources on IAS 37 are available at icaew.com/IFRSstandards.