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FRC: more information needed on significant balance sheet events

Author: ICAEW Insights

Published: 24 May 2021

Better explanation of balance sheet movements and alternative performance measures are among the recommendations flagged up by a review of quoted companies’ interim reporting by the Financial Reporting Council.

Ahead of the 2021 interim reporting season, the analysis of interim reports produced by 20 quoted companies across a range of industries highlighted several areas where further improvements are required, as lockdown restrictions start to ease and the reliance on high-quality interim reporting steps up a notch. 

In its review, the Financial Reporting Council (FRC) has stressed the importance of timely and reliable interim reporting, which it says is vital for investors, creditors and other stakeholders to properly understand a company’s financial position, performance and liquidity. At the same time, the FRC review coincides with the BEIS consultation on measures to restore trust in UK corporate reporting.

Overall, the regulator said it was pleased with the quality of interim reports, with most companies taking into account FRC COVID-19 recommendations to enhance their disclosures, particularly in relation to going concern and the statement of cashflows. 

The FRC also welcomed the fact that many companies had provided detailed explanations and other helpful information normally reserved for the annual reports and accounts for significant events and transactions taking place during the interim period, such as impairments. 

However, although some companies experienced significant movements in balance sheet items such as net pension obligations and lease liabilities, the regulator expressed disappointment about the lack of explanation for these movements. “The pandemic caused abnormal movements for some companies. This put greater pressure on the need to ensure that there was sufficient narrative to explain how and why balances had changed,” the review says.

It said the best management commentaries reviewed not only provided an overview of the key events in the first half of the year and how these had affected operations and results but also differentiated the impact that the various stages of the pandemic had on the financial statements. Where necessary, companies gave an update of the risks and uncertainties for the remaining six months of the financial year.

The FRC’s Executive Director of Supervision, David Rule said the ongoing impact of the pandemic meant the 2021 interim reporting season was likely to be one of the most important and consequential for users of corporate reports.

“High-quality reporting is vital for investors and other users of accounts to make better informed decisions about a company’s health and prospects. While it is pleasing that many companies followed the FRC’s COVID-19 guidance, there is still room for further improvement particularly around providing better and clearer explanations of the impact of significant events on financial statements,” Rule said.

Marianne Mau, ICAEW’s Technical Lead for financial reporting, said: ‘The FRC’s thematic reviews are useful sources of practical guidance for companies to help them improve their corporate reports. The inclusion of illustrative examples together with explanations of what makes the disclosure useful is particularly helpful.’ 

Andrew Ninian, Director for Stewardship and Corporate Governance at the Investment Association said: "Investors rely on high-quality interim reporting, particularly in times of uncertainty, to support companies and take informed decisions on their long-term future. We welcome the findings of the Financial Reporting Council's report and encourage companies to heed the best practice examples and make improvements to their reporting where necessary." 

Keep up to date with the latest on financial reporting at ICAEW’s Financial Reporting Hub. Follow developments in non-financial reporting including guidance on the strategic report, s172 statements, and carbon and energy reporting at www.icaew.com/non-financial-reporting