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Judgements and estimates: improvement noted, but more needed

Author: ICAEW Insights

Published: 23 Aug 2022

With judgements and estimates continually topping the list of topics most frequently raised in its monitoring activity, the FRC’s latest thematic review identifies key areas for further improvement.

The FRC has issued a report outlining its findings from a follow-up thematic review on disclosures of significant accounting judgements and sources of estimation uncertainty in annual reports. An initial thematic review was published in November 2017, but the topic has consistently featured in the Corporate Reporting Review (CRR) team’s Top Ten matters of challenge. 

This latest report indicates an overall improvement, with most companies presenting judgements separately from estimates. Detailed and granular disclosures explaining management’s judgements as well as the nature of uncertainties relating to significant estimates are also being provided. The report also notes an increased effort in the tailoring of disclosures to be company-specific and relevant, with many instances of effective linkage and use of cross-referencing that achieves well-integrated estimate disclosures. Usefully, the report highlights extracts from annual reports that represent good quality, and notes the opportunity for companies to learn from their peers.

However, several key areas where there is generally still room for improvement have been identified. 

Significant estimates

To improve clarity for users on the potential future impact of the significant estimates made, there should be clear and explicit disclosure as to whether, and why, estimates have a significant risk of material adjustment to the carrying amounts of assets and liabilities within the next financial year. The disclosures provided should relate to the estimates that require management’s most difficult, subjective or complex judgements. 

The FRC goes on to note that some estimates disclosure had been provided in addition to reporting requirements, such as for those carrying lower risk, having smaller impact or crystallising over a longer timeframe, and agreed that this information can be helpful to users. However, it emphasises that where additional estimate and associated sensitivities disclosures are provided, they should be clearly distinguished from those with a significant effect within the next year.

Sources of estimation uncertainty may vary from year to year and companies should ensure that current year disclosures are reflective of current conditions. Explanations should be provided for any changes to past assumptions where the uncertainty remains unresolved.

Meaningful sensitivity disclosures

Sensitivities and/or ranges of reasonably possible outcomes for significant estimates are expected to be provided more frequently and be meaningful. The report highlights that, where sensitivities were not provided, ranges of outcomes could have still have been disclosed to meet requirements. Ranges of outcomes may be more relevant where an estimate is not sensitive in a linear manner to changes in input assumptions; instead there may be several different possible outcomes. For example, when estimating a provision for litigation. In all cases, sensitivity disclosures should be consistent with disclosures elsewhere in the annual report, including the audit report, and reflect that the estimates are as significant as disclosed elsewhere. 

Climate-related judgements and estimates

The FRC notes that the better disclosures in this area clearly articulated the timing of any impact, providing specific clarification that climate change either had a significant risk of a material adjustment to carrying values of assets and liabilities in the next year or did not, but that it could then have medium or longer-term impacts.

With the next Annual Review of Corporate Reporting expected in the autumn, it will be interesting to see whether judgements and estimates are finally knocked off the top spot in the ‘matters of challenge’ list.

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