Reporting requirements for investment trusts and IFRS 2 Share-based Payment can make it challenging to present clear, relevant information to stakeholders. The FRC thematic reviews aim to improve the quality of financial reporting, so financial statements meet stringent requirements and enable transparency and accountability. 

“We welcome the FRC’s continued focus on enhancing quality and consistency in corporate reporting,” says Fahad Asgar, Technical Manager, Corporate Reporting Faculty, ICAEW. “These new thematic reviews provide valuable insights and practical guidance that will help preparers navigate complex areas of financial reporting. 

“The focus on clarity and transparency, especially around valuation methodologies and assumptions, aligns with our commitment to supporting high-quality reporting that meets the needs of investors and other users.”

Reporting challenges: IFRS 2 Share-based Payment

IFRS 2 governs the accounting for transactions where a company receives goods or services in exchange for its equity instruments or cash based on the value of those instruments.

Applying this standard is complex, using valuation models and significant judgements and assumptions. The accounting treatment differs depending on whether transactions are cash-settled or equity-settled.

Additionally, tax effects and group arrangements can add further complications. As share-based payments are frequently used for employee compensation, there can be an overlap with the directors' remuneration report.

Key observations

The best disclosures clearly explained how awards were categorised and, where settlement alternatives existed, specified who held the choice and, where relevant, the company's intended settlement method. A notable issue was companies stating awards were equity-settled, despite having unexplained cash outflows in the cash flow statement.

In group situations, FRC found that companies generally explained the accounting in the consolidated financial statements, but disclosures about the impact on the parent company’s financial statements were frequently missing.

Regarding tax effects, clarity was often lacking on whether excess tax deductions arising from these payments were correctly identified and recorded directly in equity.

While some reports were unnecessarily wordy, the better examples were shorter with effective aggregation and cross-referencing, preventing messages from being obscured.

Reporting challenges: investment trusts and venture capital trusts

Investment trusts, venture capital trusts and other closed-ended investment companies provide investors with a single-source, diversified portfolio. Unlike open-ended funds, these companies have a fixed number of shares that are traded on a stock exchange. 

While such investment companies’ accounts are usually straightforward, the review highlighted common reporting issues, particularly the sufficiency of disclosures regarding Level 3 (L3) fair-value measurements.

These measurements involve significant unobservable inputs and are likely to be especially relevant for assets such as infrastructure and property. Clear disclosure of the techniques, assumptions and sensitivities underlying L3 fair-value measurements is essential for investor understanding.

Other areas of concern flagged by the FRC include:

• alternative performance measures (APMs);
• whether the strategic report is fair, balanced and comprehensive; and
• significant judgements.

Key observations

Fair-value measurement (L3)

Disclosures concerning L3 fair-value measurements require significant attention. Companies must clearly state the significant unobservable inputs or assumptions used in these valuations. When input ranges are wide, weighted averages are helpful.

For financial instruments, if reasonably possible changes in unobservable inputs would significantly alter the valuation, this impact needs to be disclosed by reporters.

Sensitivity analysis may be necessary to meet reporting requirements for estimation uncertainty. Furthermore, specific valuation techniques used should be clearly disclosed.

Strategic reports and APMs

Strategic reports must provide a fair, balanced and comprehensive analysis, including clear explanations of major movements in the net asset value (NAV) during the year.

APMs need careful handling. They must be clearly defined, labelled and reconciled to the closest equivalent under IFRS or UK GAAP standards for transparency and comparability.

The calculation basis for key ratios, such as ongoing charges, should also be explicitly disclosed.

Significant judgements

When significant judgement is involved in determining if the definition of an investment entity per IFRS 10 Consolidated Financial Statements is met, the basis for this conclusion must be clearly explained in the reports.