With only a few amendments to existing IFRS standards and no new standards applicable for accounting periods beginning on or after either 1 January 2021 or 2022, there is a real danger that companies fall into a false sense of security that it is ‘business as usual’ with regard to their year-end financial statements. For many entities, I would suggest it is far from business as usual, as there are complex amendments, new interpretations, increased regulatory focus and a plethora of best-practice guidance for boards and finance teams to consider. Investor expectations are almost certainly increasing and now is the time to seize upon the opportunities that quality financial reporting can bring to businesses.

Narrative reporting and risk

Undoubtedly, the pendulum has swung towards the narrative reporting aspects of financial reporting in recent years and there is a clear need for enhanced disclosure on ‘front-end’ reporting matters. Investors and other stakeholders are looking for meaningful and transparent disclosure on important topics. Boards are therefore encouraged to ensure that disclosure considerations do not simply ‘slip through the net’ for another reporting season when finalising their annual reports.

While aspects of narrative reporting such as human capital reporting, diversity, business model and so on all warrant additional consideration at the current time, I would like to specifically focus on risk. Of particular interest to investors are disclosures concerning emerging risks, risk appetite (and changes thereof), risk crystallisation, mitigating factors and how risks are evolving.

There are three risk areas I expect to be near the top of board agendas in the current reporting season.

Cyber risks

Cybercrime, data breaches and other IT failures/outages (not necessarily linked to cybercrime) are on the rise. According to the government’s 2021 survey, 64% of large businesses report having cyber-security breaches or attacks in the past 12 months. The increasing sophistication and frequency of cyber attacks highlight the escalating information security risk facing all businesses. IT risks to businesses have also been impacted by virtue of the shift to remote working and cloud-based infrastructure.

The US Securities and Exchange Commission (SEC) has recently announced that it is focusing on disclosures of cyber-security risk governance by public companies. It is expected that UK and European companies would also be looking to review and enhance policies and procedures in this area at the current time.

Supply-chain risks

Issues with supply chains have certainly been hitting the headlines lately. For some sectors, supply-chain challenges pose significant risk to businesses. Whether it is Brexit, COVID-19 or other factors that are ultimately behind the issues, it is clear that this is becoming a more significant risk.

Modelling supply-chain resilience to assess both operational and financial risks created by market disruptions or other catastrophic events is just one aspect of business resilience. For reporting purposes, linking principal risks and threats to the viability statement effectively is important.

Climate risks

Climate change is clearly giving rise to significant risks for businesses. Whether those risks arise from more frequent and severe weather events or the transition to a net-zero carbon economy, expectations are growing that companies appropriately embed climate-related financial risk into their governance and risk management processes. Scenario analysis is key to better understanding and managing future risks today, as well as supporting the transition to a net-zero carbon economy.

While businesses generally continue to improve the quality and coverage of climate risk disclosures, investors and other stakeholders are still demanding better disclosures on climate change matters.

The UK has already committed to make the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) mandatory by 2025. Initially impacted are UK premium-listed companies. For accounting periods beginning on or after 1 January 2021, they are required to make climate-related disclosures, on a ‘comply or explain’ basis, in line with the TCFD framework, and disclose how they are considering the impacts of climate change. Plans to extend the requirements for publicly quoted companies, large private companies and Limited Liability Partnerships from April 2022 were announced last October.

However, in these fast-changing times, it is also important for entities to have early awareness of the expected future developments regarding climate and sustainability-related disclosures. Helpfully, in its Greening Finance: A Roadmap to Sustainable Investing, HM Treasury has set out the planned measures towards making climate and environmental considerations central to decision-making processes for boards and investors, ensuring they have the information they need. This roadmap includes new Sustainability Disclosure Requirements (SDR), which will create an integrated framework for decision-useful disclosures on sustainability. SDR will look to build upon the TCFD disclosures. New requirements for companies, which will of course be subject to consultation, will include baseline disclosure standards and metrics, which are to be developed by the new International Sustainability Standards Board (ISSB), and also reporting on the environmental impact using the UK Green Taxonomy.

There is more detailed coverage on sustainability reporting, the new ISSB and climate-related matters, including TCFD, in the other articles in this issue of By All Accounts.

Financial reporting

Despite no ‘headline-grabbing’ accounting standard for the forthcoming reporting season, there are still many areas to focus on. Changes concerned with COVID-19-related rent concessions and interest rate benchmark reform (often referred to as IBOR reform) will have an impact on certain reporters. But all companies should take the opportunity to improve disclosures, particularly in regard to the application of recent standards regarding revenue, financial instruments and leasing, which are likely to come under greater scrutiny.

Additionally, it should be remembered that uncertainties and developments arising from the ongoing effects of the COVID-19 pandemic are still having an impact on many businesses and, therefore, many aspects of financial statements. Focus remains elevated in areas such as impairment, including indicators of both impairment and reversals of impairment (other than goodwill), as many businesses are starting to show signs of economic recovery and resumed growth.

The attention of finance teams and boards should also be drawn to the most recent thematic reviews issued by the Financial Reporting Council (FRC). Among them, the thematic review in relation to IAS 37 Provisions, Contingent Liabilities and Contingent Assets includes lots of guidance to help companies improve the quality of their corporate reporting in this area. Other thematic reviews published in 2021 include Viability and Going Concern, Streamlined Energy and Carbon Reporting (SECR) and Alternative Performance Measures (APMs).

The FRC has also published its 2020/21 Corporate Reporting Review and its expectations for 2021/22 annual reports and accounts. As well as some recurring themes, such as clear explanations of the significant estimates and judgements made by management, there are many new key disclosure expectations for companies to consider when preparing their annual report and accounts for the current year-end, including:

• material climate-change policies;
• use of factoring and reverse factoring in working capital financing;
• the basis of classifying amounts as ‘adjusting’, ‘non-underlying’ or ‘non-core’; and
• ensuring information in the financial statements is consistent with that reported in the rest of the annual report and accounts.

Effective linkage between the strategic report and the financial statements is becoming increasingly important.

From 1 January 2021, due to the European Single Electronic Format Regulation (implemented through the FCA’s Disclosure Guidance and Transparency Rules), issuers on regulated markets must prepare their consolidated annual financial reports in an XHTML format with iXBRL tagging. Companies affected will also need to make sure that they are fully prepared for this new requirement.

Finally, agenda decisions issued by the IFRS Interpretations Committee (IFRIC) should not be overlooked and can often have quite significant impacts. For example, many companies are now implementing big cloud-computing solutions. Following the April 2021 agenda decision, many ‘Software as a Service’ (SaaS) configuration/customisation costs will no longer be capitalised as intangibles and instead may, depending on their nature, be either expensed or recognised as a prepayment. Other issues that are under consideration by IFRIC include the timing of recognition of cash received via electronic transfer (ie, Bacs) and also whether an entity includes demand deposits with restrictions on use as a component of cash and cash equivalents for cash-flow purposes.

More detail on these and other developments in IFRS that impact reporters in 2021 and beyond are covered in the faculty’s IFRS Update webinar broadcast in September. A recording is available to faculty members at icaew.com/frfwebinars

Conclusion

The balance may have well shifted towards narrative reporting in the near term. Nevertheless, the challenges facing finance teams throughout the annual report and accounts remain significant for the forthcoming reporting season.

About the author
Steven Brice, Partner and UK Head of Accounting Technical Services, Mazars, and Chair of the Financial Reporting Faculty Board