Planning for the 2020/21 reporting season - Practical help for preparers
This guide was drawn up primarily with preparers of larger private and smaller listed company accounts in mind, although others may find the guidance useful. We also signpost to more detailed guidance.
In this guide the Financial Reporting Faculty looks at what is different about the current reporting season and where to focus your efforts.
As a result of changes to the FRC’s Ethical Standard, some reporting entities may no longer be able to rely on their auditors for help in preparation of the accounts, for example where the entity is a very large private company or pension scheme and falls within the definition of an Other Entity of Public Interest.
This ICAEW Know-How article was created by the Financial Reporting Faculty.
Every reporting season brings its challenges, but the combination of COVID-19, Brexit and climate change makes 2020 a year like no other. Not all businesses are affected to the same degree; there have been business challenges but also opportunities, and the accounts need to fairly reflect the company’s performance and prospects. The restrictions imposed by government as a result of the pandemic may affect the year-end processes involved in the preparation of the annual report and accounts as well as the year-end audit.
Below we identify areas which may require more attention than in previous years. It is not a comprehensive list and the issues companies face will as ever depend on individual facts and circumstances.
There are no new major standards applicable for 31 December 2020 year ends, but there are some important amendments and issues to consider, and accounting policies will require careful review.
Recent amendments – COVID-19 related rent concessions and IBOR reform
There have been amendments to both UK GAAP and IFRS standards which will be beneficial to those who have been granted rent concessions as a result of the COVID-19 pandemic, and those who are affected by the replacement of an interest rate benchmark as a result of IBOR reforms. More information on the amendments can be found at icaew.com/ifrs16, icaew.com/ifrs9 and icaew.com/frs102.
New or revised accounting polices
Changed circumstances may require companies to apply new accounting policies or revise existing ones, for example:
- Access to government support schemes, for example the Coronavirus Job Retention Scheme, or access to new sources of finance, for example the Coronavirus Business Interruption Loan schemes, may require the company to consider an accounting policy for government grants for the first time, or the application of an existing policy to new arrangements.
- Changes to business models, delivery of services or the way transactions are conducted, for example restaurants shifting to takeaways or gyms delaying the delivery of services, may require a revision to accounting policies. In particular, the accounting policy for revenue recognition may require adaptation to reflect changes to the delivery of services.
You can find guidance on relevant UK GAAP and IFRS standards at icaew.com/frfstandardstracker.
In the spotlight
There are some requirements that are not new but are coming into sharper focus.
Going concern and viability statements
Perhaps the sharpest focus of all will be on information which supports the going concern assumption and related information about liquidity and cash flows. You can access recent resources published by ICAEW and others (including the FRC) at icaew.com/goingconcern.
The end of the transition period may bring to an end the uncertainty around any deal between the UK and the EU. However, the impact on the business will need to be considered and explained. More information on the financial reporting implications can be found at icaew.com/brexit/financial-reporting.
There is likely to be a high incidence of impairment indicators this year, and the specific requirements are complex. Changes in circumstances and business models may have implications for the identification of cash generating units and calculations of value in use. Any COVID-related rent concessions are also likely to be indicators of impairment of the right of use asset. Further guidance is available in our factsheet Applying IAS 36 Impairment of Assets.
The ‘front half’ of the accounts provides context and deeper analysis of the company’s performance, position and outlook. You may need to check whether your company is within scope for some of the newer requirements, for example s172 statements (see below) and Energy and Carbon Reports. An overview of the requirements for the strategic report, and which entities are within scope, can be found at icaew.com/strategicreports.
Section 172 Statements
This is a relatively new requirement and in its letter to CEOs, CFOs and Audit Committee Chairs the FRC noted areas where it expected companies to improve their reporting. By way of practical guidance the Financial Reporting Lab recently published Tips to help companies make S172 statements more useful.
Reporting on the effects of climate change
Also in its letter, the FRC emphasised that users expect companies to provide full information about the future impact of climate change on the business and how the company’s activities affect the environment. The letter sets out where the FRC expects improvements: more information is available in the recent thematic review on climate. The IASB has also published some useful educational material on the effects of climate-related matters on financial statements.
- The impact that events during the year have had on the business, the actions taken by management in response.
- The financial position of the entity – specifically information on cashflows, liquidity, solvency, covenants and headroom (see the FRC’s Five questions investors seek information on and Thematic review: Cash flow and liquidity disclosures).
- The use of government assistance.
- Future prospects and recovery.
The information will need to focus on those issues that are key to the business, with the appropriate level of detail, and must be presented in a fair and balanced way.
Additional considerations when preparing the accounts
Many businesses will be looking to demonstrate the impact COVID-19 has had on their business, potentially by presenting the results in a different way. However, in its Consolidated covid-19 guidance for companies the FRC notes that ‘splitting discrete items on an arbitrary basis in an attempt to quantify the portion relating to Covid-19 is unlikely to provide users with reliable information. We discourage companies from disclosing these in their accounts.’ The FRC also states that any Alternative Performance Measures (APMs) should be clearly explained and reconciled to the closest IFRS measure, and should not be given greater prominence than IFRS measures.
Directors will need to consider whether they can lawfully pay dividends (eg under rules on distributable profits and capital maintenance) and, if they can, whether they ought to do so (eg taking into account possible reputational issues, particularly when the company has benefited from substantial government assistance). The law is complex. More information is available in the Introduction to the Law on Dividends.
Other issues that may require more time than ‘normal’ include:
- Dealing with uncertainty – you may need to prepare more than one forecast to cater for different scenarios and assumptions. You will need to document the assumptions carefully and consider how likely the assumptions are to change. This information will need to be provided to the auditors and will form the basis of the disclosures in the accounts.
- Judgements and estimates – in the FRC's annual review of corporate reporting, disclosure of judgements and estimation uncertainty is regularly at the top of the list of poor reporting practices identified. Companies must disclose how judgements have been made, what the uncertainties are, and what difference a different judgement would make. A hypothetical example of good practice is available in the 2019/20 review on page 10.
- Reverse stress testing – this additional tool can help enhance your going concern assessment and identify gaps in your risk assessment. Guidance on how to perform the test is available here.
- Crafting disclosures – as noted above, the words are likely to be subjected to as much scrutiny as the numbers. Companies will need to ensure that disclosure objectives are met as well as the explicit disclosure requirements in the standards. The disclosure of any material uncertainties will also require careful consideration.
Planning and communicating
- Finance team – make sure that the finance team is fully aware of the issues and the deadlines.
- Organisation of underlying data – being able to navigate and access (as appropriate) data is of particular importance when working remotely. There also needs to be consistency in the data used, for example for going concern reviews and impairment testing.
- Integrated reporting – there needs to be clear communication between those responsible for preparing different aspects of the annual report to ensure that there is consistency between the ‘front half’ of the annual report and the accounts.
- Auditors – keeping the auditors informed of the specific issues faced by the company and the proposed solutions should help smooth the audit process.
Planning for the audit
Most of the challenges identified above are just as relevant to the auditors and this will need to be factored into the company's year-end planning process. In particular, preparers should take account of the following:
- Going concern – a revised auditing standard is likely to increase the extent of procedures which auditors will need to perform. More information on the revised standard and implications for the audit is available in this guide from the Audit and Assurance Faculty.
- Fraud – auditors are likely to view the risk of fraud as greater due to the pandemic. They are likely to examine government support for potentially erroneous claims.
- Remote working – when auditors are working remotely, where previously they would have been on site, consideration will need to be given as to how they access the information they need. You can find answers to some frequently asked questions in this guide from the Audit and Assurance Faculty.
- Professional scepticism – professional scepticism dictates that auditors should substantiate claims by management, and in times of uncertainty there is likely to be a greater need for more or better-quality corroborative evidence to support management assumptions.
- Group audits – in addition to the practical problems posed by group audits in times of a global pandemic, there may be specific concerns about the sufficiency as audit evidence of parent company letters of support in relation to the use of the going concern assumption in a subsidiary’s accounts.
- Stocktakes – when physical attendance at a stocktake is impracticable, management will need still need to provide the auditor with sufficient audit evidence to verify the existence and condition of inventory.
- Audit report modifications – given current levels of uncertainty and potential lack of sufficient, reliable audit evidence, management need to be prepared for the possibility of a ‘modified audit report’. Management should consider the impact a modified audit report might have on the user of the accounts and take mitigating actions in advance when possible. More information on the different types of audit report wordings is available in the guide Coronavirus: understanding audit reports.
Help and support
You can find more guidance at:
ICAEW members, affiliates or members of staff in an eligible firm with member firm access may also discuss their specific situation with the Technical Advisory Service (TAS). The telephone helpline is currently unavailable but TAS can be contacted on live web chat here or by email to firstname.lastname@example.org.