The FRC released their report “Annual Review of Corporate Reporting 2021/22” in October last year. Now, just because it is the FRC does not mean that it’s not relevant. The FRC is basing this on their reviews of public interest entity financial statements and they are picking up the same issues that we are seeing commonly with smaller clients.
The top ten topical issues as identified by the FRC are:
- Cash flow statements
- Financial instruments
- Income taxes
- Companies Act matters
- Provisions and contingencies
- Alternative performance measures
- Judgements and estimates
- Impairment of assets
- Presentation and disclosures
Some of these aren’t relevant to smaller companies, but mostly they are ones that we receive quite a lot of questions on.
The first one is cash flow statements, which has been on the list for a number of years now, yet every year it still surprises me to see it there. I find it surprising as cash flow statements are not considered to be very tricky when you think about them, but we do often see issues on cash flow statements when we’re reviewing financial statements. I think a big part of the problem is that there is an overreliance on accounts production software. In some cases, the software can make the cash flow balance somehow but it bears no resemblance to the rest of the financial statements. This is something to watch out for, don’t assume that just because it was calculated in the software that it is correct.
Next up is income taxes, which looks particularly at deferred taxes and deferred tax assets and the recognition of unutilised tax losses for deferred tax assets. In terms of FRS 102, we need to be quite careful about recognising the deferred tax assets and you only recognise a deferred tax asset where there is a good probability that their company will have taxable profits in future periods to actually be able to use those unutilised tax losses.
In terms of provisions and contingencies, it is really important to consider when those are relevant (and they are relevant quite frequently). This is very topical and I believe we’re going to see more and more provisions and contingencies as well.
There are a number of disclosures that are required for Provisions in terms of FRS 102. Firstly, you are required to disclose the reconciliation of the current year versus the previous year and the opening balance for that provision, the movements during the year and the closing balance. Secondly, a description of the nature and expected amount as well as the timing of the payments must also be disclosed as well as any indication of uncertainties about the amounts or timings. Lastly, the amount of expected reimbursement (if any) also needs to be disclosed.
When it comes to contingent liabilities, there are also a number of items that need to be disclosed. The first is an estimate of the financial effect as well as an indication of the uncertainties relating to timing or the amounts. It is important to provide enough information so that the user is able to consider that liability or that contingent liability and understand the potential financial effect as well as the level of uncertainty around that.
Judgments and estimates remain a very topical issue. Disclosure is only required for full FRS 102, however, a lot of small companies or section 1A companies do have significant judgments in estimates and you need to then think about that true and fair override. A lot of small companies are involved in really complex transactions, so don’t just count them out because of their size. When you are disclosing those judgements and estimates you need to think about: what are the big issues here. What are the things that keep management up at night? What is it that they’re really worried about? And disclosing that all with enough information to help the user really understand that judgement and estimate.
Lastly, we have impairment of assets. At every reporting date, one needs to assess for the indicators of impairment. You need to be thinking about all of the assets of your clients and considering if there are any indicators of impairments.
As previously mentioned, these are just the ones that we receive the most questions on.