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FRC puts focus on Brexit and climate change in reporting programme

Out-Law News | 17 Dec 2019 | 12:18 pm | 2 min. read

The Financial Reporting Council (FRC) is to focus on areas such as the effect of Brexit on companies’ disclosures, the impact of recently introduced accounting standards, and climate change in its 2020/21 corporate reporting and audit quality review programme. 

The FRC said its corporate reporting review team would carry out four thematic reviews, aimed at identifying scope for improvement, as well as areas of better practices, in a number of areas of stakeholder interest.

The four areas include the effects of the UK’s decision to leave the EU on companies’ disclosures. The FRC said it would also review companies’ disclosures related to accounting standard IFRS 16, which provides guidance on accounting for leases; on cash flows and liquidity disclosures; and carry out a “deeper dive” into findings from a recent report into the application of IFRS 15, which gives guidance on accounting for revenue from contracts with customers.

The corporate reporting review team is also due to contribute to a planned FRC-wide project focusing on climate change, by reviewing the relevant disclosures given in companies’ annual reports.

In its recent annual review of corporate reporting, the FRC said companies had taken steps to improve the quality of disclosures but more improvement could still be made. In particular, it said it had found errors within cash flow statements and related disclosures, and expressed concern that the mistakes had not been picked up by companies’ own quality control procedures or those of their auditors.

Corporate governance expert Martin Webster of Pinsent Masons, the law firm behind Out-Law, said Brexit had been on the agenda for companies’ annual reports since 2016, but the continued uncertainty over the terms of the UK’s departure from the EU meant there was little new that could be said.

“There is now some certainty that we are leaving, but still great uncertainty over the trade deal to be in place by the end of 2020, and that will be decisive for many companies. Directors still have little to base any planning on, save the worst case scenario, and so little to write about in their reports,” Webster said.

Webster said he expected companies to step up reporting on the impact of climate change on their businesses over the coming year, making it a logical area for the FRC to focus on.

He suggested that there were other areas which the regulator could have looked at.

“I think cyber risk and digital change continue to be hot topics. But with all of these risks, one big question is what internal resources does the company have available to understand the risk and seek to put mitigation in place,” Webster said. “There is a shortage of directors who have real insight into these subjects.”

The FRC’s audit quality review team are also planning to focus on the application of IFRS 15 and 16, as well as other areas including fraud risk, the impairment of non-financial assets, and other information included in annual reports such as the viability statement. They will also look at long-term audit contracts.

The FRC identified four priority sectors for its 2020/21 audit review programme: financial services; retail, including retail property and travel and leisure; construction and materials; and manufacturing. These sectors are considered to be particularly high risk in terms of corporate reporting and audit by virtue of particular economic or other pressures.