This key objective is primarily achieved through the Financial Reporting Review Panel's (FRRP) examination of directors' reports and financial statements of public and large private companies to see whether they comply with company law and relevant accounting standards (whether UK GAAP or IFRS).
As financial markets remain in distress, the Panel's work is becoming more relevant and of greater interest to both preparers and users of financial statements and the frequency of information published by the Panel has also increased over the last year.
In the words of the FRRP chairman, Bill Knight, in order to meet the needs of users financial statement disclosures need to be "full, frank and company-specific and should avoid generic descriptions of the economy which do not help users to understand how the board is responding to the challenges faced by their particular company."
Knight's comments were made when the FRRP issued its most recent annual activity report in July this year. This article looks at the key findings from that report in more detail.
The business review
The business review section of the directors' report has been an area of focus for the FRRP since its introduction as a mandatory requirement back in 2005. In its report the Panel noted that these disclosures are likely to warrant greater attention from users of financial statements at the current time due to the speed of the deterioration of market conditions over the last two years.
Unfortunately the FRRP's most recent findings indicate that these disclosures are still lacking, in particular the disclosure of principal risks and uncertainties. The Panel criticised companies for their generic, boiler-plate descriptions of risks, listing of risks with no proper description of their precise nature and, in some cases, providing no clear information about risks and uncertainties at all.
The FRRP will continue to review directors' report disclosures and, in future, will also focus on the consistency of financial statements with the disclosures made in the business review.
Segmental information
Just as narrative reporting in the business review is of increased importance to shareholders and other users when times are tough, so too is segmental reporting.
The application of IFRS 8 'Operating segments' by the majority of IFRS adopters for the first time in 2009/10 will be of particular interest to the FRRP over the next 12 months. It will also be focusing on the interaction between the segmental information in the financial statements and the disclosure of key performance indicators (KPIs) in the business review.
Smith & Williamson commentary
The Panel has already conducted an investigation into the financial statements of a listed company that had adopted IFRS 8 early but excluded certain IFRS 8 disclosure on the grounds of commercial sensitivity. The outcome of this investigation is clear; the Panel will not accept commercial sensitivity as justification for an absence of the disclosures required by the standard.
Explaining and reporting revenue
Also high on the FRRP's agenda is revenue recognition, particularly the clear and transparent disclosure of revenue recognition policies for all key income streams. Its report highlights continued concerns over the adequacy of stated accounting policies to explain the bases on which revenue is recognised and the completeness of the policies to cover all significant sources of revenue.
In its report, the Panel warns companies to keep their revenue recognition policies and practices under review, particularly given the downturn in the economy and continued uncertainties in financial markets. Clearly it is concerned that as businesses change the way they operate (for example by amending contracts to bring forward the timing of cash receipts from customers) they do not also change the timing of the recognition of revenue unless the treatment is in line with accounting standards.
The FRRP has announced that one of their priorities for 2009/10 will be the financial statements of companies which derive significant revenue from the provision of services such as advertising, media, recruitment and technology.
Investigating qualified audit reports
Since June 2008 the Panel has had in place arrangements to receive notification when any set of UK company accounts is filed with a qualified audit report for noncompliance with an accounting standard. It does not investigate every such set of accounts and in the year to 31 March 2009 they wrote to 50 companies regarding their non-compliance.
The most common standards which gave rise to non-compliance were FRS 17 'Retirement benefits' and SSAP 19 'Accounting for investment properties'. This is perhaps not surprising as these standards are often viewed by companies, particularly private companies, as being unnecessarily onerous. The Panel has made clear, however, that it will not accept a cost and benefit argument as justification for a lack of compliance and are reminding directors of their obligation to prepare accounts that give a true and fair view in accordance with the law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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