The Financial Reporting Council (FRC) recently published its reporting expectations and monitoring findings for companies amidst a high period of interest rates, persistent inflation and ongoing economic uncertainty. Most frequently raised issues and areas of focus included:

• Impairments, judgments and estimates as this reflects the ongoing economic uncertainties companies need to factor into their financial reporting and the need for detailed explanations to help users understand the positions taken.
• Companies restating cash flow results.
• Review of Directors’ remuneration particularly regarding targets and performance against them
• Corporate governance disclosures against the Corporate Governance Code. A majority of companies disclose non-compliance with at least one Code provision, which is permitted under the comply-or-explain framework, however explanations for departures continue to lack detail specific to companies’ circumstances.
• In relation to Climate Related Reporting, it is clear that companies are at very different states of maturity. As reporting practices become more established, it is more likely the FRC will enter into substantive correspondence with companies where their disclosures do not meet requirements for TCFD reporting.

IAASA’s recently published observations paper on selected financial reporting issues for years ending on or after 31 December 2023 aims to assist issuers in preparing high quality financial reports by offering observations on selected financial reporting topics with the most frequently raised issues being:

• Consideration of climate change impacts in the short, medium and long term on their operations and on the recognition and measurement of assets and liabilities.
• Consistency between front end reporting and the financial statements including climate change impacts.
• Disclosure tailoring on significant judgements, and the sources of estimation uncertainty and changes in key assumptions underpinning assets, liabilities, income, expenses and cash flows to their particular circumstances.
• Application of recognition, measurement, presentation, and disclosure requirements of financial reporting standards to provide users of their financial reports with information that is comparable, relevant, verifiable, timely and understandable.

• Lack of sufficient detail on issues/mitigating actions in relation to going concern.
• Insufficient disclosures regarding subsequent events.
• Obsolete narrative within auditor’s report.
• References to S.1A FRS 102 and PAASE for medium and large sized companies.
• Inappropriate use of Small Companies Exemption in Republic of Ireland for Schedule 5 Companies under Co. Act 2014, such as Insurance Brokers.
• Financial Instruments, terms and conditions attaching to loans, trade creditors not adequately disclosed.
• Inappropriate accounting policies, for example simple narrative for turnover.
• Inadequate consideration of policies for the treatment of biological assets
• Incorrect treatment of government grants
• Non- disclosure or inadequate disclosure of related party transactions, refer to Section 33 FRS 102.

We now explore in more detail the requirements relating to the key financial reporting areas identified at quality assurance monitoring reviews during 2023 where disclosures had not been adequately presented:

1. Government Grant Disclosures – Section 24 FRS 102

An entity recognizes grants either based on performance or accrual model. The policy choice is applied on a class-by-class basis. Grants relating to revenue per the accrual model shall be recognized in income on a systematic basis over the periods in which the entity recognizes the related costs for which the grant is intended to compensate, also a grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognized in income in the period in which it becomes receivable.

The entity discloses the following within the financials:

1. The accounting policy adopted for grants (accrual or performance models),
2. The nature and amounts of grants recognized in the financials,
3. Unfulfilled conditions and other contingencies attaching to grants that have been recognized in income; and
4. An indication of other forms of assistance from which the entity has directly benefited from.

2. Biological Asset Disclosures – Section 34 FRS 102

A biological asset is defined as a living animal or plant. There are two methods of measurement fair value model and cost model. If the fair value model cannot be measured reliably then entities shall apply the cost model. For example, an entity applying the cost model shall disclose:

1. A description of each class of biological asset
2. The depreciation method used
3. The useful lives or the depreciation rates; and
4. A reconciliation which includes:
   • Increases resulting from purchases
   • Decreases attributable to sales
   • Decreases resulting from harvest
   • Increases resulting from business combinations
   • Impairment losses recognized or reversed in profit or loss in accordance with Section 27 Impairment of assets; and
   • Other changes

This reconciliation need not be presented for prior periods.

3. Consolidation Procedures & Disclosures – Section 9 FRS 102

In addition to combining the financial statements of the parent and its subsidiaries it is necessary to eliminate in full intragroup balances and transactions including income, expenses and dividends. There needs to be a uniform reporting date, reporting period and accounting policies for like transactions and other events or conditions in similar circumstances.

The following disclosures shall be made in consolidated financial statements:

1. The fact that the statements are consolidated financial statements,
2. The basis for concluding that control exists when the parent does now own, directly or indirectly through subsidiaries, more than half of the voting power.
3. Any difference in the reporting date of the financial statements of the parent and its subsidiaries used in the preparation of consolidated financial statements.
4. The nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans,
5. The name of any subsidiary excluded from consolidation and the reason for exclusion; and
6. The nature and extent of its interest in unconsolidated special purpose entities, and the risks associated with those interests.

4. Going Concern Disclosures – Section 3 FRS 102

An entity is a going concern unless management either intends to liquidate the entity or to cease trading. When preparing financial statements under the going concern assumption, the entity is viewed as continuing in business for the foreseeable future, and at least 12 months from the entity’s financial statement approval date. Where there is a “material uncertainty” relating to events or conditions that may cash significant doubt on the entity’s ability to continue as a going concern this needs to be explicitly disclosed within the financial statements.

5. Judgements & Estimation Uncertainty Disclosures – Section 8 FRS 102

An entity shall disclose in the summary of significant accounting policies or other notes, the judgements apart from those involving estimations that management has made in the process of applying the entity’s accounting policies.

The entity shall disclose within the notes information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

6. Accounting Policy Disclosures – Section 10 FRS 102

Entities should consider reviewing their accounting policies to make sure they meet their current requirements. Existing policies may require expansion for example policies on loans/monies outstanding (e.g. debt warehousing) or asset impairments. Ensure turnover policy adequately describes the nature of the business, refer to Para 62 Sch3. Co. Act 2014 and Para 52 ,53 Sch 3A. Co. Act 2014.

7. Post Balance Sheet Disclosures – Section 32 FRS 102

At the end of each reporting period, entities should carefully evaluate information that becomes available after the reporting date but before issuance of the financial statements. The amounts must be adjusted to reflect events that provide evidence of conditions that existed at the end of the reporting period. If non-adjusting events are material, an entity would be expected to disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made. A common error is post balance sheet events are disclosed but not the financial effect.

Refer to Para 67 Sch. 3 FRS 102 and Para 56 Sch. 3A FRS 102.

8. Deferred Tax Disclosures – Section 29 FRS 102

Deferred tax is recognized in respect of all timing differences at the reporting date with some exceptions. The timing differences are differences between taxable profits and total comprehensive income as stated in the financial statements that arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognized in financial statements.

An entity shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of the current and deferred tax consequences of recognized transactions and other events.

The major components of tax expenses (income) for disclosure include:

1. Current tax expense (income),
2. Any adjustments recognized in the period for current tax or prior periods,
3. The amount of deferred tax expense (income) relating to the origination and reversal of timing differences,
4. The amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes,
5. Adjustments to deferred tax expense (income) arising from a change in the tax status of the entity or its shareholders; and
6. The amount of tax expense (income) relating to changes in accounting policies and material errors.

9. Related Party Disclosures – Section 33 FRS 102

If an entity has related party transactions, it shall disclose the nature of the related party relationship as well as information about the transactions, outstanding balances and commitment necessary for an understanding of the potential effect of the relationship on the financial statements.

At a minimum disclosures shall include:

1. The amount of the transactions.
2. The amount of outstanding balances, terms and conditions, details of guarantees given or received.
3. Provisions for uncollectable receivables related to the amount of outstanding balances.
4. The expense reorganized during the period in respect of bad or doubtful debts due from related parties.

• IAS 12 – Income Taxes – Two Pillar Model Rules

The issuer must disclose qualitative and quantitative information about its exposure in Pillar Two income taxes at the reporting date.

• IAS 1 – Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies

These amendments require issuers to disclose their material accounting policy information rather than their significant accounting policies.

In relation to FRS 102 there have been 3 draft amendment consultations during 2023 namely FRED 82, FRED 83 and FRED 84. CPA Ireland has responded to two consultations with deadline of 31 December 2023 for response to FRED 84. The link for CPA response to FRED 82 and FRED 83 can be found here.

The EU Commission adopted on 31st July 2023 the European Sustainability Reporting Standards (ESRS) for use by all companies subject to the CSRD. Member states have until July 2024 to transpose the CSRD, with requirements being phased in between 2024 and 2028. The ESRS in this first set are sector agnostic, meaning that they apply to all undertakings under the scope of the CSRD, regardless of which sector or sectors the undertaking operates in.

The European Commission has put forward a number of proposals to reduce the reporting burden for financial market participants in their recently announced Work Programme for 2024. One of the proposals is 2-year delay of the date of adoption of the sector specific ESRS and the proposed standard for non-EU companies with business in the union, currently required to be adopted by July 2024.

This postponement will allow companies in scope to focus on the implementation of the first set of standards and will allow EFRAG time to develop proportionate sector specific standards.

CPA Ireland’s Sustainability Hub alongside the Sustainability Micro-Credentials aims to provide valuable information and training within sustainability related matters. Further information can be found here.