November 17, 2020
The Financial Reporting Council (FRC) has today published a review of corporate reporting in relation to IAS 7 ‘Cash flow statement’ and the liquidity disclosure requirements in IFRS 7 ‘Financial Instruments: Disclosures’.
The FRC continues to identify errors in cash flow statements and this review examines many of the issues faced in their preparation and provides insights into how the quality of cash flow statements can be improved.
The FRC will continue to challenge those companies where there is an apparent material inconsistency between the cash flow statement and the notes, or where cash flows were incorrectly classified. In addition, the FRC notes most companies could improve their disclosures of accounting policies and judgements in relation to the cash flow statement.
The review also addresses the disclosure of liquidity risk, a highly topical issue in the current challenging economic environment. It supplements the review on the financial reporting effects of Covid-19 (July 2020) and the FRC Lab’s two Covid-19 reports (June 2020) by providing more recent examples of good reporting that companies should find helpful.
Several companies in the sample published their accounts before the UK lockdown in March and many of these accounts contained only boilerplate disclosures in respect of liquidity risk and related issues. There was, however, a marked improvement in liquidity risk reporting, including linkage to viability statement and going concern disclosures, in reports and accounts published from April onwards, most notably in smaller listed companies. This is consistent with the findings of the review on the financial reporting effects of Covid-19.
The majority of companies in the sample that published their accounts from April onwards disclosed key liquidity information such as availability of cash, undrawn borrowing facilities, use of supply chain finance and compliance with covenants. The FRC did, however, identify that some companies could improve their disclosures of covenant testing, and assumptions and judgements around going concern and viability.
The FRC encourages all companies to review the report in detail and consider the findings carefully when preparing their future reports and accounts.
The FRC’s Executive Director of Supervision, David Rule said:
“It is frustrating that we continue to identify basic errors in relation to cash flow reporting which, in most cases, were easily identifiable from a desktop review of the financial statements. We expect companies to perform robust pre-issuance reviews to ensure cash flow statements and related notes comply with the requirements of IAS 7 and are free from errors.
Given investors’ focus on cash management in this uncertain economic climate, we were pleased to see improved liquidity risk reporting following the UK lockdown in March.”