DECEMBER 2012The financial reporting challenge:key issues and questions fornon-executive directors1                 2     ...
Contents                                               Introduction  1   	 Going concern – the continuing challenge       ...
Going concern –the continuing challengeThe continuing difficult economic                                                  ...
Are you on top of currencyand country risks?A number of countries around the                                              ...
FRC Conduct Committeehot topicsIn its Corporate Reporting Review                                                          ...
Do you need to recognisean impairment?Impairment testing continues to be an                                               ...
The narrative reporting challengeTelling a consistent story throughout                                                    ...
Can you cut the clutter?Annual reports have been growing                                                                  ...
Future of UK GAAP –the key challengesThe FRC plans to replace current                                                     ...
IFRS developments –the key questionsMajor changes to IFRSs on                                                             ...
Finish
Start© 2012 Grant Thornton UK LLP. All rights reserved.‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability p...
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The financial reporting challenge: key issues and questions for non-executive directors

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Grant Thornton’s guide The Financial Reporting Challenge – key issues and questions for non-executive directors is intended to highlight some of the key financial reporting issues that companies are having to deal with currently and provide a reference for non-executive directors to help them focus on what they need to address.

The guide identifies high-level issues relating to the company’s annual report and accounts and puts forward ideas for questions NEDs may wish to pose to the Board as a whole to ensure that those issues have been addressed. To help you focus on what is most relevant to you, we have flagged these issues according to whether they are relevant where you prepare your accounts under UK GAAP, IFRS or both.

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The financial reporting challenge: key issues and questions for non-executive directors

  1. 1. DECEMBER 2012The financial reporting challenge:key issues and questions fornon-executive directors1 2 3
  2. 2. Contents Introduction 1 Going concern – the continuing challenge Businesses of all sizes face many challenges at present. Key challenges in relation to corporate reporting are to ensure that the 2 Are you on top of currency and country risks? annual report and accounts provide relevant and reliable information to stakeholders, 3 FRC Conduct Committee hot topics comply with relevant law and accounting standards and tell a consistent story. 4 Do you need to recognise an impairment? All directors, both executive and non-executive, have a legal responsibility for preparing accounts and 5 The narrative reporting challenge must not approve accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, 6 Can you cut the clutter? financial position and profit or loss. It is important not to underestimate your legal responsibility as a non-executive 7 Future of UK GAAP – the key challenges director to prepare accounts that give a true and fair view and that comply with the law and accounting standards. 8 IFRS developments – the key questions Grant Thornton’s guide The financial reporting challenge – key issues and questions for non-executive directors is intended to highlight some of the key financial reporting issues that companies are having to deal with currently and provide a reference for non-executive directors to help them focus on what they need to address. The guide identifies high-level issues relating to the company’s annual report and accounts and puts forwardStart ideas for questions NEDs may wish to pose to the Board as a whole to ensure that those issues have been addressed. To help you focus on what is most relevant to you, we have flagged these issues according to whether they are relevant where you prepare your accounts under UK GAAP, IFRS or both. Companies’ individual circumstances will vary greatly and some issues may be more pertinent than others in any given company. This guide is not intended to be a comprehensive list of issues or questions that companies may face during the financial reporting season. Joyce Grant, Technical Partner
  3. 3. Going concern –the continuing challengeThe continuing difficult economic UKconditions mean that the assumption GAAP IFRSthat the business is a going concern Has the Board conducted a rigorous process to assess the validitymay not be clear-cut in some cases and of the going concern assumption and related risks and uncertainties?directors may need to make carefuljudgements relating to going concern. Have borrowing facilities and covenants been considered and theDirectors need to ensure that it is likelihood of facilities being maintained or renewed assessed?reasonable for them to prepare thefinancial statements on a going concern Are cash flow forecasts based on relevant information and reasonable and supportable assumptions consistent withbasis. Where directors are aware, in business plans?making their going concern assessment,of material uncertainties relating to Do forecasts extend for a period sufficient to enable all major issuesevents or conditions that may cast to be evaluated and cover a period of at least twelve months fromsignificant doubt upon the company’s the date the accounts are approved?ability to continue as a going concern, Have forecasts and assessments been stress tested against aUK GAAP and IFRS require those combination of pessimistic but plausible estimates and assumptions?uncertainties to be disclosed in thefinancial statements. Have guarantees, indemnities and commitments been taken into account and the risks and consequences of the company being called on to honour them assessed? Does the annual report and accounts explain clearly the basis for adopting the going concern assumption and have relevant risks and uncertainties been described? 1 The financial reporting challenge 1
  4. 4. Are you on top of currencyand country risks?A number of countries around the UKWorld are facing major economic GAAP IFRSrisks and uncertainties, notably Does the description of principal risks and uncertainties in thethe Eurozone. The annual report business review reflect appropriately the companys exposure toand accounts need to explain the currency and country risks and the mitigating actions taken?business’s exposure to these risksthrough financial instruments, foreign Have you considered how currency and country risks may affectoperations and exposure to trading your business and thus your going concern assessments or asset impairment testing?counterparties. Stakeholders will alsobe interested in the potential impact Do adverse developments in country or currency risk, such asof austerity measures being adopted government austerity measures or credit deterioration, trigger theon forecasts, impairment testing and need for asset impairment reviews?going concern assessments. As thesituation evolves, enhanced disclosure Have budgets and forecasts underlying going concern assessmentsof post-balance sheet events may be or impairment tests been stress tested for the potential impact of country or currency events that have not been built into thenecessary to inform investors and other underlying assumptions, such as the country’s exit from the Euro?stakeholders. Has adequate disclosure been provided in the financial statements of impairments, provisions against receivables, concentrations of credit risk and other risk exposures? Are key judgements and key sources of estimation uncertainty relating to currency and country issues explained in the financial statements? Have events after the reporting date been reflected appropriately in the financial statements? 22 The financial reporting challenge
  5. 5. FRC Conduct Committeehot topicsIn its Corporate Reporting Review UKwork, the Conduct Committee of the GAAP IFRSFinancial Reporting Council (FRC) Are accounting policies relevant to the companys circumstances,seeks to ensure that the provision of do they cover all material areas and are they set out clearly?financial information by public andlarge private companies complies with Is the basis on which the company recognises and measuresrelevant reporting requirements. The revenue clear and in compliance with relevant standards?Conduct Committee will challengecompanies whose annual reports and Have intangible assets been recognised and measured appropriately on a business combination?accounts raise questions as to whetheror not requirements have been adhered Have impairment reviews been conducted in accordance withto. This was formerly the remit of the relevant standards and are the disclosures in the accounts clearFinancial Reporting Review Panel and complete?(FRRP). The Conduct Committee maychallenge any area of the annual report Are cash flows classified under the appropriate heading and does the cash flow statement include all cash flows and excludeand accounts. Some key areas of focus non-cash items?are identified here. Are operating segments in the financial statements consistent with how the business is described in narrative reports? Where the accounts identify the Board as a whole as the Chief Operating Decision Maker, do the NEDs consider themselves as making operating decisions? Are capital risk management disclosures clear and will the reader understand how the business manages capital? Are key judgements made in applying accounting policies and key sources of estimation uncertainty disclosed clearly? 3 Does the business review provide a balanced analysis including both good and bad news and are principal risks and uncertainties described, including steps taken to mitigate? Does the corporate governance report explain clearly any departures from the provisions of the UK Corporate Governance Code, where applicable? The financial reporting challenge 3
  6. 6. Do you need to recognisean impairment?Impairment testing continues to be an UKimportant issue for many businesses, GAAP IFRSwhilst the disclosures made about the Has an assessment been made of whether there are any indicatorsimpairment testing in the financial that assets might be impaired and thus that an impairment review ofstatements are an area of on-going assets or cash-generating units is required?scrutiny by the FRC ConductCommittee. The process followed in Are the assumptions underlying impairment tests reasonable,testing for impairment may be complex supportable and consistent with the companys budgets and forecasts and with how the companys prospects have beenand involve significant judgement, described in narrative reports such as the business review?whilst the disclosure requirementsunder IFRS in particular are extensive. Are discount rates and assumed growth rates specific to theImpairment issues affect financial and assets or cash-generating units being tested and compatible withnon-financial assets as well as goodwill. requirements in accounting standards? Do changes in the business mean that allocations of assets and goodwill to cash-generating units need to be revised? Has appropriate sensitivity analysis been applied to test the robustness of assumptions and determine whether additional sensitivity disclosures are required? Do the financial statements include all relevant disclosures and explanations regarding impairment testing and any impairments recognised? Are all key disclosures and movements in the financial statements discussed appropriately in the narrative? 44 The financial reporting challenge
  7. 7. The narrative reporting challengeTelling a consistent story throughout UKthe annual report and accounts is GAAP IFRSessential to producing a good set of Does the annual report provide a fair, balanced and comprehensivereports and accounts. Your narrative review of the companys business and its performance, including anreporting, including the directors’ explanation of the business model?report, business review, chairman’sstatement and other narrative reports, Is the analysis supported by relevant key performance indicatorsneeds to communicate clearly the used by the Board in monitoring the business?company’s business model, give a Does the business review describe the principal risks andclear and balanced account, including uncertainties to which the business is exposed, rather than set outinformation about the company’s all possible risks, and state the mitigating actions taken?performance in the year, both goodand bad, and explain the principal risks Has the Board taken into account all relevant issues that have comeand uncertainties the business faces and to its attention during the year when deciding what matters meritthe key performance indicators which discussion in narrative reports?the Board uses to measure success. Are the key messages given consistent across narrative reports andWhere the UK Corporate Governance with the financial statements?Code is applied, the company needs toexplain how it has applied the principles Does the corporate governance report, where prepared, explainand explain any departures from how the main principles of the UK Corporate Governance Code haveCode provisions. For annual periods been applied and are any departures from specific Code provisions explained clearly?commencing on or after 1 October2012, the UK Corporate Governance Has the Board established a policy on diversity, including gender,Code will require Boards to confirm and has the Board set any measurable objectives for implementingthat the annual report and accounts that policy? If not, is the Board ready to explain its departure fromtaken as a whole are fair, balanced and the new Code provision on this matter, where applicable?understandable and disclose the Board’spolicy on diversity, including gender,any measurable objectives set andprogress on achieving the objectives. 5 The financial reporting challenge 5
  8. 8. Can you cut the clutter?Annual reports have been growing UKlonger and longer each year amidst GAAP IFRSincreasing concerns about the Are your accounting policies specific to the circumstances ofcomplexity of financial reporting. your company?Repetition and inclusion of immaterialdetail in annual reports add unnecessary Do you have irrelevant or immaterial accounting policies that addclutter and may obscure key messages. clutter and could be deleted?A key challenge is to make thecommunication in your annual report Do you duplicate information unnecessarily within the annual report, for example by repeating messages in several places where oneand accounts focused, open and honest, would do?clear, understandable, interestingand engaging. Specific disclosures generally need not be provided if the resulting information is not material. Are your judgements on materiality of disclosures appropriate or over-cautious? Have you assessed the clarity of expression and the language used in your annual report, and are you satisfied that information is communicated in a clear way that users will be able to understand? Does the structure of your annual report and accounts allow users to find the information they need easily? 66 The financial reporting challenge
  9. 9. Future of UK GAAP –the key challengesThe FRC plans to replace current UKUK accounting standards with new GAAP IFRSrequirements based on the IFRS for Will transitioning to the new UK GAAP affect your loan covenantSmall and Medium-sized Entities. compliance?Changes will take effect from 1 January2015. Parents and subsidiaries will If you prepare your group accounts under IFRS, should you movehave the option of applying IFRS with your UK subsidiaries to IFRS with reduced disclosures under the newreduced disclosures in their individual FRS 101 Reduced Disclosure Framework?accounts. The FRC began issuing the Could the group structure be simplified to reduce the costs ofnew standards in November 2012 transitioning to the new regime?and the framework is expected to becomplete by early 2013. Early adoption Will you need to determine fair values of financial instrumentswill be permitted. for inclusion in your accounts under the proposed FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland? Who in your finance team will need training, and when? How will your company communicate the impact of the changes to key stakeholders? Should your company adopt the new standards early? 7 The financial reporting challenge 7
  10. 10. IFRS developments –the key questionsMajor changes to IFRSs on UKconsolidation, joint ventures, fair GAAP IFRSvalues and accounting for defined Will applying the revised IAS 19 Employee Benefits affect yourbenefit pension schemes begin to come reported profits or change how you treat actuarial gains and losses?into force from 2013 onwards. Theentities included in the scope of the Have you considered whether IFRS 13 Fair Value Measurementconsolidation may change. Companies will change how you measure any assets and liabilities carried at fairwith joint ventures may find that their value, including fair values on business combinations?accounts look very different. More Do you have the systems in place to provide the information requireddisclosures relating to fair values will to meet IFRS 13s disclosure requirements, which cover a widebe needed and these disclosures will range of fair values and extend beyond financial instruments?reach far beyond financial instruments.Changes to treatment of defined Have you assessed whether the introduction of IFRS 10benefit schemes are also on the way. Consolidated Financial Statements will alter which entities areImplementing these changes may included in your consolidation?require new or different information on Have you evaluated how the accounting treatment of your jointlywhich to make key judgements or meet controlled assets, operations or entities will change when you begindisclosure requirements. You will need to apply IFRS 11 Joint Arrangements?to communicate the likely impact ofthese changes to shareholders and Have you identified the key information you will need to be able toother users of your annual report make the key judgements required in applying IFRSs 10 and 11 and provide the enhanced disclosures that will be required by IFRS 12and accounts. Disclosure of Interests in Other Entities? Are key judgements and key sources of estimation uncertainty relating to the application of new and revised standards explained in the financial statements? Have you considered how you will communicate to your key stakeholders the impact of new and revised standards on your reported position and 8 performance?8 The financial reporting challenge
  11. 11. Finish
  12. 12. Start© 2012 Grant Thornton UK LLP. All rights reserved.‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership.Grant Thornton is a member firm of Grant Thornton International Ltd (Grant ThorntonInternational). References to ‘Grant Thornton’ are to the brand under which the Grant Thorntonmember firms operate and refer to one or more member firms, as the context requires.Grant Thornton International and the member firms are not a worldwide partnership. Servicesare delivered independently by member firms, which are not responsible for the services oractivities of one another. Grant Thornton International does not provide services to clients.This publication has been prepared only as a guide. No responsibility can be accepted by usfor loss occasioned to any person acting or refraining from acting as a result of any material inthis publication.grant-thornton.co.ukEPI954

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