The FRC has issued additional guidance on reporting of exceptional items and APMs during COVID-19
This article summarises the key points in the latest updated FRC guidance on reporting of exceptional items and Alternative Performance Measures (APMs) in the context of COVID-19
The UK Financial Reporting Council (FRC) has issued updated guidance on reporting considerations during COVID-19. The latest version now includes guidance for companies on the reporting of exceptional items and Alternative Performance Measures (APMs) in their accounts and reports in the light of the COVID-19 pandemic.
Exceptional and similar items
Under IAS 1, Presentation of Financial Statements, many companies disclose individually material items on the face of the income statement or in the notes to their accounts. Companies will need to consider whether additional items of income and expenditure arising from the COVID-19 crisis should be separately disclosed in accordance with their existing policies for ‘exceptional’ or other similar items.
The materiality of items such as restructuring costs, impairment charges, incremental health and safety costs, and the costs of onerous contracts, will need to be considered on a company by company basis. The nature and amounts of any such items should be presented in a way that is helpful to readers; for example, by giving them all in a single note or linking them with cross-references. Information about the effect of these or similar items on cash flows, and their timing, and tax implications will also be relevant to readers.
In considering the disclosure of such items, the guidance advises that companies should:
- be even-handed in identifying any gains as well as losses;
- not describe amounts as ‘non-recurring’ or ‘one-off’ if they are also expected to arise in future periods;
- not disclose costs (sometimes described as ‘stranded’, ‘sunk’ or ‘excess’) as exceptional solely because of a reduction in, or elimination of, the related revenue streams due to the COVID-19 crisis; and
- not identify incremental costs as exceptional if they result in incremental revenue that is not also described as exceptional; for example, additional staff costs related to managing unusually high levels of sales of in-demand items.
In circumstances where the effects of COVID-19 are pervasive and hard to quantify, it would be helpful for companies to include narrative disclosures explaining the nature of the items and the uncertainties around them. However, splitting discrete items on an arbitrary basis in an attempt to quantify the portion relating to COVID-19 is unlikely to provide users with reliable information. The FRC discourages companies from disclosing these in their accounts.
Some companies present sub-totals on the face of their income statement which adjust for exceptional or similar items. IAS 1 permits sub-totals to be presented if they are relevant to understanding a company’s financial performance. These must only be comprised of line items made up of amounts recognised and measured in accordance with IFRS. Accordingly, presenting a sub-total derived on a hypothetical or ‘pro-forma’ basis (for example, by adding back an estimate of ‘lost’ revenue), either as a line item or in a ‘third column’ format, would be inconsistent with the requirements of IAS1.
Alternative Performance Measures (‘APMs’)
Companies often use APMs in their interim and Annual Reports and Accounts to supplement information provided under IFRS. These frequently include measures such as profit adjusted for exceptional or similar items.
Companies are expected to provide APM disclosures that:
- have clear and accurate labelling;
- have an explanation of their relevance and use;
- are reconciled to the closest IFRS measure; and
- are not given more prominence than the equivalent IFRS measures.
APMs should also be presented on a consistent basis year-on-year. However, there may be circumstances where the COVID-19 crisis results in changes to the APMs used to manage and monitor the business. In these circumstances, readers should be informed of any such changes and provided with an explanation of why they provide reliable and more relevant information.
APMs which attempt to provide a measure of ‘normalised’ or ‘pro-forma’ results, excluding the estimated effect of the COVID-19 crisis, are likely to be highly subjective and, as such, are potentially unreliable. In addition to the subjectivity arising around which costs to exclude, in most cases, COVID-19 is likely to have resulted in reductions in revenues. Any adjustment for lost revenues would be hypothetical and could not be reflected reliably in an APM. The FRC would not expect companies to include these results; for example, by including them in a ‘third-column’ income statement presentation.
For more information on the latest COVID-19 developments related to business and practice, visit the ICAS coronavirus hub.