FRC requires improvements in the reporting of revenue and leases
By Anne Adrain, Head of Sustainability and Reporting
1 October 2020
This article summarises the improvements required in the reporting of revenue and leases based on a review published by the FRC
Ahead of the next reporting cycle for financial statements, the Financial Reporting Council (FRC) has published two reviews into the reporting of revenue and leases identifying several critical areas where companies need to improve their reporting.
These reviews covered current reporting on IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases following the first year of its application. This follows an FRC review last year into the quality of the transitional disclosures in a sample of annual (IFRS 15) and interim (IFRS 16) reports. The reports published today indicate several areas where further improvement is required.
IFRS 15 ‘Revenue from Contracts with Customers’
This is the third review on the application of IFRS 15 and focusses on those areas that have previously provided the greatest cause for concern. Although there has been some progress, the FRC continues to identify disclosures by many companies that do not meet the FRC’s quality threshold. Companies should critically review their revenue-related disclosures to ensure they provide a clear understanding of how they have applied the requirements of the standard to their own circumstances.
In particular, the FRC expects companies to:
- provide clear descriptions of performance obligations, the timing of revenue recognition and explanations of any significant judgements made by management;
- identify, and explain significant movements in, contract balances;
- ensure there is consistency between revenue-related information in the strategic report and information in the financial statements, including, for example, details about significant contracts and disclosures of disaggregated revenue; and
- specify the types of any variable consideration that exist within contracts and how they are both estimated and constrained.
The FRC’s report includes examples of both inadequate and better disclosures against which companies can benchmark their own draft disclosures. The FRC will challenge companies whose future disclosures do not meet its expectations.
IFRS 16 ‘Leases’
The FRC found that most companies provided a good explanation of the impact of adopting IFRS 16, which applies for the first time this year. However, the quality of their disclosures should improve in future reporting. The FRC expects companies to:
- tailor the descriptions of their leasing accounting policies to match their particular circumstances and to cover all material areas;
- provide detailed information about the significant judgements affecting their accounting for leases; and
- include sufficient detail to enable a good understanding of the financial reporting effects of their leasing arrangements on their financial position, financial performance and cash flows.
IFRS 15 sets the principles to apply when a company reports information about the nature, amount, timing and uncertainty of revenue or cash flows from a contract with a customer.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.