There have continued to be examples of listed businesses identifying errors in their financial reporting practices, leading to profit warnings, restatements or other public reporting. In the current environment, robust financial reporting is equally important for privately held companies. Concerns around the quality of reported results could have a significant impact on the ability to complete a refinancing or corporate transaction. The continued market interest in audit quality and scope means that auditors will also be challenging key areas, requesting additional documentation and support. We have highlighted below some of the key areas that we believe businesses should be focusing on:
Accounting policies and practices
The adoption of new accounting standards can be very complex and time-consuming, and there may be commercial consequences from failing to complete analysis on a timely basis. For example, companies reporting under IFRS that delayed their assessment of the IFRS 16 leasing standard found that they were left with little time to deal with business matters such as the impact on loan covenants.
As well as the impact of new standards, companies should ensure they have clearly documented their application of existing requirements. There may be choices of accounting policy available and typically these are required to be applied on a consistent basis for all related transactions.
For new or significant transactions, accounting considerations should be documented alongside the assessment of other relevant matters such as taxation. Where we have seen that accounting issues have been identified in relation to corporate activity such as transactions, group reconstructions and other changes, this is often because a comprehensive accounting analysis has not been undertaken in tandem with agreeing commercial arrangements.
Key developments as a consequence of the pandemic, such as receiving government assistance through the Coronavirus Job Retention Scheme or borrowing under the Coronavirus Business Interruption Loan Scheme, could require specific new accounting policies to be determined, along with the consideration of disclosure within financial statements.
Significant accounting estimates
In the current environment, companies should be revisiting the processes they apply to key accounting estimates. Scenario analysis, stress-testing and sensitivities support the assessment of whether conclusions remain appropriate and are likely to be areas of documentation required by auditors. Volatile conditions may mean that there are additional areas receiving focus, such as the carrying value of investments in subsidiaries for parent companies.
It is good practice also for companies to periodically review the approach taken to key areas of judgement within their financial reporting. Judgements could relate to areas where market practice has evolved or where additional guidance in the application of accounting standards has been issued. Understanding how the position your business has taken compares with your peers may also be important context.
A number of businesses have identified that they have made errors in determining the level of distributable profits that they have available for dividends, or that they have not followed the appropriate procedures under the Companies Act 2006. These considerations can be complex, requiring accounting technical and legal consideration. It is therefore important for companies to ensure they have completed this analysis in planning for any distribution.
The disclosure requirements of accounting standards have continued to increase in recent years. Most regulatory reviews of financial statements identify areas where disclosures need to be enhanced. Financial reporting has again attracted attention where it is found that businesses have failed to give required disclosures, particularly in sensitive areas such as remuneration or related party transactions. Assessing the disclosure aspects of new standards, significant transactions, key judgements and estimates should be areas of focus.
How can we help?
Our Consulting and Accounting Solutions Team (CAST) can provide accounting advisory support across a wide range of areas including business change, transactions, new accounting standards, financial statements and disclosures.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.
Smith & Williamson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.