FRC publishes thematic reviews into offsetting in the financial statements and IFRS 17 Insurance Contracts
News types: Publications
Published: 5 September 2024
The FRC has today published two thematic reviews into the quality of UK company reporting in respect of offsetting in the financial statements and IFRS 17 Insurance Contracts.
Offsetting contributes to a number of the FRC’s top ten reporting findings. It involves presenting items that would otherwise be shown separately as a single net amount. International Financial Reporting Standards (IFRS) permit or require offsetting only in specific situations.
Companies are reminded that inappropriate use of offsetting can mask the full extent of the risks relating to a company’s assets and liabilities, income and expense, and cash flows. The FRC regularly identifies material errors in the use of offsetting through its routine monitoring work which has led to a number of restatements of primary financial statements. The review sets out the most commonly found issues, particularly in the areas of the cash flow statement, financial instruments and provisions and provides examples of good disclosures. Addressing these issues can help companies avoid queries from the FRC’s Corporate Reporting Review team and the potential need to restate their accounts.
Key findings include:
- Cash flows should be presented gross, unless otherwise required or permitted.
- Bank overdrafts and positive bank balances that form part of a cash pooling arrangement are offset in the statement of financial position only when there is an intention to exercise a legally enforceable right to set off period-end bank balances.
- High quality disclosures are important where financial instruments have been offset or are subject to a master netting arrangement or similar agreement.
- A reimbursement asset is required to be separately presented from the associated provision. Any reimbursement rights that satisfy the contingent asset requirements of IAS 37 should also be appropriately disclosed.
Alongside the review of offsetting, the FRC has also published a review of company disclosures against IFRS 17 Insurance Contracts following the first full year of reporting. Overall, the quality of IFRS 17 disclosures in the FRC’s sample was good.
While some further areas for improvement were identified, many of these related to areas commonly raised with companies, such as judgements and estimates, and alternative performance measures (APMs). The FRC recognises that this is a new accounting standard, with a significant impact on the insurance sector, and that practice will continue to develop and improve over time. In the early periods of implementation of a new standard the FRC is particularly careful to take a proportionate approach, so that companies have the opportunity to innovate and consider fully how best to disclose the required information. This is particularly the case with IFRS 17 due to the significant amounts of disclosures that are required to be made.
Read the Thematic Review on Offsetting in the financial statements.
Read the Thematic Review on IFRS 17 Insurance Contracts Disclosures in the First Year of Application.