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.

1. DECEMBER 2012
The financial reporting challenge:
key issues and questions for
non-executive directors
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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 forward
Start
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. Going concern –
the continuing challenge
The continuing difficult economic UK
conditions mean that the assumption GAAP IFRS
that the business is a going concern
Has the Board conducted a rigorous process to assess the validity
may not be clear-cut in some cases and of the going concern assumption and related risks and uncertainties?
directors may need to make careful
judgements relating to going concern. Have borrowing facilities and covenants been considered and the
Directors need to ensure that it is likelihood of facilities being maintained or renewed assessed?
reasonable for them to prepare the
financial statements on a going concern Are cash flow forecasts based on relevant information and
reasonable and supportable assumptions consistent with
basis. 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 issues
events or conditions that may cast to be evaluated and cover a period of at least twelve months from
significant 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 a
UK GAAP and IFRS require those
combination of pessimistic but plausible estimates and assumptions?
uncertainties to be disclosed in the
financial 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?
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The financial reporting challenge 1

4. Are you on top of currency
and country risks?
A number of countries around the UK
World are facing major economic GAAP IFRS
risks and uncertainties, notably
Does the description of principal risks and uncertainties in the
the Eurozone. The annual report business review reflect appropriately the company's exposure to
and accounts need to explain the currency and country risks and the mitigating actions taken?
business’s exposure to these risks
through financial instruments, foreign Have you considered how currency and country risks may affect
operations and exposure to trading your business and thus your going concern assessments or asset
impairment testing?
counterparties. Stakeholders will also
be interested in the potential impact
Do adverse developments in country or currency risk, such as
of austerity measures being adopted government austerity measures or credit deterioration, trigger the
on forecasts, impairment testing and need for asset impairment reviews?
going concern assessments. As the
situation evolves, enhanced disclosure Have budgets and forecasts underlying going concern assessments
of 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 the
necessary 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?
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2 The financial reporting challenge

5. FRC Conduct Committee
hot topics
In its Corporate Reporting Review UK
work, the Conduct Committee of the GAAP IFRS
Financial Reporting Council (FRC)
Are accounting policies relevant to the company's circumstances,
seeks to ensure that the provision of do they cover all material areas and are they set out clearly?
financial information by public and
large private companies complies with Is the basis on which the company recognises and measures
relevant reporting requirements. The revenue clear and in compliance with relevant standards?
Conduct Committee will challenge
companies whose annual reports and Have intangible assets been recognised and measured appropriately
on a business combination?
accounts raise questions as to whether
or not requirements have been adhered Have impairment reviews been conducted in accordance with
to. This was formerly the remit of the relevant standards and are the disclosures in the accounts clear
Financial Reporting Review Panel and complete?
(FRRP). The Conduct Committee may
challenge 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 exclude
and 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. Do you need to recognise
an impairment?
Impairment testing continues to be an UK
important issue for many businesses, GAAP IFRS
whilst the disclosures made about the
Has an assessment been made of whether there are any indicators
impairment testing in the financial that assets might be impaired and thus that an impairment review of
statements are an area of on-going assets or cash-generating units is required?
scrutiny by the FRC Conduct
Committee. The process followed in Are the assumptions underlying impairment tests reasonable,
testing for impairment may be complex supportable and consistent with the company's budgets and
forecasts and with how the company's prospects have been
and involve significant judgement,
described in narrative reports such as the business review?
whilst the disclosure requirements
under IFRS in particular are extensive. Are discount rates and assumed growth rates specific to the
Impairment issues affect financial and assets or cash-generating units being tested and compatible with
non-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?
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4 The financial reporting challenge

7. The narrative reporting challenge
Telling a consistent story throughout UK
the annual report and accounts is GAAP IFRS
essential to producing a good set of
Does the annual report provide a fair, balanced and comprehensive
reports and accounts. Your narrative review of the company's business and its performance, including an
reporting, including the directors’ explanation of the business model?
report, business review, chairman’s
statement and other narrative reports, Is the analysis supported by relevant key performance indicators
needs 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 and
clear and balanced account, including
uncertainties to which the business is exposed, rather than set out
information about the company’s all possible risks, and state the mitigating actions taken?
performance in the year, both good
and bad, and explain the principal risks Has the Board taken into account all relevant issues that have come
and uncertainties the business faces and to its attention during the year when deciding what matters merit
the key performance indicators which discussion in narrative reports?
the Board uses to measure success.
Are the key messages given consistent across narrative reports and
Where the UK Corporate Governance with the financial statements?
Code is applied, the company needs to
explain how it has applied the principles Does the corporate governance report, where prepared, explain
and explain any departures from how the main principles of the UK Corporate Governance Code have
Code provisions. For annual periods been applied and are any departures from specific Code provisions
explained clearly?
commencing on or after 1 October
2012, 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 implementing
that the annual report and accounts that policy? If not, is the Board ready to explain its departure from
taken as a whole are fair, balanced and the new Code provision on this matter, where applicable?
understandable and disclose the Board’s
policy on diversity, including gender,
any measurable objectives set and
progress on achieving the objectives.
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The financial reporting challenge 5

8. Can you cut the clutter?
Annual reports have been growing UK
longer and longer each year amidst GAAP IFRS
increasing concerns about the
Are your accounting policies specific to the circumstances of
complexity of financial reporting. your company?
Repetition and inclusion of immaterial
detail in annual reports add unnecessary Do you have irrelevant or immaterial accounting policies that add
clutter and may obscure key messages. clutter and could be deleted?
A key challenge is to make the
communication in your annual report Do you duplicate information unnecessarily within the annual report,
for example by repeating messages in several places where one
and accounts focused, open and honest,
would do?
clear, understandable, interesting
and 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?
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6 The financial reporting challenge

9. Future of UK GAAP –
the key challenges
The FRC plans to replace current UK
UK accounting standards with new GAAP IFRS
requirements based on the IFRS for
Will transitioning to the new UK GAAP affect your loan covenant
Small and Medium-sized Entities. compliance?
Changes will take effect from 1 January
2015. Parents and subsidiaries will If you prepare your group accounts under IFRS, should you move
have the option of applying IFRS with your UK subsidiaries to IFRS with reduced disclosures under the new
reduced 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 of
new standards in November 2012
transitioning to the new regime?
and the framework is expected to be
complete by early 2013. Early adoption Will you need to determine fair values of financial instruments
will 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?
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The financial reporting challenge 7

10. IFRS developments –
the key questions
Major changes to IFRSs on UK
consolidation, joint ventures, fair GAAP IFRS
values and accounting for defined
Will applying the revised IAS 19 Employee Benefits affect your
benefit pension schemes begin to come reported profits or change how you treat actuarial gains and losses?
into force from 2013 onwards. The
entities included in the scope of the Have you considered whether IFRS 13 Fair Value Measurement
consolidation may change. Companies will change how you measure any assets and liabilities carried at fair
with 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 required
disclosures relating to fair values will
to meet IFRS 13's disclosure requirements, which cover a wide
be 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 10
benefit schemes are also on the way. Consolidated Financial Statements will alter which entities are
Implementing these changes may included in your consolidation?
require new or different information on
Have you evaluated how the accounting treatment of your jointly
which to make key judgements or meet controlled assets, operations or entities will change when you begin
disclosure requirements. You will need to apply IFRS 11 Joint Arrangements?
to communicate the likely impact of
these changes to shareholders and Have you identified the key information you will need to be able to
other 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 12
and 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
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performance?
8 The financial reporting challenge

11. Finish

12. Start
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