Key points

The FRC issued its thematic review on judgements and estimates on 26 July 2022 as a follow-up to their 2017 report, due to the frequency with which issues on this topic have continued to be identified. Their review identified areas which could be improved and also included a summary of overall expectations on judgement and estimate disclosures.
What is the issue?
Disclosures about significant judgements and sources of estimation uncertainty provide important information about reports and accounts. These disclosures allow readers to assess how the accounting policies applied have been affected by the judgements taken by management, and facilitate a better understanding of the assumptions made about the future and the extent to which changes to those assumptions may affect a company’s future position.
The FRC issued their first thematic review on the topic of judgement and estimates disclosures in November 2017. This follow up report was produced due to the frequency with which issues on the topic have continued to be identified. For the purpose of this thematic, the FRC focussed on three relevant topics and also provided a summary of the overall expectations on judgement and estimate disclosures. The three areas were:
  • The use of sensitivity and range-of-outcome disclosures,
  • Mineral reserve estimates; and
  • Judgements and estimates relating to climate change.
Key observations
Whilst the FRC identified many good examples of detailed, granular disclosures, their report identified four areas where they considered there to be room for further improvement, being:
  • Companies should explicitly state whether estimates have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
  • Sensitivity disclosures should be provided more frequently and in the way that is most meaningful to readers.
  • Sources of estimation uncertainty may vary from year to year. Companies should reassess whether disclosures made in a previous year need to be revised
  • Where additional estimate disclosures are provided, such as those carrying lower risk, having smaller impact or crystalising over a longer timeframe, they should be clearly distinguished from those with a significant short-term effect.
Specifically in relation to climate change, they noted that better disclosures clearly articulated the timing of any impact, providing specific clarification that climate related change either had a risk of a material adjustment to carrying values of assets and liabilities in the next year or did not, but could have medium or longer-term impacts.
The FRC reminded companies that estimates disclosures should:
  • provide sufficient granularity in the descriptions of assumptions and/or uncertainties to enable users to understand management’s most difficult, subjective or complex judgements,
  • provide meaningful sensitivities and/or ranges of reasonably possible outcomes for significant estimates; these should not be limited to those required by other IFRS standards; and,
  • quantify the assumptions underlying significant estimates when investors need this information to fully understand their effect; for example, commodity prices.
What is the impact and for whom?
The findings are applicable to all companies applying IAS 1.
When does it apply?
The FRC expects entities to consider the guidance immediately and incorporate the guidance in their reporting and disclosures where necessary going forward.
Where do I get more details?
Refer to this link for the FRC’s report.
Please reach out to your usual PwC contact if you have any queries with regards to the guidance contained within this In brief.
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