Advice to boards on market disruption
3 Nov 08
The Financial Reporting Review Panel (FRRP) has issued advice for company directors on the likely impact of the current disruption in ?nancial markets in its latest activity report on its review of accounts in the year to 31 March 2008
The FRRP advises directors to pay particular attention to the following areas where market conditions may require changes in accounting or in the nature and extent of disclosures:
- Sources of uncertainty affecting management’s estimates which carry a risk of causing a material adjustment to the carrying value of assets and liabilities;
- Revenue recognition criteria where unreliability of measurement may lead to deferral of income; and
- Relationships with special purpose entities which may have been amended during the year resulting in changes in the shape of consolidation.
The report includes early findings from the panel’s reviews of directors’ reports, including business reviews, following the extension to the panel’s remit during the year.
The FRRP says: “Given the speed and pervasiveness of the financial crisis and other market changes, including rising prices and pressures on supply, directors may need to contemplate risks and uncertainties previously thought to be too remote to have warranted serious consideration.”.
Bill Knight, chairman of the panel said: “UK company directors generally work hard to comply with accounting standards. This report aims to help them in the next reporting season by highlighting areas where directors’ judgment is vital and where the assumptions on which it must be based are sensitive to change. The panel is less likely to question directors whose business model is clear, who avoid boiler-plate descriptions and who are open and direct about the specific risks and uncertainties that may challenge their business in the foreseeable future”.