UK retailers urged to clarify "complex supplier arrangements" in their audited accounts

The Financial Reporting Council (FRC) said that it would be paying particular attention to the quality of firms' disclosures about what it called "complex supplier arrangements" going into the 2015 reporting season. It said that it expected to see "high quality disclosure" about these arrangements in upcoming annual and interim reports and accounts.

"Complex supplier arrangements such as fees and discounts may have a significant impact on the reported margins and other results of a company and on investors' views of its performance," said Richard Fleck, chair of the FRC's financial reporting review panel. "Where this is the case, it is essential that investors are able to understand the basis and extent of judgement and estimation involved and the potential uncertainties affecting the accounts and future prospects."

The announcement follows an FRC report on accounting policies, published in July; which the watchdog said showed how important it was that companies avoid "boilerplate" text and provide their investors with more information about how they account for different types of transactions and revenue streams.

Supplier contracts often incorporate complex arrangements including fees, contributions, discounts, multiple offers and volume rebates, which can account for a "significant" component of a firm's operating margins, according to the FRC. Due to the complexity of these arrangements, firms often have to make "significant judgements" when estimating amounts receivable and payable as part of their annual and interim reports, the effects of which were not always obvious to investors and shareholders, it said.

The International Financial Reporting Standards (IFRS), which apply to all EU-publicly listed companies and are intended to ensure consistency in the reporting of economically similar transactions, do not specifically address how these types of commercial arrangements should be reported, the FRC said. However, the standards do require that companies disclose any "material judgements and significant uncertainties" included in their reports as well as specifying what can be included in revenue and how it should be measured.

Although it said that these arrangements were a common feature of supplier contracts across "a number of industry sectors", the FRC said that "boards of retailers in particular" should pay particular attention to the announcement. The FRC is currently considering whether to formally investigate Tesco's recent profit overstatement, which is also the subject of a criminal investigation by the Serious Fraud Office (SFO). The retailer has said that "accelerated recognition of commercial income and delayed accrual of costs" accounted for the overstatement.