Many companies are now starting to think about the accounting and reporting changes impacting their next annual report and accounts. With relatively few new and amended IFRS Accounting Standards coming into effect, it would be easy to think the upcoming reporting season will bring fewer challenges for finance teams than usual. 

Unfortunately, this is highly unlikely to be the case for most companies. In fact, greater consideration will be necessary across multiple aspects of the financial statements for forthcoming year-ends. Undoubtedly many of the corporate reporting challenges for 2022/23 are linked to applying current accounting standards in the shifting economic and political landscape. Factors to consider include the effects of the conflict in Ukraine, the energy crisis, the long-term impact of COVID-19 and rampant inflation. Uncertainty, volatility and change create a powerful mix when it comes to preparing financial statements that are intended to be useful to users and that faithfully represent the issues they purport to represent.

After many years of low inflation, companies are now entering more challenging times with both rising prices and volatile financial markets. Consequently, there are many potential corporate reporting implications that need to be considered. These include:

Impairment of non-financial assets 
The impact of inflation and market conditions will need to be carefully factored into the assumptions underlying forecast cash flows and fair value estimates. It is important that estimates are based upon assumptions that are both reasonable and supportable at the reporting date and that there is also consistency between the cash flow forecast and the discount rate. During inflationary times, companies typically use higher discount rates. Other factors – such as the impact of the cost-of-living crisis on customer behaviours – may also have a part to play depending on the elasticity of demand for the product or service. 

Impairment of financial assets 
For some financial assets, inflationary pressures coupled with rising interest rates may result in a significant increase in credit risk since initial recognition. Moving from stage 1 to stage 2 will require moving from 12-month to lifetime expected credit losses. Even companies using the simplified approach for trade receivables may find that the probability of default could significantly increase. Clearly, it remains more important than ever that companies manage their trade receivables efficiently.

Borrowings 
With central banks raising interest rates to combat inflation, variable rate borrowings and any new loans are going to have higher interest rates attached. Additionally, it is likely that sensitivity analysis disclosures for the ‘reasonably possible change in interest rates’ will need to be revisited.

More focus on hedging activities is also likely as companies look to alleviate market risk and volatility. Economic hedging and hedge accounting may introduce additional complexity into an entity’s financial reporting. 

Foreign currency
While the sterling exchange rate is decided by supply and demand, foreign exchange markets have been particularly volatile recently and we have again seen central bank intervention. This is likely to impact financial results for many companies and again, a need for more focus on disclosures including sensitivity analysis based upon reasonable possible changes in exchange rates. 

The financial statements of any entity whose functional currency is that of a hyperinflationary economy will need to be restated for changes in the general purchasing power of that currency. A number of countries, including Turkey and Argentina, are currently experiencing hyperinflation. IAS 29 Financial Reporting in Hyperinflationary Economies lists factors that indicate an economy is hyperinflationary. 

Defined benefit pension schemes
Increased yields on high-quality corporate bonds are likely to result in higher discount rates leading to lower pension liabilities. However, other assumptions, including increases in salary levels, may swing the pendulum in the opposite direction. All assumptions are likely to require careful consideration at the reporting date. Furthermore, changes in market expectations may also affect the funding requirements for the plan. 

Leases
As well as careful consideration of the assumptions used for new leases (such as the incremental borrowing rate and lease term), attention will also need to be given to variable lease payments linked to an index or rate. For example, certain lease agreements may contain escalation clauses tied to an index such as CPI, which will result in higher lease liabilities and right-of-use assets, with a corresponding increase in future depreciation and interest charge impacting profit and loss. 

Share-based payments
Current economic conditions are likely to impact on share-based payment valuations, particularly for new awards and cash-settled share-based payments. Assumptions including volatility and the risk-free rate are clearly going to be impacted, but non-market performance targets may also be affected. Should companies look to make changes to their share-based payment arrangements, the impact of modifications will also need to be factored into the charge.

Income taxes
It is likely that deferred tax positions will warrant additional focus. In particular, economic uncertainty is likely to impact company forecasts and thus the recoverability of deferred tax assets. 

The applicable corporate tax rate has been a moving target of late. Consideration of the impact from changes in tax rates – depending on if, and when, any new rates are substantially enacted – may be needed. 

Going concern
Each reporting period, management must evaluate whether there’s substantial doubt about the company’s ability to continue as a going concern. Challenging economic conditions will mean more detailed analysis may be required and for some companies more focus will be needed on going concern disclosures. 
Potential implications are far reaching, and careful attention will be necessary when preparing financial statements for forthcoming year-ends. Beyond the areas outlined, soaring inflation and current economic conditions may also affect topics such as provisions, revenue recognition and investment property valuations. Consequently, companies should factor sufficient time into their reporting timetable to ensure all potential implications are considered.

It is also essential for companies to consider the Financial Reporting Council’s (FRC) Annual Review of Corporate Reporting, which highlights key findings and areas where improvements are needed for the 2022/2023 reporting season. 

For the first time in a number of years, ‘judgments and estimates’ has fallen off the top spot (it is now down to number eight) in the ranking of the 10 topics that arose most frequently in the FRC’s correspondence with companies. The new number one is ‘cash flow statements’. Extra time should be spent making sure that the cash flow statement is checked and simple errors avoided. Not surprisingly, financial instruments are an increased area of focus and now rank number two. In particular, care is needed regarding disclosures of expected credit losses and liquidity. In third spot is ‘income taxes’, where greater care and clarity is required regarding reconciling items in effective tax rate reconciliations and more details of the supporting evidence behind the recognition of deferred tax assets is needed. 

Interestingly, the FRC is also raising more questions on the strategic report and other issues related to the non-financial reporting requirements, such as the section 172(1) statement and stakeholder engagement. It is certainly no longer just about the numbers.

The Annual Review of Corporate Reporting is a comprehensive and helpful document with many examples and recommendations included. As such, it should be considered essential reading for finance teams. Given that the FRC has also issued several Thematic Reviews this year, there is certainly lots to consider. The reporting season looks anything but quiet.