With low growth and ongoing geopolitical uncertainty, impairments remain an area of heightened focus. Despite the importance of a robust impairment process, it is the area on which the FRC raised the most substantive enquiries for the second year in a row.

Entities should assess at each reporting date whether there is any indication that an asset or cash-generating unit is impaired. IAS 36 Impairment of Assets and FRS 102 Section 27 Impairment of Assets both list sources of information that an entity must consider when assessing if there is any indication that an asset may be impaired. If there are significant risks or uncertainties identified in other areas of an entity’s reporting, the entity should consider whether they might be an indicator of impairment.

While there are some signs of improvement, the economic environment is fragile. Entities should be mindful of factors that might trigger the need for impairment tests, including declining growth forecasts, changing consumer habits and unfavourable exchange rates. Similarly, climate-related risks identified in an entity’s sustainability report and/or principal risks and uncertainties disclosures may be indicators of impairment.

Entities must assess at each reporting date whether there is any indication that the recoverable amount of an asset has increased, such that a previously recognised impairment loss may no longer exist or has decreased to the point that it should be reversed. This is not applicable to goodwill impairment which cannot be reversed. Decreases in interest rates, which have recently started to be seen, may indicate that impairment losses have reversed. Other indicators include changes in selling prices or costs arising from movements in exchange rates, and improvements in economic outlook.

When performing an impairment assessment, value in use (VIU) calculations require careful consideration. Entities should ensure inputs and assumptions used to estimate future cash inflows and outflows are not only reasonable and supportable, but also consistent with information presented elsewhere in the annual report and beyond. This includes the front half of the annual report, including sustainability reports, going concern reporting and viability statements, if applicable. The FRC frequently queries inconsistency between the financial statements and other information disclosed; entities should ensure they tell a consistent and coherent story throughout the annual report.

Future cash flow projections in a VIU calculation should be based on management's most recently approved financial budgets or forecasts and should not exceed a period of five years, unless a longer period can be justified. Explanation must also be disclosed. VIU calculations must be based on the asset in its current condition, and not include cash inflows or outflows relating to future restructuring to which an entity is not yet committed, or improving or enhancing the asset’s performance.

Additional disclosures are required when the headroom between an asset’s carrying amount and its recoverable amount is low. In such circumstances, a small change in a key assumption could result in an impairment. These disclosures remain particularly relevant in the current environment as ongoing economic uncertainty and low growth means there is a wide range of possible outcomes for future cashflows or discount rates.

The FRC’s Annual Review particularly highlighted the need for parent companies to assess whether there is an indication of impairment relating to their investments in subsidiaries. A relevant indicator is the net assets of the parent company significantly exceeding the market capitalisation of the group. Parent companies should also ensure they consider the value of loans receivable from group companies in their impairment testing.

Further guidance on accounting for impairments is available in the faculty’s factsheets on Applying IAS 36 Impairment of Assets and FRS 102: Impairment of Assets. While published in 2019, the FRC’s thematic review on impairment of non-financial assets continues to remain relevant.

The statement of cash flows provides key insights about an entity’s liquidity and solvency and is therefore subject to increased scrutiny from stakeholders during times of uncertainty and low economic growth.

At number two in the FRC’s “top ten”, the frequency of questions raised in relation to cash flow statements remains high. It is also one of the most common reasons for companies restating their prior year financial statements.

Cash flow statements tend to be prepared towards the end of the financial reporting process and preparers are reminded to allow sufficient time for a thorough and robust review. Preparers should ensure the cash flow statement is consistent with other information in the financial statements. Key points to look for when reviewing include ensuring proper classification of cash flows, avoiding the netting of inflows and outflows, and ensuring that non-cash transactions are appropriately excluded from the cash flow statement or disclosed separately if material.

The faculty’s guide Statement of cash flows: common pitfalls and tips provides further guidance on how to avoid common errors that entities make when preparing cash flow statements. Preparers may also find the FRC’s 2020 thematic review on cash flow and liquidity disclosures useful.

Given the low economic growth in many economies, combined with ongoing geopolitical uncertainty, high quality disclosures of significant judgements and estimates are particularly important. Disclosures should explain the significant judgements involved in applying accounting policies; it is not sufficient to just list the matters requiring judgement. These disclosures should explain the uncertainties involved and be free of specialist terminology that might confuse users.

Care should also be taken to ensure that the assumptions used and the ‘reasonably possible’ ranges for sensitivity disclosures remain relevant at the reporting date. Any changes to assumptions should be explained, particularly if the range of possible outcomes has widened due to increased uncertainty. Sources of estimation uncertainty that have a significant risk of resulting in a material adjustment within one year should be clearly distinguished from other estimates.

The FRC’s 2022 thematic review of judgements and estimates provides further guidance on best practice in this area, along with the faculty’s guide on judgements and estimates.

Preparers should ensure consistent, and transparent disclosures in income tax reporting, with particular attention given to deferred tax assets. Careful consideration should be given to the entity’s deferred tax positions at the reporting date as uncertainty over future profitability may mean deferred tax assets are no longer recoverable. Loss-making entities that recognise material deferred tax assets should clearly explain the nature of evidence to support their recognition. Preparers should ensure they are providing a reconciliation of material deferred tax balances, recognising deferred tax liabilities resulting from business combinations, and carefully considering the appropriate requirements for accounting for government schemes such as Research and Development Expenditure Credits. In addition, preparers should ensure they carefully address the new requirements relating to Pillar Two income tax disclosures when applicable.

More guidance on deferred tax under FRS 102 can be found in the faculty’s factsheet.

The FRC regularly identifies errors in the use of offsetting, and its recent thematic review on offsetting in the financial statements sets out some of the most commonly found issues. While not a topic on its own in the Annual Review, several of the areas in the FRC’s “top ten” issues include matters discussed in the thematic review of offsetting.

Entities should familiarise themselves with the requirements around offsetting, as inappropriate application of the offsetting requirements may obscure the full extent of the risks relating to an entity's income and expense, assets and liabilities, or cash flows. Preparers should always present cash flows gross, except for limited cases where netting is specifically required or permitted. For example, the cash flow on a business acquisition is specifically required to be offset with the cash acquired.

Entities should review their accounting policies to ensure they are clear and aligned to offsetting requirements. Material accounting policy information should be disclosed, along with any significant judgements. In particular, high-quality disclosures are important where financial instruments have been offset or are subject to a master netting arrangement or similar agreement.

Except for those that fall within the small companies exemption, all companies are required to prepare a strategic report for each financial year. The strategic report should provide a fair, balanced and comprehensive review of the company’s position, performance and prospects, including a description of the principal risks and uncertainties facing the company.

The strategic report should include an unbiased description of both the positive and negative aspects of performance, covering all material parts of the business, and explain material changes to balances in the financial statements including the balance sheet and cash flow statement. Preparers should focus on providing clear articulation of the effects of economic uncertainties on the business. Investors will also want to understand the extent to which management’s actions may mitigate these risks. Where relevant, the description of the principal risks and uncertainties facing the entity should include linkage to and discussion of the entity’s strategy and/or business model.

Preparers should pay careful attention to the government’s announced plans to uplift company size thresholds by approximately 50%; which will come into effect from 6 April 2025. Some entities may find themselves moving down into a lower size category as a result, which could result in simplified requirements when preparing a strategic report. See the company size thresholds section below for further detail.

More guidance on preparing strategic reports can be found in this faculty guide and also in the factsheet, Strategic Report and Directors’ Report. The FRC has also developed and published non-mandatory guidance on the application of strategic report requirements, Guidance on the Strategic Report (June 2022).

In its Annual Review, the FRC noted raising queries on the lawfulness of dividends. The Companies Act 2006 (CA 2006) requires that a dividend only be paid out of distributable profits; a company cannot lawfully make a distribution out of capital. Entities should ensure they have sufficient distributable reserves and that all statutory requirements for the payment of dividends have been met. This should be supported by the last annual accounts unless these do not justify the distribution, in which case initial or interim accounts may be required. Public companies must file their interim accounts with Companies House before the dividend is paid.

Issued by ICAEW and ICAS, Tech 02/17BL Guidance on realised and distributable profits under the Companies Act 2006 identifies, interprets and applies the principles relating to the determination of realised profits and losses for the purposes of making distributions under the CA 2006.

Certain UK listed companies are required by the Financial Conduct Authority (FCA) Listing Rules (the listing rules) to, on a comply or explain basis, disclose information consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). From 6 April 2022, many of these companies will also have been subject to the Climate-related Financial Disclosure Regulations 2022 (CFD regulations), which apply to public interest entities and large private companies. Further details on the scope of the CFD regulations, along with an overview of the regulations, can be found in the faculty’s factsheet on Climate-related Financial Disclosure Regulations.

While the requirements of the listing rules and the CFD regulations have significant similarities, as both are based on TCFD recommendations, preparers should take care to ensure they have considered the differences between the two. One key difference is that the listing rules are applied on a ‘comply or explain’ basis whereas the CFD regulations apply on a mandatory basis. Additionally, entities in scope of the listing rules are permitted to make TCFD disclosures outside of the annual report. Under the CFD regulations, disclosures must be included within the annual report.

Irrespective of whether reporting under the listing rules or the CFD regulations, preparers should ensure they make concise, company-specific disclosures with a focus on providing material information.

The CFD regulations will continue to be an area of focus for the FRC in the coming reporting season, with a thematic review expected to be published in early 2025.

Two new IFRS Accounting Standards have been published in 2024, IFRS 18 Presentation and Disclosure in Financial Statements and IFRS 19 Subsidiaries without Public Accountability: Disclosures, both effective for annual periods beginning on or after 1 January 2027 (subject to endorsement for use in the UK or EU).

IFRS 18 will affect all entities reporting under IFRS Accounting Standards to varying levels, so preparers should consider the impact early and plan for implementation. Once effective, IFRS 18 will replace IAS 1 Presentation of Financial Statements. Early application is permitted, subject to local endorsement. IFRS 18 will introduce new requirements for the statement of profit or loss for all entities applying IFRS Accounting Standards, aiming to meet investor demand for better, more comparable presentation of information about entities’ financial performance. At the date of publication of this guide, IFRS 18 is not endorsed for use in either the UK or the EU. The current expectation is that the UK endorsement process will complete in late 2025. The faculty hosted a webinar introducing the requirements of IFRS 18 in more detail; a recording is available.

IFRS 19 permits eligible subsidiaries to apply IFRS Accounting Standards with reduced disclosures. It is a voluntary standard that aims to simplify the group reporting process for eligible subsidiaries. Early adoption is permitted (although special requirements apply if IFRS 19 is adopted prior to IFRS 18). IFRS 19 is also not yet endorsed for use in either the UK or the EU. Any UK-endorsement of IFRS 19 will need to consider the interaction between the new standard and FRS 101, which already sets out a reduced disclosure framework for qualifying UK entities based on IFRS Accounting Standards.

Following the completion of its second periodic review of financial reporting standards, the FRC has issued amendments to FRS 102 and other FRSs (the Periodic Review 2024 amendments), most of which are effective for accounting periods beginning on or after 1 January 2026. The amendments introduce substantial changes to FRS 102, the most significant of which apply to leases and revenue recognition to align with the principles of equivalent IFRS Accounting Standards. Entities should familiarise themselves with the amendments and consider early how they will be implemented.

ICAEW’s periodic review hub contains more detail on the changes. Further information on the amendments can be found in the faculty’s 2024 UK GAAP Accounts factsheet and our UK GAAP update webinar. The faculty also held an event outlining the key changes and considerations for implementation, a recording of which is available.

In addition, the FRC has published three new factsheets and updated five others, to reflect the amendments and provide guidance to preparers on their implementation.

The UK Government has published legislation to uplift the CA 2006 company size thresholds by approximately 50%. The increased thresholds will be effective from 6 April 2025. The measures, which will also see the removal of several obsolete or overlapping requirements relating to the contents of the directors’ report, are designed to ease the UK’s regulatory burden, particularly with regard to non-financial reporting. The uplift in thresholds means some companies will move to a smaller size category, enabling them to take advantage of the accompanying reduction in reporting requirements. In addition to the previously published impact assessment, the government has published an explanatory memorandum setting out the detail of these changes.

The government’s announcement in October 2024 also confirmed that a consultation will be launched in 2025 aimed at further simplifying and modernising the UK’s non-financial reporting framework.

The faculty’s guidance on small and micro-entity reporting gives further detail on the simplifications available to small and micro entities. See the UK regulations for company accounts hub for further resources on company sizes, filing requirements, the content of the strategic report and directors’ report, and climate-related reporting.

The long-awaited endorsement decision of the UK government regarding the ISSB’s IFRS Sustainability Disclosure Standards is expected in early 2025. The Department for Business and Trade’s May 2024 update set out the Government’s aims to make the UK-endorsed ISSB standards available in Q1 2025. These will be known as UK Sustainability Reporting Standards (UK SRS). Subject to endorsement and a consultation process, the FCA will be able to introduce requirements for UK-listed companies to apply UK SRSs in reporting sustainability-related information. For entities outside the FCA’s regulatory perimeter, the Government will determine the scope and timing of mandatory disclosure requirements against UK SRS. It is expected that the UK SRS will be effective no earlier than 1 January 2026.

Both the ISSB standards and the UK’s CFD Regulations have been developed based on TCFD recommendations. Entities already in scope of the listing rules or UK CFD Regulations will therefore be well-placed to apply UK SRS in the future, particularly any requirements based on IFRS S2 Climate-related Disclosures.

While no decisions have been made on the future of the UK’s existing Climate-related Financial Disclosure Regulations, implementation decisions of UK SRS will seek to avoid duplication of reporting obligations.

More information on the topics discussed above can be accessed from the faculty’s Non-financial reporting hub. Recent developments in narrative reporting developments are covered in the faculty’s Narrative Reporting Update webinar.

The July 2024 King's Speech put Audit and Corporate Governance reform firmly back on the agenda, with the publication of a draft Audit Reform and Corporate Governance Bill expected in Spring 2025. While its content is not yet confirmed, it is expected that the draft Bill will look to expand the Public Interest Entity (PIE) definition, increase director accountability (but not changing their responsibilities) and introduce the creation of Auditing, Reporting and Governance Authority (ARGA) to replace the FRC, among other measures.