As we approach the 2023/24 reporting season, businesses are continuing to face challenges arising from economic and geopolitical disruption. In the UK, the cost-of-living crisis persists. While inflation has fallen in recent months, it nonetheless remains high relative to recent years. Interest rates may have peaked or be approaching their peak, but the consensus view is that they are likely to remain high for some time. There is heightened uncertainty due to the outbreak of war between Israel and Hamas in Gaza, as well as the ongoing war in Ukraine. As a result, the uncertainty in global energy markets remains.

Additionally, the climate emergency continues to impact businesses around the world, with many countries aiming for net zero carbon emissions by the middle of the century. Investors continue to increase demands for businesses to be cleaner, greener and more sustainable. The strategic, operational and reporting impact of these demands need to be carefully considered.

The resulting corporate reporting considerations are likely to be far reaching. Below we identify areas which may require particular attention in the upcoming reporting season to ensure that the current environment is taken into account. It is not a comprehensive list and the issues that entities face will depend on their individual facts and circumstances.

IFRS Accounting Standards

IFRS 17 Insurance Contracts is effective for accounting periods beginning on or after 1 January 2023. It introduces comprehensive accounting requirements for insurance contracts and is therefore relevant not just to insurers, but to all entities that issue insurance contracts. Entities offering guarantees, breakdown cover and certain warranties should take particular care as they may find that they have contracts that are within scope of the standard.

More information on IFRS 17, targeted at non-insurers, is available in the Corporate Reporting Faculty's factsheet and webinar. Insurers and other entities may also wish to refer to the FRC’s recent thematic review on IFRS 17 Insurance Contracts – Interim Disclosures in the First Year of Application.

Several narrow scope amendments to IFRS Accounting Standards are also effective for accounting periods beginning on or after 1 January 2023.

Further information on these amendments, together with details of other amendments issued by the IASB with a mandatory application date of 2024 and beyond, can be found in the faculty's 2023 IFRS Accounts factsheet and our IFRS Update webinar.

The faculty's standards tracker can be used to quickly identify which requirements are applicable to a particular accounting period.

UK GAAP

While there are no major new or amended UK accounting standards for accounting periods beginning in 2023, several minor amendments come into effect.

Changes have been made to FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' based on the amendments to IAS 12 'Income Taxes' related to Pillar Two tax reforms highlighted above. Related disclosure exemptions have also been added to FRS 101 'Reduced Disclosure Framework'. It should, however, be noted that Pillar Two tax reforms are only relevant to multinational enterprises with revenue in excess of €750 million meaning that many UK GAAP adopters will not be affected.

The Application Guidance to FRS 100 'Application of Financial Reporting Requirements' was updated in November 2022 to reflect changes to company law and decisions on GAAP equivalence following the UK's departure from the European Union. These changes became effective immediately. See the faculty's 2022 UK GAAP Accounts factsheet for more details.

The amendments to IFRS Accounting Standards discussed above will be relevant to FRS 101 preparers, who apply the requirements of UK-endorsed IFRS within a reduced disclosure framework. Changes prohibiting insurers from applying FRS 101 are also effective for annual periods beginning on or after 1 January 2023. See the faculty's FRS 101 hub page for further information.

Major changes to UK GAAP are in the pipeline with the FRC's periodic review of FRS 102 and other standards currently ongoing. The final amendments are currently expected to be issued in the first half of 2024, with an effective date not before 1 January 2026. The periodic review hub contains more detail on the proposed changes.

Further information on these developments be found in the faculty's 2023 UK GAAP Accounts factsheet and our UK GAAP Update webinar.

UK regulation: climate-related financial disclosures

Certain large and listed UK entities will be complying with the 'Climate-related Financial Disclosure Regulations 2022' for the first time in the 2023/24 reporting season.

The regulations apply to:

• Public interest entities with more than 500 employees;
• AIM listed companies with more than 500 employees;
• Companies which are not included in the categories above but with more than 500 employees and a turnover of more than £500m;
• Traded or banking LLPs with more than 500 employees; and
• Large LLPs which are not traded or banking LLPs, with more than 500 employees and a turnover of more than £500m.

The regulations apply for annual periods beginning on or after 6 April 2022 and apply to entities that report under IFRS and to entities that report under UK GAAP.

An overview of these regulations, as well as practical tips, can be found in the faculty's factsheet, Climate-related Financial Disclosure Regulations.

There are some areas of financial reporting that are of heightened relevance in light of the current economic and geopolitical uncertainty.

Reference should be made to the FRC's Annual Review of Corporate Reporting 2022/23 and the faculty's guide on How high inflation impacts accounting for more information on some of the topics discussed below.

Judgements and estimates

Providing high quality disclosures in this area remains particularly important in the light of ongoing economic and geopolitical uncertainty. Disclosures should explain the significant judgements involved in applying accounting policies; it is not sufficient to just list the matters requiring judgement.

Given the current economic environment, significant judgements and sources of estimation uncertainty, and the related disclosures, should be reassessed to ensure that they remain relevant at the reporting date. Particular attention should be paid to judgements and estimates relating to the going concern assessment and accounting for inflationary features, including the use of discount rates.

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 with a significant risk of resulting in a material misstatement within one year should be clearly distinguished from other estimates.

The FRC's 2017 thematic review on Judgements and Estimates and the follow up report published in 2022 provide further guidance on this topic, including examples of better disclosure. Its recent thematic review on IFRS 13 Fair Value Measurement considers, among other things, how estimation uncertainty and management judgement affect fair value measurement.

Impairment of non-financial assets

Entities should consider how the current economic environment is impacting customer behaviour and whether the net realisable value of affected inventory is less than its carrying value. Where this is the case, inventory should be written down to its net realisable value.

IAS 36 'Impairment of Assets' and the equivalent section of FRS 102 both provide a list of factors that could indicate that an impairment has taken place. The ongoing uncertainties discussed above could trigger an impairment test in some instances.

For example, both standards make it clear that an increase in market interest rates in the period is a potential indicator of impairment as it could lead to a material decline in an asset's recoverable amount (ie, the higher of fair value less costs of disposal and value in use). In addition, an entity's inability to pass inflationary increases onto customers, or a decrease in forecast sales volumes, may also result in a decline in an asset's recoverable amount.

The war in Ukraine, the conflict in the Middle East or the climate emergency could also lead entities to conclude that there is a significant adverse change 'in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated'.

Value in use calculations will require careful attention to ensure that assumptions and inputs used to estimate future cash flows reflect current circumstances and are both supportable and consistent with data used in other areas of reporting. For example, assumptions used for impairment testing should be consistent with those used when assessing going concern.

Preparers must also ensure that the discount rates used when undertaking value in use calculations are consistent with the assumptions used in their cash flow projections, particularly in respect of the effect of inflation. Nominal cash flows, which include the effect of inflation, should be discounted at a nominal rate and real cash flows, which exclude the effect of inflation, should be discounted at a real rate. See the FRC's recent thematic review on Discount rates for more information.

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

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. The FRC's 2019 thematic review on Impairment of Non-Financial Assets also continues to provide helpful insights and examples of good reporting practice.

Recoverability of financial assets

Economic uncertainty also increases the risk that trade receivables and other financial assets are not recoverable.

Entities applying IFRS 9 'Financial Instruments' and making expected credit loss assessments may find that high inflation and rising interest rates have created additional credit risk as borrowers struggle to pay their debts as they fall due. Care should be taken as historical default rates may need to be adjusted to reflect current and forecast economic conditions. Assumptions applied when measuring expected credit losses – and any concentrations of risk – should be disclosed where material.

Entities applying IFRS 9's simplified model to trade receivables will also need to consider carefully whether the probability of default has increased if customers are struggling to pay their debts as they fall due. Determining forward-looking information to incorporate into this assessment is likely to be more challenging in the current economic climate.

Macroeconomic conditions may also provide evidence of impairment for FRS 102 preparers who must assess whether there is objective evidence of impairment of any financial assets held at cost or amortised cost at the end of each reporting period.

The faculty's factsheets on IFRS 9 Financial Instruments - Overview and FRS 102 Financial Instruments - Overview provide a more in-depth look at the relevant requirements.

Recoverability of deferred tax assets

Deferred tax assets are generally recognised for deductible temporary differences (referred to as timing differences under UK GAAP), unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which they can be utilised. The carrying amount of deferred tax assets should be reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can be utilised.

The effect of the current economic environment should be considered when making forward-looking assessments to support the recognition of deferred tax assets. Careful attention should be paid to any uncertainty over future profitability which may mean deferred tax assets are not recoverable. Where material deferred tax assets are recognised by loss-making entities, the nature of the evidence supporting their recognition should be disclosed.

Further guidance can be found in the FRC's 2022 thematic review on Deferred Tax Assets. While this review focussed specifically on the basis of recognition of deferred tax assets and related disclosure requirements in the light of the effect of the COVID-19 pandemic on entities' profitability, many of the issues it raised remain pertinent.

Defined benefit pension schemes

Defined benefit pension schemes are particularly exposed to the effects of high inflation and rising interest rates. Reporting entities should carefully monitor the appropriateness of the actuarial assumptions used to estimate the scheme's assets and liabilities.

After many years of defined benefit pension schemes being in deficit, some entities are finding that such schemes are now in surplus due to pension obligations falling significantly in present value terms as a result of increased discount rates.

Entities will need to consider whether any asset in respect of a surplus should be recognised.

IAS 19 'Employee Benefits' and the equivalent section of FRS 102 both require the amount recognised to be limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. This so-called 'asset ceiling' may limit what can be recognised in the statement of financial position. Entities should clearly explain their basis for the recognition of an asset and any judgement required.

Financial Instruments

Preparers should ensure that adequate disclosure is made about material risks arising from financial instruments together with details of how those risks are managed. In the current environment, entities should particularly focus on ensuring that they adequately disclose details of any risks driven by inflation or rising interest rates, including any hedging arrangements put in place to manage those risks.

The effect of any refinancing and changes to covenant arrangements should also be adequately explained. Information about banking covenants should be provided unless the likelihood of any breach is considered remote.

Climate-related matters

In July 2023, the IFRS Foundation published an updated version of its educational material on the effects of climate-related matters on the financial statements. The updated version was issued in light of recent developments including the publication of the first two IFRS Sustainability Disclosure Standards.

While IFRS Accounting Standards do not refer explicitly to climate-related matters, they require entities to consider such matters in financial statements if their effects are considered material. The updated educational material sets out examples of situations in which entities might need to consider the effects of climate-related matters in their financial statements.

The FRC's staff factsheet sets out similar guidance in the context of UK GAAP.

Hyperinflation

IAS 29 'Financial Reporting in Hyperinflationary Economies' and the equivalent section of FRS 102 both provide guidance on determining whether an economy is hyperinflationary and set out what an entity should do if it reports in the currency of a hyperinflationary economy. Ghana, Haiti and Sierra Leone have become hyperinflationary during 2023, joining a list of hyperinflationary countries that already includes the likes of Argentina, Turkey and Venezuela. Entities that are within scope of the guidance must apply the relevant requirements as appropriate.

Post-balance sheet events

With economic and geopolitical events continuing to move at speed throughout 2023, preparers must keep in mind the fundamental principle that the financial statements should reflect conditions that existed at the balance sheet date. In an evolving situation, it can be challenging to assess whether or not information that comes to light after the balance sheet date provides evidence of conditions that existed at the balance sheet date.

The faculty has published guidance on distinguishing between adjusting and non-adjusting post-balance sheet events under both IFRS and UK GAAP.

Cash flow statements

The cash flow statement provides key insights about an entity's liquidity and solvency and is therefore subject to increased scrutiny from stakeholders during times of uncertainty.

The FRC continues to find entities making routine errors when preparing cash flow statements and it remains a key area of regulatory focus.

Cash flow statements tend to be prepared towards the end of the financial reporting process and preparers are reminded to allow sufficient time for thorough review. A robust pre-issuance review should be performed to ensure that the cash flow statement is consistent with other information in the financial statements. Care should be taken to ensure that routine errors are avoided and that the relevant requirements relating to classification, netting and the reporting of non-cash movements are met.

The FRC's 2020 thematic review on Cash Flow Statements and Liquidity provides further guidance on how to avoid common errors that entities make when preparing cash flow statements.

Going concern

In uncertain and rapidly changing environments, performing going concern assessments becomes more challenging. Forecasts prepared for the purposes of the assessment need to reflect the current economic outlook and it therefore continues to be important to review and update assumptions – particularly those relating to inflation and interest rates – regularly up until the financial statements are authorised for issue.

An entity severely impacted by the current economic and geopolitical environment will need to carefully consider its long-term viability and going concern status. Where material uncertainties exist that cast significant doubt over the entity's ability to continue as a going concern, these uncertainties must be disclosed. Significant judgements applied by management in this process may need to be disclosed in accordance with the requirements of IAS 1 and FRS 102 irrespective of the conclusion reached.

Guides on how to conduct a going concern review and the implications for the accounts, and particularly the necessary disclosures, are available for those reporting under IFRS, FRS 102 and FRS 105.

Investors and other stakeholders seek meaningful and transparent disclosure on current important topics in the 'front half' of the annual report. Narrative reporting requirements should not be prepared in isolation. To communicate a holistic story to investors and other users, there should be connectivity and consistency between the 'front-half' of the annual report and the financial statements.

Strategic report

The directors of all companies – with limited exceptions – 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 a clear articulation of how current uncertainties such as high inflation, high interest rates and supply chain issues have specifically impacted 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.

The contents of the s172(1) statement – which explains how directors have undertaken their duty to promote the success of the company for the benefit of its members as a whole – will also be affected by the current economic environment.

The faculty's factsheet, Strategic Report and Directors' Report, provides more guidance on preparing strategic reports.

Climate-related reporting

As discussed above, the 'Climate-related Financial Disclosure Regulations 2022' are effective for annual periods beginning on or after 6 April 2022. These regulations are based on the Task Force on Climate-related Financial Disclosure (TCFD) recommendations and require in-scope entities (certain publicly quoted companies, large private companies and large LLPs) to disclose information about their governance, risk management, strategy, and metrics and targets in relation to climate-related matters.

An overview of the regulations is provided in the faculty's factsheet Climate-related Financial Disclosure Regulations.

The FRC's thematic review of Climate-related Metrics and Targets assesses the quality of these disclosures and identifies examples of better reporting practice and opportunities for improvement. Entities are encouraged to improve the linkage between climate-related metrics and targets and the principal climate-related risks and opportunities identified. More entity-specific metrics relating to net zero transition plans are also encouraged.

An entity must also perform a climate scenario analysis, whereby it explores and develops an understanding of how resilient the business model and strategy is to the risks of climate change over time. For those yet to perform a climate scenario analysis, taking time to research and understand existing guidance and practice is key.

Further resources

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 Narrative Reporting Update webinar.

As explored above, and as outlined in its Annual Review of Corporate Reporting 2022/23, the FRC expects entities to carefully consider how current economic conditions may impact on financial and narrative reporting in 2023/24.

By way of summary, it particularly recommends that entities should:

• explain the risks and changes in the business environment and their impact on the entity's position, performance and prospects;
• consider the effect of uncertainty and high inflation on the recognition and measurement of assets and liabilities, and related disclosures; and
• ensure assumptions are consistent, to the extent required by the standards, and explain any differences in approach to users.

Bringing together some of the themes discussed above, the FRC's key disclosure expectations for 2023/24 are that entities should:

• ensure disclosures about uncertainty are sufficient to meet the relevant requirements and for users to understand the positions taken in the financial statements;
• give a clear description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, cross-referenced to relevant detail in the reports and accounts;
• provide transparent disclosure of the nature and extent of material risks arising from financial instruments; and
• provide a clear statement of consistency with TCFD.

The FRC also expects entities to perform a sufficiently critical review of the annual report and accounts, including taking a step back to consider whether the report as a whole is clear, concise and understandable, omits immaterial information and whether additional information, beyond the requirements of specific standards, is required to understand particular transactions, events or circumstances.

The FRC has published a report on What Makes a Good Annual Report and Accounts. This publication, which complements the FRC's thematic reviews, is designed to support preparers, audit committee chairs and company secretaries in preparing high quality annual reports and accounts.

The Corporate Reporting Faculty provides a range of online resources to help members stay up-to-date and meet their continuing professional development needs. Content is accessible to all ICAEW members as part of their general subscription by logging in to icaew.com. By registering to join the faculty, members will receive a monthly bulletin highlighting the latest resources and current corporate reporting issues, plus more. Corporate Reporting Faculty membership is open to all (charges apply for non-ICAEW members).

ICAEW members, affiliates or members of staff in an eligible firm with member firm access may also discuss their specific situation with the Technical Advisory Service (TAS). TAS can be contacted via telephone or webchat, for more information visit Technical Advisory Services.