Against a backdrop of continuing economic and geopolitical uncertainty, Sally Baker highlights areas of particular relevance for the upcoming reporting season.
As we approach the 2023/24 reporting season, businesses continue to face challenges arising from economic and geopolitical uncertainty. The Bank of England’s base rate, while perhaps now at its peak, has steadily increased from 3.5% to 5.25% in the course of 2023. Inflation has been on a downward trajectory, with the Consumer Price Index falling from 10.1% in January to 3.9% at the time of writing, but remains well above the government’s 2% target and considerably higher than businesses have been used to in recent years. The war in Ukraine continues and conflict between Israel and Hamas has broken out, impacting energy and food markets. In addition, the climate emergency and the importance of green and sustainable business practices is influencing consumer demand, as well as the information needs of investors.
This presents a challenging backdrop for companies as they turn their attention to preparing their Annual Report and Accounts (ARA) for late 2023/early 2024 year ends. This article highlights some areas of heightened relevance for preparers as they approach the reporting season. These topics are explored in more depth in the Corporate Reporting Faculty’s online guide Preparing for the 2023/24 reporting season.
New reporting requirements
A new IFRS Accounting Standard, IFRS 17 Insurance Contracts, is effective for accounting periods beginning on or after 1 January 2023. Introducing new accounting requirements for insurance contracts, the standard is not just for insurers. Entities offering guarantees, breakdown cover and certain warranties should take particular care to understand whether their contracts are in scope. Besides this, IFRS reporters may be impacted by several narrow scope amendments to standards which become effective from 2023. More information on these can be found in the faculty’s 2023 IFRS Accounts factsheet.
For UK GAAP reporters, minor amendments have been made to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland related to Pillar Two tax reforms plus, for annual periods beginning on or after 1 January 2023, changes have been made to prohibit insurers from applying FRS 101 Reduced Disclosure Framework. More detail can be found in our 2023 UK GAAP Accounts factsheet.
Irrespective of being an IFRS or UK GAAP reporter, certain large and listed UK companies will be complying with the Climate-related Financial Disclosure Regulations 2022 for the first time in the 2023/24 reporting season. The faculty’s factsheet Climate-related Financial Disclosure Regulations provides a comprehensive overview of the scope and requirements of the regulations, as well as providing practical tips and signposts to other useful guidance.
Reporting uncertainty
As noted above, entities will be preparing their ARAs against a backdrop of continuing uncertainty. The extent to which businesses are affected will depend on their individual facts and circumstances, such as the pace of reduction in inflation in jurisdictions in which they operate and the impact of supply chain stresses in their sector. The ARA should, as a whole, provide a holistic story to investors and other stakeholders. To achieve this, connectivity and consistency between the ‘front-half’ narrative reporting and the ‘back-half’ financial statements is key.
The ARA should, as a whole, provide a holistic story to investors and other stakeholders
Narrative reporting
The strategic report should provide a meaningful picture of a company’s business model, strategy and objectives and provide context for the financial statements. As part of this, the report should include an explanation of the main trends and factors affecting the entity and the principal risks and uncertainties it faces.
In the current environment, entities should therefore expect to incorporate an explanation of how the uncertainties it is exposed to are changing its business environment and impacting its business model. The impact on the position, performance and prospects of the entity should be explained. Current uncertainties may also need to be drawn out within the Section 172(1) statement where directors explain how they have complied with their duty to promote the success of the company by having regard to various factors such as the likely consequences of decisions in the long-term, the impact of the company’s operations on the environment and the interests of employees and others.
Preparers should bear in mind the requirement for the strategic report to be fair, balanced and understandable.
Financial statements
In the financial statements, the effect of uncertainty and in particular high inflation and rising interest rates on the recognition and measurement of assets and liabilities should be given particular consideration. Assumptions behind valuations will need to be reviewed alongside ‘reasonably possible’ ranges for sensitivity disclosures to ensure they remain appropriate.
Impairment of assets is likely to be a key area of focus for most. Higher interest rates and inflation will impact cash flow projections and discount rates, potentially leading to more instances of impairment. Reduced headroom between an asset’s carrying value and its recoverable amount might also trigger additional disclosure requirements under IAS 36 Impairment of Assets.
Quality disclosures in the area of judgements and estimates will be particularly pertinent in light of current uncertainties. Judgements and estimates has returned to being one of the highest ranked topics in the Financial Reporting Council’s (FRC’s) ‘top 10’ of areas of reporting that resulted in regulatory challenge (the full list can be found in the FRC’s Annual Review of Corporate Reporting 2022/23). Entities are reminded to ensure that disclosures explain the significant judgements involved in applying accounting policies, not to just list the policies requiring judgement. Entities should also provide quantified sensitivities where judgements involve a significant source of estimation uncertainty; disclosures which might be linked to accounting for inflationary features. Sources of estimation uncertainty must be reassessed to ensure they remain relevant to the reporting date and changes to assumptions, particularly where the range of possible outcomes might have widened, should be explained. The faculty will be publishing guidance on judgements and estimates in early 2024.
Quality disclosures in the area of judgements and estimates will be particularly pertinent in light of current uncertainties
The recoverability of assets such as inventory, deferred tax assets and receivables should be under the spotlight this year. Higher inflation and interest rates mean defined benefit pension schemes are more likely to be in surplus, which in turn will necessitate consideration of whether any asset should be recognised.
Summary
While it may feel that the 2023/24 reporting season is in relatively calm waters compared to some recent years, continuing uncertainty ensures that the preparation of ARAs remains challenging. The Corporate Reporting Faculty has a range of online resources to support preparers as they navigate the months ahead, including a webinar recording Preparing for the 2023/24 reporting season, hosted live in December 2023.
Sally Baker, Head of Corporate Reporting Strategy, ICAEW
