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Publication date: 29 Feb 2024
uk March 2024 Year end reminders
Geopolitical risks
Geopolitical conflict has continued to create significant shifts in the global risk landscape, and is having a pervasive economic impact. Investors will want to understand if and how this is affecting a company’s operations, risk exposure and outlook. Entities must carefully consider the impact on its financial statements and disclosures. Items to look out for include:
- Impacts of restrictions and sanctions on trade, investing, and financing (including restricted access to cash accounts and foreign currency reserves.
- Impairment, onerous contracts and contingencies.
- Breaches of supply contracts or financial covenants.
- Foreign exchange exposure and translation of foreign currency transactions.
- Assets or disposal groups held for sale.
- Level of influence or power over existing associates and subsidiaries located in areas of conflict.
- Post balance sheet events and related disclosure for non-adjusting material events.
UK In depth INT2022-05 provides accounting guidance in the context of the conflict between Russia and Ukraine, and includes considerations relevant to other geopolitical conflicts.
Disclosures relating to inflation and interest rates
Inflation and interest rates can be a significant source of estimation uncertainty, and can have a material impact on the carrying amount of assets and liabilities. Whilst for a number of jurisdictions recent spikes in inflation and interest rates may now be stabilising or decreasing, entities may still be exposed to additional risks in this regard, and may continue to need to update judgements and estimates, as well as related disclosures. Entities may also need to update sensitivity analysis to reflect a widening reasonable possible range for interest rate changes and still need to consider the impact inflation and rates have had on their 31 March 2024 financial statements
UK In depth INT2022-12 provides guidance on accounting during periods of high inflation and interest rates.
Climate change and connectivity between sustainability reporting and financial reporting
Climate-related risks can have an impact on an entity’s operations and financial performance. IFRS Accounting Standards do not explicitly address climate-related risks, but the principles that underlie various judgements and estimates made in preparing the financial statements will often incorporate climate-related risk factors. Examples of specific areas to consider as climate-related issues become more significant include any financial impacts of net zero commitments, ‘green loans’, exchange traded climate-related credit schemes, and participation in the voluntary carbon market. In many cases, an entity’s exposure to climate-related risks might not have changed significantly since its last annual reporting period. However, climate-related risks are an important topic for many investors, and so entities should ensure that all material information affecting the financial statements in this respect is provided.
Entities should also ensure consistency between financial and non-financial reporting on key climate-related assumptions, if such consistency is necessary for compliance with IFRS. For example, if an entity publicly discusses a best estimate about the impact that an international climate agreement has on the entity in a sustainability report, and an IFRS Accounting Standard requires a best estimate approach to be used in measurement, the entity would need to consider consistency between the estimates used for financial reporting and those disclosed in the sustainability reporting.
If there are statements in the sustainability report that haven't been reflected in financial reporting (for example, because the entity is relying on a market participant's assumptions which differ) the entity should consider the need for additional commentary on why such items have been reflected on a different basis in financial reporting.
UK In brief INT2020-14 and UK In depth INT2021-11 provide guidance on reflecting climate matters in the financial statements. UK In depth INT2023-02 provides guidance on voluntary carbon markets.
The FRC issued a report regarding TCFD disclosures and climate in the financial statements, see FRC thematic review examines quality of climate-related metrics and targets disclosures.
Budget updates and implications on tax accounting
On 20 June 2023, Finance (No.2) Act 2023 (the ‘Bill’) completed its third reading in the House of Commons. For UK GAAP and IFRS, the measures within Finance (No 2) Bill 2023 are considered to be substantively enacted on completion of its third reading. Many of the measures in the Bill reflect the Spring Budget of 15 March 2023 and include the introduction of the global minimum effective tax rate of 15% (the OECD Pillar Two legislation effective for accounting periods starting on or after 31 December 2023), and the Electricity Generator Levy of 45% on ‘extraordinary returns’.
UK In Brief UK2023-16 provides further details on the Bill.
On 5 February 2024, Finance Bill 2023-24 completed its third reading in the House of Commons. Therefore, the Finance Bill 2023-24 is considered as substantively enacted for financial reporting purposes. The summary of measures approved under this bill is as follows.
- Permanent full expensing - This measure makes “full expensing” and the 50% first-year allowance permanent for companies investing in plant and machinery.
- The new regime for Research and Development - These measures combine the current Research and Development Expenditure Credit (RDEC) and R&D SME scheme into a merged scheme, implement the enhanced support for R&D intensive SMEs and restrict the use of nominations and assignments for R&D tax credit payments.
The Spring Budget 2024 will take place on 6 March 2024.
Cash flow statements
The cash flow statement is a primary financial statement and provides extremely valuable information to users, particularly in respect of an entity’s liquidity and going concern. However, cash flow statements continue to be an area of focus for regulators in the UK. In the 2022/23 FRC Annual Review of Corporate Reporting, the FRC reported that they continue to find a number of issues arising from their desktop reviews of cash flow statements and, on investigation with companies, a number of these statements did not comply with the requirements of IAS 7 ‘Statement of Cash Flows’. Careful attention should be paid to cash flow statements, especially around the cash flow classification and the consistency between items in the cash flow statement and the notes.
UK In brief 2022-66 provides further guidance on cash flow classification.
Offsetting (or netting) in the financial statements
Offsetting (sometimes referred to as ‘netting’) is the net presentation of separate assets and liabilities or income and expenses in the financial statements. Similar considerations apply to the reporting of gross or net cash flows in the cash flow statement.
Offsetting and netting are generally prohibited, except where expressly required or permitted by accounting standards. This is because it detracts from users’ ability to both gain a full and proper understanding of the transactions, other events and conditions that have occurred and to assess an entity’s future cash flows.
Where offsetting is permitted, there are usually specific criteria that must be met in order to offset. Most cases where the criteria for offsetting are met, offsetting must be applied – it is not a choice.
Relevant guidance with respect to the areas where we most commonly see offsetting are as follows:Offsetting in relation to: |
IFRS guidance |
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General offsetting, including in the income statement
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Financial instruments
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Current and deferred tax
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Cash flow statement
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Items that are often overlooked
When reviewing financial statements it can be challenging to identify missing transactions that should have been posted but were not. We have compiled a list of key reminders on what not to miss to assist preparers and auditors in ensuring these accounting items are properly reflected in the financial statements.
Liabilities for financial guarantees especially in parent entities.Provisions for onerous contracts.Provisions for restoration.Liabilities for share repurchases.Structured entities - unconsolidated SPEs might exist that should be consolidated.Implied leases.Share-based payment charges in subsidiary financial statements.
UK In depth INT2023-12 provides further guidance.
FRC Annual Review of Corporate Reporting
The FRC has issued its Annual Review of Corporate Reporting for 2022/23. The review contains a summary of the FRC’s areas of focus, and its expectations for company disclosures going forward. During the current review cycle, the most frequently raised issues are related to impairment of non-financial assets, and disclosures of judgements and estimates which may be reflective of the heightened economic uncertainties companies need to factor into their financial reporting. In addition, as noted above, the FRC identified a number of errors in cash flow statements.
FRC has also announced that they would focus on the following risk sectors in the coming review cycle:
- Travel, hospitality and leisure.
- Retail and personal goods.
- Construction and materials.
- Industrial transportation.
The FRC also expects companies to carefully consider how current economic conditions may impact on financial and narrative reporting in 2023/24. In particular, reporting on the effects of inflation and other uncertainties.
FRC thematic reviews
FRC thematic review on reporting by the UK’s largest private companies
In January 2024, the FRC published its thematic review on the key findings that private companies and their auditors should take into account for future annual reports. This review focused on strategic report, presentation of primary statements including cash flow statement and supporting notes, revenue, judgements and estimates, provisions and contingencies and financial instruments.
In the FRC’s opinion, many of the issues identified could have been avoided if a sufficiently critical review of the annual report and accounts had been conducted prior to finalisation. This review should include taking a step back to consider whether the report as a whole is clear, concise and understandable, omits immaterial information and whether additional information is necessary to understand particular transactions, events or circumstances. It should also include a review for internal consistency and more detailed presentation and disclosure matters.
UK In brief UK2024-07 provides further guidance.
FRC thematic review on FRS 17 ‘Insurance Contracts’ Interim Disclosures in the First Year of Application
In November 2023, the FRC published its thematic review on the adequacy of disclosures regarding the effect of the transition to IFRS 17 in the first year of adoption. Whilst the review focussed on the interim financial statements of 10 listed life and general insurers, the sample also included specialty, re-insurance and bancassurance. The thematic review has also considered disclosures made by non-insurance groups where a material impact of IFRS 17 had been disclosed.
The review aims to provide examples of better practice and details the FRC’s expectations for companies ahead of their more extensive, year-end disclosures, making several key observations and setting out clear reporting expectations. Whilst their reviews identified examples of good practice, the FRC concludes that there is scope for improvement.
UK In brief UK2023-38 provides further guidance.
FRC thematic review on fair value measurement
In June 2023, the FRC published its thematic review on the requirements of IFRS 13, with a particular focus on disclosures, reflecting the fact that most of the FRC’s IFRS 13 challenges are prompted by poor disclosure. However, aspects of measurement where errors have been found were also addressed.
The application of IFRS 13 by banks and insurers was not considered, as they typically have specialised teams that perform valuations and the FRC believes the quality of their reporting in this area is usually high.
UK In brief UK 2023-15 provides further guidance.
Non- financial asset key reminders for impairment reviews
Impairment is an ongoing area of concern for many entities in the current economic environment. Regulators remain focused on this area and continue to push for increased transparency in disclosures. Groups holding significant amounts of goodwill and intangibles or those that are affected to a greater extent by - climate change, inflation or global conflicts are at greater risk of a regulatory challenge to their impairment assessments and in related disclosures.
For a discussion of common pitfalls we observe in impairment of non-financial assets see UK In brief 2023-02.In addition to these common pitfalls, the economic and geopolitical uncertainties discussed above as well as regulatory focus raise the following additional key points to consider in impairment testing:
Increased uncertainty due to rising inflation and interest rates and geopolitical uncertainty
- In times of greater uncertainty, it is likely to be easier to incorporate the impact of the economic environment uncertainties in impairment testing by using multiple cash-flow scenarios and applying relative probability weightings to derive a weighted average set of cash flows rather than using a single central forecast and attempting to risk adjust the discount rate to reflect the higher degree of uncertainty in the environment.
- A VIU calculation should incorporate specific price changes as well as the effect of general inflation. Where inflation assumptions could have a material impact on the financial statements, additional disclosures may be required to explain how inflation has been incorporated into the VIU.
- Where uncertainty in the economic environment has increased, the established methods for calculating the WACC should continue to be used. However, a reassessment of each input into the calculation and assessment of the overall result is needed..
- Given the increased uncertainty and volatility in many markets, the range of reasonably possible changes has widened. Key assumptions and wider ranging assumptions covering multiple Cash Generating Units ('CGUs') should be clearly disclosed. Where material assumptions specific to each CGU should be identified. Furthermore, in an impairment case, entities would need to clearly disclose the cause of the impairment and whether this is based on external data or changes in the entity’s own estimates.
- Where the headroom is sensitive to changes in key assumptions, an entity would need to disclose the specific changes in assumptions that would erode headroom to nil (for example + / - x% in sales growth or discount rates).
Regulatory focus
- Regulators have observed that, whilst the long-term growth rate used to extrapolate cash flow projections (to estimate a terminal value) and the pre-tax discount rate are important, they are often not 'key assumptions' on which the cash flow projections for the period covered by the most recent budgets or forecasts are based. Therefore, attention should also be paid to the discrete growth rate assumptions applied to the cash flows projected to occur before the terminal period. Accounting policy disclosures should always be consistent with the basis used in the according impairment test. The regulators have noted that they will continue to challenge companies where the recoverable amount is measured using VIU, but the cash flow forecasts appear to include the benefits of developing new business or to rely on future investment capacity. When VIU disclosures cross refer to forecasts used in going concern and viability assessments, it should be made clear how any costs and benefits in those forecasts that relate to future improvements have been addressed for the VIU calculation.
- It’s also important to consider one of the most common impairment questions we are seeing in respect of investments in subsidiaries in separate financial statements. If an impairment has been recognised in the consolidated financial statements, consideration should be given to whether there is also an impairment in respect of the ‘investment in subsidiary’ recognised by the parent in its separate financial statements. In addition if there is either external or internal debt at the subgroup level, the recoverable amount of this investment might be lower than the amount calculated for the CGU at the consolidated level.
Considerations related to impairment reversals
- An additional issue to consider is whether an impairment would need to be reversed. Determining whether there is an identifiable impairment reversal indicator might require the use of judgement. If there is any such indication, the entity has to recalculate the recoverable amount of the asset. Further details are provided in FAQ 24.153.2 and FAQ 24.154.2.
Global minimum tax (“GloBE rules”)
In 2021, 136 countries agreed to a Two Pillar approach to international tax reform. Amongst other things, Pillar One proposes a reallocation of a proportion of tax to market jurisdictions, while Pillar Two seeks to apply a global minimum effective tax rate of timing of the legislative changes in each country The rules will impact current income tax when the legislation comes into ef15%. The OECD Agreement is likely to see changes in corporate tax rates in a number of countries in the next few years. The impact of changes in corporate tax rates on the measurement of tax assets and liabilities depends on the nature and fect. In the UK, the Pillar Two legislation to implement a domestic top-up tax and a multinational top-up tax was substantively enacted on 20 June 2023 when Finance (No.2) Act 2023 completed its third reading in the House of Commons. In the UK, the new domestic minimum taxes (affecting all UK entities meeting the size criteria - consolidated revenues, of €750m in at least two of the last four years regardless of whether they are part of a multinational group or not) and multinational top up taxes will apply for accounting periods beginning on or after 31 December 2023.
The IASB amended IAS 12, ‘Income taxes’, with immediate effect to provide a temporary relief from accounting for deferred taxes arising from the implementation of the GloBE rules, including any qualifying domestic minimum top up taxes. The temporary exception is effective immediately for December 2023 year ends (and later) and will remain in place until the IASB is in a position to make further amendments to IAS 12. The disclosure requirements are effective for accounting periods beginning on or after 1 January 2023, with early application permitted.
The narrow-scope amendments to IAS 12 introduced targeted disclosure requirements for affected companies. They require entities to disclose:
- the fact that they have applied the exception to recognising and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes
- their current tax expense (if any) related to the Pillar Two income taxes; and
- during the period between the legislation being enacted or substantively enacted and the legislation becoming effective, known or reasonably estimable information that would help users of financial statements to understand an entity’s exposure to Pillar Two income taxes arising from that legislation. If this information is not known or reasonably estimable, entities are instead required to disclose a statement to that effect and information about their progress in assessing the exposure.
The amendments to IAS 12 on Pillar Two rules have been endorsed by the UK Endorsement Board on 19 July 2023.
As a result, for the March 2024 reporting period, there would be no impact on the recognition and measurement of deferred tax on qualifying top-up taxes following the substantive enactment of GloBE legislation in the UK but there are disclosure requirements in respect of the potential impact of Pillar Two.
UK In depth INT2023-10 provides guidance on the global implementation of Pillar Two, particularly the impact of deferred taxes and disclosures. See also our Pillar Two Country tracker and IFRS Talks podcast episode ‘Global minimum tax’.
Hyper-inflationary economies
Based on the current global economic environment and following deteriorating economic conditions, Ghana and Sierra Leone are now considered to be hyper-inflationary for the purpose of IAS 29 for reporting periods ending on or after 31 March 2024. South Sudan might no longer be a hyper-inflationary economy from 31 December 2023, and if so entities with the currency of South Sudan as their functional currency will stop applying IAS 29 at the beginning of the reporting period in which hyperinflation ceases. However, entities should consider any significant events or conditions that might contradict this conclusion between now and 31 March 2024.
There have been no other changes in hyper-inflationary economies for the period 1 April 2023 to 31 March 2024. IAS 29 requires financial statements of an entity whose functional currency is the currency of a hyper-inflationary country to be restated into the measuring unit at the end of the reporting period. Therefore, transactions in the reporting period and non-monetary balances at the end of the period would be restated to reflect a price index that is current at the balance sheet date. Comparatives are typically restated to reflect a price index that is current at the balance sheet date. This is because IAS 29 is applied as if the economy had always been hyper-inflationary. Entities are not, however, required to present an additional balance sheet as at the beginning of the preceding period.
Multinational companies that have subsidiaries that are in a hyper-inflationary economy should consider paragraph 43 of IAS 21. This requires the financial statements of a subsidiary entity that has the functional currency of a hyper-inflationary economy to be restated, in accordance with IAS 29, before being included in the consolidated financial statements. Comparative amounts of these subsidiaries that were presented previously in the parent’s stable currency are not restated.
UK In brief INT2023-09 provides guidance on hyperinflationary economies, including a country tracker.Identifying insurance contracts issued
IFRS 17 is now effective and it’s not just insurance companies that need to pay attention to IFRS 17. A contract does not need to be labelled as insurance or even issued by an insurer to be in scope of IFRS 17. Any contract that transfers a non-financial risk from one party to another could potentially meet the definition of an insurance contract for the party taking on the risk if that risk transferred is judged to be significant.
The definition hasn’t changed, but, unlike the predecessor standard IFRS 4, IFRS 17 attaches significant recognition and measurement consequences to that definition. That means that from now on, all companies need to maintain a good understanding of how to identify an insurance contract issued, and to know what types of arrangements are explicitly scoped out of IFRS 17.
UK In depth INT2022-14 provides guidance on identifying insurance contracts in scope of IFRS 17.
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