Retail insights - FRC's Annual Review of Corporate Reporting

The Financial Reporting Council (FRC) continues to spotlight the retail industry in its Annual Review of Corporate Reporting, highlighting key risks and challenges shaping the sector.

The focus in the current year has been on accounting and reporting that may be unusually complex, contentious or subject to divergence in practice among retailers.

Retailers should consider these issues for their upcoming reporting season, ensuring that they have company-specific accounting policies, including explanation of key judgements and estimates, and comply with the relevant disclosure requirements.

Key messages for 2024/25 financial reporting season

1. Impairment testing

Retail businesses need to consider how online sales are incorporated into their impairment assessment, and the effect of this on their recoverable amounts. While some retailers are allocating a portion of online sales to individual stores, others have not done so due to insufficient data to allocate on a systematic basis. This is an issue we reported on previously in "Bricks vs Clicks: is the way we assess store impairments fit for purpose?", with the FRC also suggesting that evidence of touchpoints between stores and online sales should be considered as part of impairment reviews.

What retailers should consider: ensure that your accounting policies and impairment assessment includes clear identification and explanation of Cash-Generating Units (CGUs) and related assets. This should include when and how online revenues are allocated to individual stores, in addition to the basis and amount of online revenue allocated to stores. Disclosures should also explain how relevant costs have been allocated, the method of allocation and significant judgements involved.

2. Alternative performance measures (APMs)

The use of APMs such as “like-for-like” (LFL) and “pre-IFRS 16” as APMs in the retail sector reflects the importance of changes from year to year (for example in the property estate), and leased premises. While retailers adopt their own approach for determining LFL, the FRC identified inconsistent definitions of a LFL measure in different parts of an individual annual report and accounts.

Additionally, the FRC identified inconsistencies in the extent and use of adjustments to profit by retailers to present an “underlying” or “core” performance. Retail stakeholders are concerned that APMs of adjusted profit are not comparable and exclude costs that they consider normal business expenses. For example, there is diversity in the treatment of costs associated with opening and closing branches and property impairments - some retailers treat these as a normal retail business expense whereas others treat these as an exceptional cost.

What retailers should consider: disclosing how LFL measures have been calculated and reconcile to amounts in the financial statements, for example LFL across their estate with the number of branches opened and closed in the current and prior year and LFL across variable reporting periods with the basis of the calculation. Retailers should also ensure they explain and disclose an accounting policy for any costs considered exceptional and excluded from adjusted profit measures.

3. Leased property

Given their large property portfolio, the determination of the lease term, which requires entities to consider options to extend or terminate a lease, is often a significant judgement for the retail sector.

There is diversity among retailers on accounting for leases beyond their contractual term where occupation continues, including when the Landlord and Tenant Act 1954 applies. Some retailers accounted for these as a short-term lease and expensed the rental cost. However, other retailers treated the tenancy as a term lease, on the same basis as the expired lease, where eventual renewal is considered likely.

What retailers should consider: lease accounting policies should include company-specific factors affecting determination of the lease term. Retailers occupying property beyond their contractual term need to ensure that their accounting policies includes explicit and specific disclosure of how continuing tenancies are treated and the related significant judgements.

In addition, if impairment testing is based on projected cash flows beyond the end of the lease term of the stores this should be explained and disclosed. These are important issues that retailers reporting under UK GAAP should consider ahead of the upcoming changes as mentioned in "FRS 102: the new lease accounting model for consumer businesses".

4. Supplier income arrangements

Contracts between retailers and their suppliers frequently include supplier income arrangements. Such arrangements may take many forms including discounts, volume rebates, reimbursement of promotional or advertising costs, margin or price protection, fees for advantageous placement in a physical or online store, and fees to enter into a contract. While these arrangements have become less complex for retailers, in practice there is usually an element of negotiation in determining the actual amounts paid.

What retailers should consider: where supplier income is material, retailers should include an accounting policy explaining the type of income recognised, how amounts are determined and where they are reported in the financial statements. Retailers should also explain the significant judgements and/or major sources of estimation uncertainty involved.

How we can help

Our dedicated team of accounting and financial reporting experts operate across the retail spectrum, helping our clients understand and navigate the ever-changing financial reporting landscape and identify possible opportunities and risks within the retail sector.

Our fully tailored service can cover all your financial reporting needs, from dealing with complex transactions and auditor queries, to preparing documentation to support accounting treatment in your financial statements or preparing your annual report and financial statements.

For further information, or if you would like to discuss how we can support your retail business, please contact Jacqui Baker, Lou Ward or your usual RSM contact.