The Financial Reporting Council (FRC) released its Annual Review of Corporate Reporting, outlining the principal findings from their reviews of listed companies reporting under IFRS in 2024/25 and their expectations for the upcoming reporting season. Whilst the report focuses on companies preparing their accounts under IFRS reporters, their messages are relevant to companies reporting under UK GAAP, particularly with upcoming adoption of the FRS 102 Periodic Review 2024 Amendments.

Key issues from 2024/25 FRC reviews

Although the FRC noted a reduction in the overall number of restatements stemming from its reviews, most restatements occurred among companies outside the FTSE 350. Common areas of challenge included a lack of consistency within the annual report and accounts, along with impairment of assets, cash flow statements and revenue, which we consider in more detail below.

1. Impairment of assets

For the third year running, the highest number of the FRC’s substantive queries concerned impairment of assets. No restatements were necessary during this review period in this area; rather, the bulk of queries arose from insufficient disclosures and lack of alignment between impairment disclosures and other sections of the Annual Report and Accounts. The main findings in their review were key inputs and assumptions for impairment reviews, impairment methodology applied and recoverability of investments in subsidiaries.

Considerations for 2025/26 Reporting Season:

• Ensure comprehensive disclosure of the principal inputs and assumptions for impairment reviews, especially where financial plans or forecasts extend beyond five years.
• Reflect the effect of income tax consistently in both discount rates and projected cash flows.
• Confirm that discount rates align with market perspectives on the specific risks linked to the assets in question.
• Impairment disclosures should be consistent with other information in the Annual Report and Accounts, including any events or circumstances that may signal potential impairment.

There is further guidance included in previous FRC Thematic Reviews, summarised on our pages "FRC Thematic Review: Discount Rates" and "Impairment disclosures for non-financial assets".

2. Cash flow statements

Issues with the classification and reporting of cash flows remain a leading cause of prior year restatements following an FRC review, particularly among companies outside the FTSE 350.

In terms of cash flow classification, issues identified included the treatment of purchase or sale of non-controlling interests, the settlement of borrowings of an acquiree either on or shortly after acquisition, payments of deferred consideration relating to previous acquisitions, and the repayment of loans to group undertakings.

The findings in reported cash flows, included inconsistencies between figures presented in the cash flow statement and those disclosed elsewhere in the Annual Report and Accounts. Queries were raised in cases where it was unclear how working capital adjustments within operating cash flows correlated to corresponding movements in inventories, receivables, and payables.

Inconsistencies were noted between the amounts of cash and cash equivalents reported in the cash flow statement and those presented in the statement of financial position. Furthermore, non-cash transactions were incorrectly reported within the cash flow statement.

A number of these issues were identified by the FRC in a thematic review on cash flow disclosures, summarised on our insight page "Cash flow statements need to improve".

Considerations for 2025/26 Reporting Season:

• Ensure that the classification of cash flows, as well as the reporting of cash and cash equivalents, complies with the applicable definitions and criteria.
• Verify that the amounts and presentation of cash flows are consistent with the information disclosed elsewhere in the Annual Report and Accounts.
• Exclude all non-cash transactions from the cash flow statement.

3. Revenue

Although the FRC raised fewer substantive queries on revenue in 2024/25 compared to previous years, the queries continued to be in respect of clarity of revenue accounting policy and the disclosure of significant judgements applied to revenue recognition.

Key issues raised included:

• Insufficient information on the nature of each significant revenue stream and how the 5-step revenue model was applied.
• The justification for recognising revenue over time, as well as the methodology used to measure progress towards fulfilling performance obligations, was not clearly articulated.
• It was unclear whether an assessment of whether the company was acting as principal or agent had been made, and where this assessment was made the disclosures lacked significant judgments made in the assessment.
• The basis for determining the transaction price, including how variable consideration was assessed and incorporated, was not adequately explained.

Considerations for the 2025/26 Reporting Season:

• Ensure comprehensive disclosures are provided for each significant revenue stream, including:

  • The specific accounting policies adopted with a clear explanation of the application of the 5-step revenue recognition.
  • The timing of revenue recognition.
  • Basis for recognising revenue over time.
  • Methodology applied, for example method used to measure progress towards fulfilling performance obligations or method used to assess and incorporate any variable consideration into transaction price.

• Clear and transparent disclosure of all material judgements made in applying the revenue recognition policy to each significant revenue stream.

These considerations are important for UK GAAP reporters who will need to apply the new 5-step revenue model for periods beginning on or after 1 January 2026, "Preparing for change: Revenue recognition".

FRC expectations for the 2025/26 Reporting Season

Alongside the principal issues highlighted in their most recent corporate reporting assessments, the report also outlines the FRC’s main expectations for Annual Reports and Accounts, which remain consistent with those of previous years.

Pre-issuance checks

Establish and completed a robust review process pre-issuance, ensuring accounting policies are clear, concise and company-specific.

Judgements, estimates and risks

Disclosures should be presented clearly and succinctly, providing insight into the rationale behind the positions adopted in the financial statements, rather than simply listing items.

Narrative reporting

The strategic report should present a fair, balanced and thorough overview of the development, position, performance and outlook for the business. Disclosures should remain succinct, ensuring that all material information is clearly communicated and not obscured.

Consider the Annual Report and Accounts as a whole

Ensure it tells and consistent and cohesive story throughout narrative reporting and financial statements. It should be clear, concise and understandable, and includes all material and relevant information.

Supporting your finance function

We have a team of accounting and financial reporting experts experienced in UK GAAP and IFRS to help our clients understand and navigate the ever-changing financial reporting landscape, identifying potential opportunities and risks.

We offer a comprehensive, bespoke service to address all aspects of your financial reporting requirements. This includes managing complex accounting transactions, preparing supporting documentation to substantiate accounting treatments within your financial statements, conducting disclosure reviews and pre-issuance checks, as well as drafting your annual report and financial statements.

For further information, or if you would like to discuss how we can support your financial reporting needs, please get in touch with Andy Ka, Lou Ward or your usual RSM contact.

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