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Reporting by the UK’s smaller listed companies
The FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.
© The Financial Reporting Council Limited 2025 Financial Reporting Council 13th Floor, 1 Harbour Exchange Square London, E14 9GE
1. Executive summary
Introduction
High standards of corporate reporting are important for maintaining investor confidence and underpinning UK companies' access to the capital they need to scale and grow. Through our publications, including focused thematic reviews on complex and emerging reporting areas, we seek to support companies and drive up the quality of reporting.
For smaller listed companies, annual reports are vital for communication with current and potential investors, lenders and creditors, especially due to that part of the market's more limited analyst coverage when compared with the FTSE 350. High-quality annual reports build trust between companies and their stakeholders, often leading to better access to capital and stronger commercial relationships, providing opportunities to drive sustainable growth.
As highlighted in our recently published Annual Review of Corporate Reporting 2024/25, our write-rate 1 for companies of all sizes has declined in recent years. Despite this, a long-term trend persists where companies outside the FTSE 350 are significantly more likely to receive a substantive letter as a result of our corporate reporting reviews. Our enquiries with these companies are also more likely to result in restatements of primary financial statements, although it is worth noting the low number of restatements that affect consolidated profit. We have also observed lower quality in the reporting of smaller listed companies compared to their larger counterparts in areas of presentation and disclosure.
As smaller listed companies are often engines of growth in the economy, the Financial Reporting Council (FRC) would like to see improved reporting in coming years by these companies. This thematic review is designed to help them make the most of their resources to help narrow the quality gap we have observed in corporate reporting.
We performed a desktop review of 20 companies with year-ends between September 2024 and April 2025 operating in a range of market sectors. These companies are either listed outside of the FTSE 350 on the Main Market or on the Alternative Investment Market (AIM). We focused on the requirements of IFRS Accounting Standards where, as part of our routine monitoring work, we most frequently asked substantive questions of smaller listed companies – these are areas that investors have told us they pay particularly close attention to:
- revenue;
- cash flow statements;
- impairment of non-financial assets; and
- financial instruments.
These areas have also been addressed in previous publications (see our Bibliography in section 9), and this thematic review reiterates the factors that might lead us to open an enquiry with a company. It also highlights the characteristics we observe in good quality reporting and contrasts this with less informative disclosures.
Key observations
When reviewing the annual reports of companies within our selection, we considered the four areas where, historically, we have been more likely to find potential non-compliance with relevant reporting requirements. They are also topics of investor focus, some of which lead to the most complex or judgemental transactions and balances. Across these areas, we emphasise the need for transparency, accuracy and consistency of reporting. Our key observations are as follows:
Revenue
- Companies should ensure they have a clearly articulated accounting policy on revenue recognition, which covers all material revenue streams and is consistent with the company's description of its business model.
- Improvements could be made to explanations of the timing of satisfaction of performance obligations, determination of the transaction price, agent versus principal considerations, and the associated judgements. Section 3 provides examples of this.
Cash flow statements
- Misclassification of cash flows between operating, investing and financing is one of the most common reasons for our enquiries. This often stems from the lack of clear explanation of specific transactions and the rationale for the treatment of the related cash flows.
- Companies should ensure consistency between the amounts disclosed in the cash flow statement and the information disclosed elsewhere. We list the consistency cross-checks that we perform when reviewing cash flow statements in section 4.
Impairment of non-financial assets
- It is important that transparent disclosures on impairment reviews of non-financial assets, such as goodwill, reflect a company's reasonable and supportable expectations about its future cash flows and market conditions.
- Good quality reporting requires clear explanation of significant judgements and estimates, key assumptions and sensitivity analysis. This must be consistent with the narrative throughout the annual report. Section 5 offers some practical insights on this topic.
Financial instruments
- We expect companies to disclose tailored accounting policies for more complex financial instruments, clearly describing the bases for initial classification and subsequent measurement.
- Company specific accounting policies and transparency about the nature of financial instruments is key in understanding companies' exposure to financial risks. Financial instrument disclosures provide valuable insight into companies' liquidity and longer-term viability. Section 6 considers this in more detail.
Clear and concise - In all the areas listed above we found room to improve conciseness. Section 7 on clear and concise reporting highlights opportunities for companies to cut clutter and emphasises that good quality reporting does not necessarily require greater volume.
2. Scope and how to use this publication
Scope
We performed a desktop review of the annual reports of 20 companies, with 11 ranked outside the FTSE 350 on the Main Market and nine listed on AIM. Our selection comprised companies with year ends between September 2024 and April 2025. The market capitalisation ranged from around £100m to £500m. All of the companies selected applied IFRS Accounting Standards. Our findings were supplemented by the results of our routine casework.
Our selection excluded companies operating in the financial services sector. In line with the general distribution of smaller listed companies, about half of our selection were companies operating in industrial goods and services, technology and basic resources, with the rest being evenly spread across various other industries.
How this report differs from our previous publications
The main objective of our thematic reviews is to encourage good quality reporting, as we believe that relevant, reliable and transparent financial information is an essential ingredient to a growth economy. We generally do this by focusing on examples of good disclosure.
In this thematic review, we also highlight in greater detail the common triggers for our enquiries to help smaller listed companies identify and address the key areas of ambiguity and omission that may lead to us writing a 'substantive' letter to them. We do this by including hypothetical examples that illustrate both good and inadequate aspects of disclosure.
Using this publication
Hypothetical disclosure examples are included in shaded boxes. They are based on our review of the selected companies and our routine casework. They are summarised to illustrate more prominent aspects of particular disclosures and should not be viewed as complete examples.
Grey boxes intend to illustrate aspects of good reporting.
Good quality application
Blue boxes highlight a disclosure that could indicate a potential issue that we might query with a company.
Potential triggers for an enquiry
During our reviews, we often identify disclosure omissions or inconsistencies where company-specific facts and circumstances may not warrant us asking a substantive question. In such cases we include observations in our letters for which we do not expect a formal response. We encourage companies to take these into account in their future reporting, if the matters are material and relevant.
The bibliography and glossary in section 9 includes links to relevant previous thematic reviews, as well as IFRS Accounting Standard titles referred to in this publication.
Who is this publication for
Companies
- This thematic review is primarily intended to help smaller listed companies direct their often more limited resources by encouraging focus on transparency and accuracy of the annual report, particularly in respect of complex or judgemental transactions and balances.
- A well-prepared annual report becomes an effective communication tool that builds trust with a company's stakeholders and can help unlock the potential for growth.
Audit committees
- Audit Committees may find this thematic review helpful when considering the appropriateness of the accounting polices, estimates and judgements and the clarity and completeness of disclosures in the financial statements. 3
- In this review we include pointers on what good quality reporting should look like by contrasting this with less informative disclosures. These can assist in challenging management and the external auditor.
Auditors
- Auditors of smaller listed companies may find this publication helpful in understanding our approach to reviewing annual reports.
- Auditing standards require the evaluation of whether information presented in the financial statements is relevant, reliable, comparable and understandable. This includes considering the quality of the related disclosures. 2
Investors
- Investors' need for transparent and reliable disclosures coincides with our objective of upholding high standards of corporate reporting.
- The areas discussed in this review provide important forward-looking perspectives on a company's business. Investors might use this publication as a prompt to engage with companies to promote better quality disclosures.
Our proportionate approach to smaller listed companies
The approach we currently take when reviewing smaller listed companies is consistent with that taken for those listed in the FTSE 350. However, proportionality and materiality are carefully considered, on a case-by-case basis, at every stage of our review work. We are mindful of our duty to support UK economic growth and to protect stakeholders in the public interest, by promoting high standards in corporate reporting while avoiding disproportionate impact on those we regulate. This is explained further on page 7 of the FRC's 2024/25 Annual Review of Corporate Reporting.
3. Revenue
Revenue is a fundamental metric for any company. It provides an indication of its capacity to fund operations and innovation, and to invest in future growth. Consistency between the business model, accounting policy and details of the main revenue streams is key to understanding the business and its financial performance over the longer term.
We have looked at this topic in previous thematic reviews. 4 It is common for us to raise queries on the lack of information about significant revenue streams and the associated judgements.
Given the importance of revenue, disclosing a clearly articulated revenue accounting policy is essential to a good quality annual report.
A good accounting policy on revenue recognition is company specific and: * Covers all material revenue streams and is consistent with the company's description of its business model. * Explains the timing of revenue recognition and any related judgements. * Provides details of how the transaction price is determined and allocated, including any material instances of variable consideration. * Is regularly reviewed and updated for any significant changes in the business.
Queries we might raise with companies
We generally ask a question when we identify a risk that a material measurement or recognition issue may exist. The areas where we most frequently raise queries relate to:
- Performance obligations
- Transaction price and variable consideration
- Agent versus principal
Our review identified potential queries, in areas consistent with those listed above, in about 10% of the selected companies. This is similar to our write-rate on this topic in routine reviews of non-FTSE 350 companies last year. In contrast, in that same year, our routine reviews of FTSE 350 companies did not result in any substantive questions about revenue.
On the following pages, we provide examples of good practice and highlight factors that might lead to us raising queries with companies.
Good quality application
Information is consistent with the description of the business model in the strategic report (CA2006 S414C 8(b) 5) and disclosures on revenue disaggregation (IFRS 15.114).
Explanation of when the performance obligation is satisfied (IFRS 15.119(a)) and methods adopted for over time revenue recognition (IFRS 15.124).
Explains when the payment is typically due and whether there is a significant financing component (IFRS 15.119(b)). This information is consistent with classification of trade receivables and contract balances as current on the balance sheet.
Example 1: Extract from accounting policy – information about performance obligations
Industrial plc's (the Group) main revenue generating activity is the design, manufacture and installation of robotic systems. The contracts with customers are long-term and have a fixed base price. The activities undertaken are combined as a single performance obligation as the customer does not benefit from these on their own and they are not separately identifiable in the context of the contract.
The Group has an enforceable right to payment for performance completed to date, being recovery of costs incurred in satisfying the performance obligation plus a reasonable profit margin. As the systems are bespoke and do not have an alternative use to the Group the performance obligation is satisfied over time. Progress towards complete satisfaction of the performance obligation is measured using an input method, based on costs incurred compared to total expected contract costs.
The period between recognition of revenue and customer payments is always less than one year. Therefore, there is no significant financing component. Where the amount of consideration is variable (e.g. due to late delivery penalties and other similar items) the Group includes the variable consideration in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. In addition to standard warranties, some contracts include extended service warranties which are a separate performance obligation, with revenue recognised evenly over the extended warranty period.
Good quality application
Identifies performance obligations and explains whether they are considered distinct. This area is also a key judgement, and it is explained in more detail on the next page (IFRS 15.29).
Explains why over time recognition was considered appropriate with reference to IFRS 15.35(c).
Information on variable consideration and its constraint is provided (IFRS 15.119(b)).
Information on types of warranties and related obligations (IFRS 15.119(e)).
Good quality application
The judgement explains entity-specific considerations in assessing that there is one combined performance obligation (IFRS 15.123, IAS 1.122).
Example 1 (continued): Extract from accounting policy information about performance obligations
Key judgement: Identification of performance obligations The Group applies judgement in assessing whether the design, manufacture and installation activities should be combined into a single performance obligation. While these promises are capable of being distinct because these can be sold separately to other market participants, they are not distinct in the context of the contract. This is because the Group provides a significant service of integrating the various activities into the system that the customer has contracted to purchase as one complete package.
Key estimate: Assessment of the percentage of completion of long-term contracts The long-term design, manufacture and installation contracts require estimates of labour hours and rates, and material costs to determine forecast costs to completion. Where actual costs incurred differ to forecast costs, or where forecast cost estimates change, the assessment of the percentage of completion will be affected and therefore revenue and profits or losses recognised will also be affected. Forecast Costs to Complete (FCC) are closely monitored with weekly and monthly project review meetings. If FCC were 10% higher than forecast at 31 December 2024, the revenue and adjusted operating profit for the year ended 31 December 2024 would have been £1.5m lower. The amounts recognised as contract assets and liabilities are disclosed in note 5. 6
Good quality application
Sources of estimation uncertainty are explained and additional information on sensitivity is provided. Cross reference is made to the note where the carrying amounts subject to estimation uncertainty are disclosed (IAS 1.125, 129).
Potential triggers for an enquiry
A key judgement is disclosed, but it does not provide an entity-specific rationale for determining that the software licence and the ongoing support are two separate performance obligations. The strategic report and the company's website suggest that the support is essential to the functionality of the software.
We might enquire why the ongoing support and the software license are considered distinct performance obligations as this may affect the point-in-time recognition of software revenue (IFRS 15.27-29).
Example 2A: Extract from accounting policy – information about performance obligations Technology plc is a provider of software solutions. Its main revenue streams are the sale of software and specific project work. These are considered separate performance obligations.
Software revenue is recognised at the point the customer has the ability to use the licence.
Other project work includes specific interface development requested by customers and is provided on a fixed price basis. Revenue is recognised over time based on the percentage of completion basis using the input method of actual hours incurred against the estimate of total hours to be incurred.
Example 2B: Extract from accounting policy – information about performance obligations Software plc is a provider of software solutions. Its main revenue streams are the sale of software and ongoing support. These are considered separate performance obligations.
The software licence is assessed to be a 'right to use' licence and control of the licence is transferred at a point in time.
The ongoing support is recognised on a straight-line basis over the duration of the contract.
Key judgement: The identification of performance obligations and assessing whether these are distinct involves significant judgement. This affects the timing and quantum of revenue recognition.
Potential triggers for an enquiry
Elsewhere in the strategic report it is stated that the entity provides a Software-as-a-Service (SaaS) solution hosted on its platform. This is typically considered a service provided over-time and no further information on this judgement is included in the annual report.
We might ask the company to explain the basis for point-in-time recognition of software revenue. Combined with a significant accrued income balance disclosed elsewhere, this may indicate inappropriate revenue recognition (IFRS 15.31-37, B52-B62).
Potential triggers for an enquiry
It is unclear whether costs of tendering and obtaining contracts are included in the measure of progress. Consequently, we might enquire on what basis 10% of revenue is recognised at the start of the contract (IFRS 15.39).
In the absence of a policy on, or identifiable balance for, costs to obtain and cost to fulfil a contract we may also enquire into the company's treatment of those items (IFRS 15.91, 95).
We might ask the company for further details on the nature of these vouchers and whether these are separate performance obligations (IFRS 15.74, B39-B42).
Example 3: Extract from accounting policy – timing of revenue recognition Purchase plc provides procurement services to its clients. Revenue is recognised over time as the customer receives the benefits of the services provided as the company performs. Revenue is recognised using a cost-based input method. The company incurs costs associated with tenders and obtaining contracts. Management judged that recognition of 10% of total contract value at the start of the contract was suitable recognition of the proportion of time spent on the contract relative to the total expected inputs. The remaining 90% is recognised evenly over the life of the contract.
Example 4: Extract from accounting policy – identifying performance obligations and determining the transaction price Cyber plc provides cyber security services. The Group recognises three performance obligations: set-up fees, post-go-live monitoring fees and licence services. The transaction price for the overall service and the allocation to individual performance obligations is outlined within the customer contract.
Example 5: Extract from accounting policy – determining the transaction price Apparel plc sells branded clothing. As part of promotional campaigns, the company offers free gift vouchers to customers which are recognised as cost of sales.
Potential triggers for an enquiry
We might ask the company why set-up fees are considered a performance obligation, as it is unclear how these are distinct from other services provided (IFRS 15.27-30).
We might also enquire how the transaction price is allocated to each performance obligation and whether the contractual price equates to the stand-alone selling price (IFRS 15.77).
Potential triggers for an enquiry
The accounting policy makes no reference to variable consideration. Given a high accrued income balance, with a significant portion of it recognised as non-current, we might enquire how the IFRS 15 requirements in relation to variable consideration and its constraint have been considered by the company (IFRS 15.50-59).
Example 6: Extract from accounting policy – variable consideration Savings plc provides services for which it is remunerated based on a percentage of customer savings realised. The company's performance obligation is fulfilled following confirmation that a saving has been identified and the work required to secure future economic value for the customer has been completed. Revenue is recognised at this point, and the amount recognised is based on the company's percentage share of agreed actual customer savings. The company is paid as the customer realises the cash saving and, therefore, the company recognises accrued income or amounts uncollected at the date revenue is recognised. Where the amounts recognised within accrued revenue are due to be collected in more than twelve months after the balance sheet date, they are recognised within non-current assets.
Example 7: Extract from accounting policy – principal vs agent considerations Retail plc sells home furniture and provides a range of optional product warranties to its customers. Revenue is recognised when control of the goods or service is transferred to the customer. This is deemed to be when the goods and any associated warranty contracts have been delivered to the customer. Warranty services, once sold, are subsequently provided by third parties.
Potential triggers for an enquiry
The accounting policy does not explain whether the company acts as a principal or agent in providing the warranty service (IFRS 15.B34-B38). We may seek clarification of this from the company.
Other observations
The matters relating to revenue that we most commonly raise as observations not requiring a formal response include:
Contract balances
- The omission of disclosures required by IFRS 15, paragraphs 116 to 118. In particular, missing an explanation of significant changes in contract assets and liabilities, as well as the amount of revenue recognised in the reporting period that was included in the contract liability balance at the beginning of the period.
Revenue disaggregation
- Inconsistencies between revenue disaggregation disclosures required by IFRS 15, paragraph 114, the accounting policy and the revenue streams discussed in the strategic report.
Key sources of estimation uncertainty
- Missing information on sensitivity analysis or ranges of outcomes as required by IAS 1, paragraphs 125 and 129, when revenue is recognised over time using percentage of completion method and it is disclosed as a significant estimate.
- The non-disclosure of the amount subject to estimation uncertainty - e.g. customer rebates, as required by IAS 1, paragraph 125(b).
Contract renewals and modifications
- A lack of clarity on what is a typical contract duration and whether contract renewals represent a material right under IFRS 15, paragraphs B39-B43, where there is a particular emphasis on recurring revenue.
- The use of old IAS 11 terminology when referring to revenue in respect of contract variations being recognised only when it is highly probable to be agreed with the customer. IFRS 15, paragraph 18 requires the approval of the parties to a contract for a contract modification to exist.
Assets recognised from the costs to obtain or fulfil a contract
- Missing disclosures in relation to assets recognised from the costs incurred to obtain or fulfil a contract, such as closing balances by category of asset, and the amount and method of amortisation (IFRS 15, paragraphs 127-128).
Information about remaining performance obligations
- The omission of disclosures relating to the transaction price allocated to performance obligations that are unsatisfied or partly unsatisfied at year-end and when this amount is expected to be recognised as revenue (IFRS 15, paragraph 120). This may be particularly relevant for companies with long-term contracts.
4. Cash flow statements
The cash flow statement is highly valued by users of annual reports. 7 It provides insight into a company's liquidity, operational strength and financial stability and helps investors assess its ability to meet obligations and fund future growth.
We have looked at this topic in previous thematic reviews. 8 However, it continues to be one of the areas where we most frequently raise questions with companies and is the primary statement which is most often restated as a result of our enquiries.
In addition to considering the cash flow treatment of specific transactions, there are several cross-checks we perform that can highlight material inconsistences which may lead to us raising a question with a company.
- Items in the reconciliation of net cash from operating activities, including depreciation, amortisation, impairments and gains/losses on disposal, to relevant income statement lines and notes.
- Working capital movements in the cash flow statement to changes in the related balance sheet items.
- Purchases and proceeds of property, plant and equipment, right of use assets and intangibles to the related notes.
- Cash flows from acquisition and disposal of businesses to the notes.
- Cash flows from transactions with shareholders to movements in the statement of changes in equity.
- Proceeds and repayment of borrowings to the disclosures of changes in liabilities from financing activities.
Queries we might raise with companies
Most of our queries relating to cash flow statements arise from the classification of specific transactions as operating, investing or financing, where these do not appear to align with specific requirements of IAS 7. We may also raise questions about the following areas:
- Apparent inclusion of non-cash transactions in the cash flow statement.
- Material, unexplained inconsistencies between amounts or descriptions in the cash flow statement and other information in the annual report.
Our review identified potential queries, in areas consistent with those listed above, in about 15% of the selected companies. This is similar to our write-rate on this topic in routine reviews of non-FTSE 350 companies last year. A significant number of the issues we found related to classification in the parent company cash flow statement where those accounts had also been prepared under IFRS Accounting Standards.
On the following pages, we provide examples of good practice and highlight factors that might lead to us raising queries with companies.
Good quality application
Provides details of the cash flow effect of transactions included elsewhere in the financial statements and explains the reasons why the company has included such transactions in cash flows from financing and operating activities.
Example 8: Extract from accounting policy for business combinations Deferred consideration for business combinations contains an implicit financing element. As such, the Group includes the payment of deferred consideration within cash flows from financing activities. Contingent payments to previous owners require their ongoing employment and are included in cash flows from operating activities.
Example 9: Analysis of changes in net debt
| Lease liabilities | Borrowings | Total liabilities from financing activities | Cash and cash equivalents | Net debt | |
|---|---|---|---|---|---|
| Balance at 1 January | (7,500) | (12,250) | (19,750) | 4,520 | (15,230) |
| Additions | (325) | - | (325) | - | (325) |
| Cash flows | 1,200 | 3,000 | 4,200 | 5,050 | 9,250 |
| Finance charges | (125) | (830) | (955) | - | (955) |
| Foreign exchange | 35 | 50 | 85 | (20) | (65) |
| Balance at 31 December | (6,715) | (10,030) | (16,745) | 9,550 | (7,195) |
Good quality application
The statement clearly separates cash and non-cash items.
Includes a subtotal to satisfy the requirement to disclose changes in liabilities arising from financing activities (IAS 7.44A).
The table also reconciles net debt, a non-GAAP measure voluntarily provided by many companies, to an equivalent GAAP amount.
Potential triggers for an enquiry
The trade and other receivables note indicates that a significant loan has been made to a joint venture in the year. However, the increase appears to have been included in operating cash flows.
We might enquire about the nature of the transaction and the basis for it not being classified as an investing cash flow.
Example 10: Cash flows from operating activities
| £'000 | |
|---|---|
| Profit before interest and taxation | 15,230 |
| Adjustments for: | |
| Depreciation of property, plant and equipment and right of use assets | 1,220 |
| Amortisation of intangible assets | 530 |
| Profit on disposal of property, plant and equipment | (250) |
| Decrease in inventory | 2,650 |
| Increase in receivables | (4,000) |
| Increase in payables | 1,670 |
| Cash generated from operations | 17,050 |
| Interest received | 130 |
| Interest paid on borrowings | (1,551) |
| Taxation paid | (3,510) |
| Cash flows from operating activities | 12,119 |
Potential triggers for an enquiry
We might enquire if the movement in inventory is significantly different to that shown in the balance sheet and there is no obvious explanation for the difference (such as a business acquisition or disposal in the period).
We might ask the company to explain why interest paid was significantly different to the charge included in the income statement, if we identified material unexplained differences when reconciling movements in borrowings.
Potential triggers for an enquiry
The revenue note and strategic report indicate that the company both rents assets and sells ex-rental assets to customers, suggesting that the cash flows should be classified as operating (IAS 7.14).
The notes to the accounts indicate that the dividend was not paid prior to the year end.
We might enquire about the nature of the dividend arrangements and the reason for inclusion in the cash flow statement.
The borrowings note describes a repayment of one loan balance and the drawdown of another, suggesting inappropriate net presentation in the cash flow statement (IAS 7.21).
Example 11: Cash flows from investing activities
| Purchases of property, plant and equipment | (12,630) |
| Purchases of intangible assets | (1,325) |
| Sale of shares in subsidiary company | 7,500 |
| Disposals of property, plant and equipment | 2,300 |
| Cash flows from investing activities | (4,155) |
Example 12: Cash flows from financing activities
| Dividends paid | (5,610) |
| Movement in borrowings | (2,600) |
| Payment of contingent consideration | (14,500) |
| Principal element of lease payments | (1,250) |
| Cash flows from financing activities | (23,960) |
Potential triggers for an enquiry
We might enquire if disclosures elsewhere in the accounts indicated that the company has not lost control of the subsidiary. This suggests the cash flow is a sale of a non-controlling interest, which should be classified as a financing activity (IAS 7.42B).
The announcement of the acquisition on the company's website notes that the former owner of an acquired subsidiary is entitled to employment-linked contingent payments. It is unclear if the cash flow relates to this arrangement. We might ask about the nature of the contingent payment and if it should have been treated as remuneration and an operating cash flow (IFRS 3.52(b)).
Other observations
The matters relating to cash flow statements that we most commonly raise as observations not requiring a formal response include:
Changes in liabilities arising from financing activities
- Incomplete information on changes in liabilities arising from financing activities, e.g. by not including items such as lease liabilities (IAS 7, paragraphs 44A, 44D).
- Highly aggregated disclosure that combines multiple non-cash movements into one line item. Further disaggregation – separately showing the effects of changes in foreign exchange rates, changes due to capitalised interest, fair value or business combinations is more informative (IAS 7, paragraph 44B).
- Changes disclosed could not be reconciled back to the cash flow statement. This is often the case when a net debt reconciliation is presented without being adapted to include the subtotal of changes in liabilities arising from financing activities (IAS 7, paragraphs 44D-44E, BC21).
Non-cash transactions
- The nature of non-cash transactions is not clearly explained or they have not been clearly distinguished from transactions that resulted in a cash flow as required by paragraph 43 of IAS 7. Examples of non-cash transactions include entering into new leases, acquisition of an entity by means of an equity issue, and specific arrangements for the settlements of dividends.
Accounting policies
- The omission of an accounting policy on 'restricted cash' or similar balances when such items are referenced elsewhere in the accounts. The amount of such cash should also be disclosed (IAS 7, paragraph 48, IAS 1, paragraph 117).
- A lack of accounting policy in relation to supplier finance arrangements or customer invoice discounting, where the disclosures elsewhere indicate that such programmes are present (IAS 1, paragraph 117). In relation to supplier finance arrangements, for the periods beginning on or after 1 January 2024, there are additional disclosures required by IAS 7, paragraphs 44F-44H. 9
Consistency with the strategic report
- Inconsistencies between the narrative in the strategic report and the amounts presented in the cash flow statement. This may also lead to difficulties in reconciling certain measures presented in the strategic report, such as free cash flow, to the information in the cash flow statement (Companies Act 2006, s414C (2)(a), (3)).
5. Impairment of non-financial assets
Virtually all companies hold non-financial assets that are subject to impairment testing under IAS 36, 'Impairment of Assets'. The related disclosures provide a valuable insight into management's view of the business and their expectations for its future. In parent company accounts, impairments can reduce distributable profits.
We have looked at this topic in previous thematic reviews. 10 It is common for us to ask questions about the assumptions companies have used in their impairment testing.
Good impairment disclosures:
- Provide adequate information about the key inputs and assumptions used in the testing undertaken.
- Explain the sensitivity of recoverable amounts to reasonably possible changes in assumptions, where required.
- Are consistent with information elsewhere in the annual report, such as events or circumstances that are indicators of potential impairment.
- Provide information on significant judgements made in relation to the carrying value of parent company's investments in subsidiaries, particularly when the parent company's net assets are higher than the market capitalisation of the group.
- Are regularly reviewed and updated for any changes in the methodology and assumptions used.
Queries we might raise with companies
Most of our queries relating to impairment of non-financial assets request further information about the key inputs and assumptions to the testing undertaken. We may also raise questions about the following areas:
- Determination of cash generating units (CGUs) and the allocation of goodwill to CGUs or groups of CGUs.
- Recoverability of investments in subsidiaries.
Our review identified potential queries, in areas consistent with those listed above, in about 10% of the selected companies. This is similar to our write-rate on this topic in routine reviews of non-FTSE 350 companies last year.
On the following pages, we provide examples of good practice and highlight factors that might lead to us raising queries with companies.
Good quality application
The company has clearly articulated the basis on which the recoverable amount has been determined and the key inputs to their model (IAS 36.134(c)).
Example 13: Extract from notes – disclosure of key assumptions and sensitivity analysis The group tests goodwill for impairment at least annually. For each CGU, the recoverable amount is based on value in use. The key assumptions in the test are revenue growth rates, gross margins and discount rates.
UK and Ireland CGU: Based on the average revenue growth and margins experienced in the past two years continuing over the next five years, a long-term growth rate of 2.0% and a pre-tax discount rate of 15.5%, the net present value of future cash flows exceeds the carrying value of the CGU. Consequently, no impairment has been recorded. No reasonably possible changes in assumptions, individually or in combination, result in the CGUs carrying amount exceeding its recoverable amount.
Mainland Europe CGU: Based on an average revenue growth over the next five years of 5.4% and a margin improvement of 2.0% (based on the strategic recovery plan described in the strategic report), a long-term growth rate of 2.0% and a pre-tax discount rate of 16.8%, the net present value of future cash flows exceeds the carrying value of the CGU by £3.1m. Consequently, no impairment has been recorded.
With all other assumptions remaining constant, if no gross margin improvement were obtained over the forecast period, the business would need to achieve additional revenue growth of 5.2% during the forecast period to avoid a potential impairment. Alternatively, if revenue remained constant, an additional absolute improvement in gross margin of 1.2% would be required to avoid an impairment.
Good quality application
Quantitative information on headroom and key assumptions – clearly indicating whether sensitivities are on an absolute or relative basis – has been provided for a CGU where a reasonably possible change in assumptions would lead to an impairment (IAS 36.134(f)).
The key inputs and assumptions are provided for each CGU, as well as the period over which cash flows have been projected and the discount rate used (IAS 36.134(d)).
Good quality application
The company has clearly disclosed the amount of impairment loss for each class of assets and the income statement line items they are included in (IAS 36.126).
Example 14: Extract from notes – impairment During the year, impairment losses of £8.3m on the group's manufacturing operations were recognised within cost of sales:
| £m | |
|---|---|
| Property, plant and equipment | 4.2 |
| Right-of-use assets | 2.3 |
| Intangible assets | 1.8 |
Example 15: Extract from parent company investments note Industrial plc directly holds 100% ownership of Holdco Limited. It indirectly holds 100% ownership of all other Group entities. The investment in subsidiary is assessed to determine if there is any indication the investment might be impaired.
During the year, Industrial plc's market capitalisation has been lower than the net assets of the parent company. As a result, management performed an impairment test to determine whether the recoverable amount exceeded the cost of investment recognised.
The Group's value in use for goodwill impairment testing purposes has been adjusted for the subsidiaries' debt and tax balances to arrive at the value in use for Holdco Limited. As a result of the test, no impairment was necessary and no reasonably possible change in assumptions would result in the value in use being lower than the carrying value of the investment.
Good quality application
The company has been clear about the judgements it has made (IAS 1.122), noting the impairment indicator related to a low market capitalisation (IAS 36.12(d)) and has explained how it has then tested for impairment.
Potential triggers for an enquiry
Elsewhere in its annual report, the company analyses its results based only on geographical areas. We might ask how it satisfied the requirement that no CGU is larger than an operating segment (IAS 36.80).
We might also ask the company the basis on which future capital expenditure had been included in the calculation if there was evidence that this might amount to enhancements of the asset (IAS 36.44).
Example 16: Extract from notes – impairment methodology The Group has two CGUs, Pharmaceuticals and Consumer Products. Goodwill arising on acquisitions has been allocated to these CGUs.
Goodwill is tested annually for impairment on the basis of value in use calculations using discounted cash flows. The company has used approved budgets for five years and future capital expenditure is assumed in order to facilitate the forecast revenue growth.
The company has applied a long-term growth rate of 3% to the terminal year. Cash flows have been discounted at a discount rate of 14.5%.
Example 17: Extract from notes – accounting policies: property, plant and equipment Depreciation is charged to the income statement on a straight-line basis to write off the cost of the assets over the following estimated useful lives: Leasehold properties – 1-20 years up to the maximum of the lease term; vehicle fleet – 5-15 years; fixtures, fittings and equipment – 3-20 years.
The following narrative extract is included elsewhere in the annual report
As part of its commitment to sustainability, the company plans to electrify its vehicle fleet over the next seven years.
Potential triggers for an enquiry
We might ask the company why it considered the same assumptions were appropriate for both of its CGUs if evidence elsewhere suggested that different parts of the group's operations were subject to different risk profiles, or if the assumptions were different from those used in the going concern and viability statement disclosures.
If the useful economic life of vehicles was unchanged from previous years and the net book value of the assets was high in relation to their original cost, we might enquire how the company had assessed the effect of its plan to electrify its fleet, and if it had considered the potential need to perform an impairment test.
Potential triggers for an enquiry
The company is silent about whether a reasonably possible change in a key assumption would cause the carrying amount to exceed its recoverable amount (IAS 36.134(f)). If other areas of the accounts indicate that headroom might not be significant or we are concerned about other areas of the impairment calculation, we might enquire about the level of headroom observed in the calculations and how the company had met the disclosure requirements of IAS 36.134(f).
Example 18: Extract from notes – key assumptions appear to be outliers to peer companies The growth rate in the forecast period is based on detailed management budgets for those years, which is consistent with actual revenue growth achieved in recent years. The long-term growth rate is 2.5%. The discount rate used is 5.6%, based on the Group's weighted average cost of capital.
Example 19: Extract from notes – lack of disclosure of sensitivity of output to changes in assumptions The company has performed an impairment test on each of its CGUs to which goodwill has been allocated. The value in use of each CGU was higher than the recoverable amount and so no impairment has been recorded.
Example 20: Parent company – investment in subsidiaries note
| 2024 £m | 2023 £m | |
|---|---|---|
| Cost and net book value | 152.6 | 152.6 |
The company's investments in subsidiaries are stated at cost less accumulated impairment.
Potential triggers for an enquiry
Where there is no clear company-specific reason for it, we might enquire why the discount rate used is significantly lower than that used by the company's peers.
We might ask the company how the requirements of IAS 36 had been met for these investments if there was other information that suggested an indicator of impairment, such as a low market capitalisation, or an impairment had been recorded in the Group income statement (IAS 36.12(d)).
Other observations
The matters relating to impairment of non-financial assets that we most commonly raise as observations not requiring a formal response include:
Accounting policies
- The accounting policy for goodwill suggests that reversals of impairments of goodwill are recognised, contrary to the prohibition in paragraph 124 of IAS 36, but there is no evidence that such a reversal has occurred.
- A lack of information about the impairment model used, for example, if the recoverable amount is based on value in use or fair value less costs of disposal.
- Inconsistencies between the impairment methodology described in the accounting policy and the narrative in the notes, e.g. differences in the length of the period covered by the financial budgets/forecasts.
Key assumptions and other disclosures
- Where a relevant aspect of the disclosures required by paragraph 134 of IAS 36 has been omitted or is unclear, but there is no evidence that the underlying assumptions and inputs used are inappropriate.
- The omission of comparative information, as required by paragraph 38 of IAS 1, such as prior period discount rates and growth rates.
- A lack of explanation of the changes in the key assumptions, e.g. significant increases or decreases in discount rates compared to the prior period.
- The disclosure of post-tax discount rates used for value in use calculations, without also providing the equivalent pre-tax discount rates. As we highlight in our 2022 thematic review on discount rates, paragraph 134(d)(v) of IAS 36 requires pre-tax rates to be disclosed regardless of which rates were used in the calculation.
- Where an impairment has been recognised, but the recoverable amount of the related asset or CGU is not disclosed (IAS 36, paragraph 130(e)).
Sensitivity analysis
- Non-disclosure of the values of key assumptions or the amount by which they would need to change where there is indication that reasonable possible changes in key assumptions could give rise to impairment (IAS 36, paragraph 134(f)).
- Missing information on the extent of the risk of material adjustment to asset carrying values in the next year when impairment is disclosed as a significant estimate. This could include sensitivity analysis or ranges of outcomes (IAS 1, paragraphs 125, 129).
6. Financial instruments
Information on financial instruments, such as trade receivables, trade payables and bank loans, provides valuable insight into a company's liquidity and viability. Occasionally, more complex financing arrangements are in place, potentially exposing companies to more volatile cash flow and fair value risks. Appropriate accounting and disclosure for these instruments is crucial to understand transactions and their effect on a company's financial position and performance, and its longer-term risks.
These instruments have featured in our thematic reviews 11 in the past, where we focused in more detail on offsetting, fair value measurement, the disclosure of risks, and expected credit losses.
Transparency around financial instruments is key to understanding a company's exposure to financial risks.
Good disclosures on financial instruments include:
- An accounting policy that is tailored and provides in-depth explanations for the most material and complex financial instruments.
- Clarity over the nature and extent of risks arising from financial instruments, including both qualitative and quantitative information.
- Financial risk assumptions and disclosures that reflect the risks and circumstances disclosed elsewhere in the financial statements.
Queries we might raise with companies
Our queries in this area mainly relate to questioning the recognition or measurement basis of financial instruments. Given the potential complexity of financial instrument accounting, and the judgements it can involve, inappropriate treatments may have a significant effect on the financial statements.
The areas where we most frequently raise queries relate to:
- Initial recognition and subsequent measurement of loans payable and receivable, including convertible loans.
- Expected credit losses in relation to balances receivable.
- Accounting for warrants, own equity instruments and written put options over non-controlling interests.
Our review identified potential queries in about 5% of the selected companies, which is less than in the other areas of this thematic review and is also less than our write-rate in routine reviews of non-FTSE 350 companies last year. However, we identified a significantly higher number of other observations, indicating notable room for improvement in the overall quality of the disclosures in this area.
On the following pages, we provide examples of good practice and highlight factors that might lead to us raising queries with companies.
Example 21: Extract from notes – liquidity risk disclosures Infrastructure Services plc manages liquidity risk by monitoring actual and forecast short and medium-term cash flows and by maintaining adequate cash reserves and bank facilities. The nature and timing of the contractual cash flows, together with changes in business mix, caused the cash balances to reflect minimal variances between the average month-end and week-end balances during the year. The average month-end net cash balance during the year was £200m (2023: £180m) and the average week-end net cash balance during the year was £195m (2023: £178m).
Customers awarding long-term contracting work may require the Group to provide performance and other bonds. Consequently, the Group is reliant on its ability to source bank and surety bonds. It has facilities in place to provide these bonds and monitors the usage and regularly updates the forecast usage of these facilities. None of these bonding facilities are available for borrowing.
At year-end, the Group had bonding facilities of £250m (2023: £250m) and a £70m (2023: £70m) revolving credit facility (RCF), maturing on 30 September 2026. The utilisation of the bonding facilities amounted to £55m (2023: £59m) and the RCF was drawn by £20m at year-end (2023: £20m). These unsecured facilities have financial covenants based on interest cover and net debt measured quarterly and liquidity measured monthly. The Group complied with all covenants in 2024.
Maturity analysis of financial liabilities based on undiscounted cash flows:
| 31 December 2024 | Carrying amount £m | Contractual cash flows £m | Within 1 year £m | 1 to 2 years £m | 2 to 5 years £m | Over 5 years £m |
|---|---|---|---|---|---|---|
| Trade payables | 55.0 | 55.0 | 53.0 | 2.0 | - | - |
| RCF | 20.0 | 22.7 | 1.5 | 21.2 | - | - |
| Lease liabilities | 44.0 | 60.0 | 13.0 | 10.0 | 29.0 | 8.0 |
| Total | 119.0 | 137.7 | 67.5 | 33.2 | 29.0 | 8.0 |
Good quality application
Company-specific disclosure on liquidity risk including both quantitative and qualitative information, which also explains that the year-end balance is representative of the working capital throughout the year (IFRS 7.31, 35, 39(c)).
Additional information provided about the off-balance sheet bonding facilities and the RCF, including their related covenants (IFRS 7.31, IAS 1.76ZA).
The maturity analysis for undiscounted financial liabilities uses time bands appropriate to the amounts included within them (IFRS 7.39(a), B11).
Example 22: Extract from accounting policy and notes – credit risk – loss allowance for trade receivables based on a provision matrix Construction Materials plc applies the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance for all trade receivables and contract assets. The loss allowance for other receivables, which mainly comprise loan receivables from our joint operations, is based on the three-stage expected credit loss model. No other receivables have had material impairment.
Under the simplified approach, an impairment analysis is performed at each reporting date using a provision matrix. The provision rates are based on days past due. The provision matrix is initially based on the Group's historical observed default rates over the previous three years. The historical loss rate is then adjusted to take into account forward-looking information, such as GDP growth and unemployment rates. Additional specific provisions are made where evidence, such as customer credit rating, suggests there is a higher risk of default. The increase in the Group's loss allowance reflects the previous downturn in the market with ongoing volatility, following an increase in inflation and interest rates, which have a subsequent impact on mortgages and the construction and housebuilding sectors. The concentration of credit risk is limited due to the customer base being large and unrelated.
Trade receivables and contract assets
| Expected credit loss (ECL) rate | Gross amount £m | Impairment provision £m | Net amount £m | |
|---|---|---|---|---|
| Contract assets and receivables not past due | 0.45% | 295.0 | (1.3) | 293.7 |
| Receivables past due 0 to 30 days | 0.66% | 50.4 | (0.3) | 50.1 |
| Receivables past due 31 to 60 days | 2.56% | 15.0 | (0.4) | 14.6 |
| Receivables past due 61 to 90 days | 3.25% | 5.2 | (0.2) | 5.0 |
| Receivables past due more than 90 days | 19.51% | 10.1 | (2.0) | 8.1 |
| Specific provision against individual debtors | up to 100% | 4.2 | (2.5) | 1.7 |
| Balance as at 31 December 2024 | 379.9 | (6.7) | 373.2 |
Good quality application
Explains that the simplified approach is applied to trade receivables and contract assets and the general approach is used for other receivables in accordance with IFRS 9.5.5.15 and IFRS 9.5.5.3. The nature of other receivables is explained.
Disclosure of the inputs and assumptions used to calculate the loss allowance as well as entity-specific explanation of the increase in the loss allowance (IFRS 7.35G).
Disclosure of information on credit risk concentration as required by IFRS 7.35B(c).
The provision matrix discloses gross carrying amounts of trade receivables and contract assets by days past due and the specific provision, along with the provision rates (IFRS 7.35M, 35N).
Potential triggers for an enquiry
We might question the basis for measuring the investment at amortised cost as it is unclear how the conversion feature meets the 'solely payments of principal and interest' (SPPI) test. We would generally expect this type of investments to be measured at fair value through profit or loss (IFRS 9.4.1.2, Β4.1.7A).
We might seek additional information on the company's conclusion that there are no expected credit losses in relation to the loan to the associate, in particular, how the scenario where the associate does not achieve commercial production was considered (IFRS 9.5.5.17(a), B5.5.42, 5.5.18).
Example 23: Extracts from accounting policy and notes – investments The Group holds an exclusive call option to acquire 75% share capital of Investee Ltd at an agreed multiple of adjusted EBITDA. The call option period commenced two years ago and ends in one year. The Group is deemed not to have substantive control over the investee.
The Group also holds a convertible loan asset which conveys rights over the remaining 25% of the equity in Investee Ltd. This instrument is measured at amortised cost, subject to any impairment, as the Group intends to hold it with the objective of collecting contractual cash flows.
Example 24: Extract from notes – loans receivable During the period the Group provided an additional unsecured loan to its mining associate with a fixed interest rate of 2.5%. The loan is repayable in monthly instalments when funds are available.
Determination as to whether the loan to the mining associate is recoverable involves management judgement. Management used discounted cash flow forecasts of the associate and considered a range of sensitivities in respect of sales, cost of sales and discount rates, and assumed that the relevant permits will be granted. The Group concluded that no impairment is required at year-end on the assumption that commercial production can be achieved.
Potential triggers for an enquiry
It is not evident from the balance sheet whether an asset was recognised for this call option or, if so, how it was measured (IFRS 9.4.1). We may seek an explanation of this from the company.
We might ask the company for further details on why the group considered there was no control over the investee at year-end (IFRS 10.5).
It is unclear how the initial fair value of the loan was determined as the interest rate of 2.5% appears to be low when compared to the market rate (IFRS 9.5.1.1, IFRS 13.22).
Potential triggers for an enquiry
If it is not evident in the balance sheet, we might enquire whether a liability for the remaining share buyback has been recognised at the year-end (IAS 32.23).
The narrative in the strategic report is inconsistent and lacks clarity on whether the repurchase liability has been recognised. We may seek clarification of the accounting for this arrangement.
Example 25: Extracts from accounting policy and notes – share buyback programme Buyback plc has entered into an irrevocable commitment to repurchase 400,000 shares up to a maximum aggregate consideration of £3.5m. At year-end, 75,000 shares had been repurchased at a cost of £0.6m.
The following narrative extracts are included in the strategic report:
The cash position was lower due to the allocation of £3m for the share buyback programme.
In light of the results achieved in the year, together with the unutilised portion of the allocated funds for the share buyback programme, the Board has declared a final dividend of 15.0 pence per share.
Example 26: Extract from accounting policy – offset in cash and cash equivalents Cash and cash equivalents comprise cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Overdrafts are included only where a legal right of offset exists.
Potential triggers for an enquiry
We may check if the information about the arrangement disclosed in the accounts is consistent with the company's announcement on the Regulatory News Service (RNS) and may enquire about any potentially material inconsistencies.
Where there is evidence that an overdraft or other loan has been offset against cash and cash equivalents in the balance sheet, in light of the IFRS Interpretation Committee's (IFRIC) March 2016 conclusion, we may ask the company the basis on which it considers it has met the 'intention to settle net' criterion (IAS 32.42(b)).
Other observations
The matters relating to financial instruments that we most commonly raise as observations not requiring a formal response include:
Liquidity risk – information about financing covenants
- A lack of additional information about a company's financing covenants, such as performance against these covenants and the available headroom during the period. This disclosure is particularly useful where liquidity is a principal risk, the headroom is tight or there is a material uncertainty in relation to going concern.
- We note that IAS 1, paragraph 76ZA, introduces explicit requirements for periods beginning on or after 1 January 2024 to disclose information about covenants and indicators of potential difficulties in complying with them.
Liquidity risk – maturity analysis for financial liabilities
- The maturity analysis does not include all financial liabilities, and/or they are presented on a discounted rather than undiscounted basis, as required by IFRS 7, paragraph 39. In addition, more granular information might be more appropriate if substantial amounts are combined in a single time band.
Market risk sensitivity
- The sensitivity analysis for each type of market risk is either missing or does not show the effect on both profit or loss and equity, as required by paragraph 40 of IFRS 7.
Credit risk – expected credit losses (ECL)
- Missing or incomplete disclosure of the inputs, assumptions and estimation techniques used to measure lifetime ECLs (IFRS 7, paragraph 35G).
- Non-disclosure of a reconciliation between the opening and closing balance of the loss allowance, as required by IFRS 7, paragraph 35H, or instances where changes do not reconcile to ECL losses or reversals disclosed elsewhere.
- Omission of disclosures regarding the gross carrying amount of trade receivables, contract assets and lease receivables by credit risk rating grades, as required by IFRS 7, paragraphs 35M and 35N, such as a provision matrix by days past due.
- Clarity on whether contract assets are subject to impairment as required by IFRS 9, paragraph 5.5.15.
Disclosure of categories of financial instruments
- The categorisation of financial instruments, as required by IFRS 7, paragraph 8, excludes certain classes of financial instrument, or includes some balances that are not financial instruments. For example, supplier accruals are generally considered financial liabilities whereas taxation and deferred income are not. In some instances, it is unclear how the amounts disclosed as financial instruments reconcile to assets and liabilities disclosed elsewhere.
7. Clear and concise reporting
Clear and concise reporting is key to communicating information effectively. 12 As part of our review, we identified several areas where companies could remove irrelevant or immaterial information and reduce the length of their annual reports.
Accounting policies
- IAS 1, paragraph 117, requires an entity to disclose material accounting policy information. Accounting policy information is material if it can reasonably be expected to influence decisions of the primary users of financial statements. To this end, we frequently see instances of irrelevant accounting policies being disclosed. For example, accounting policies on financial instruments referring to classes of financial assets or liabilities that are not present in the accounts.
- We continue to see accounting policies that use old terminology, for example, referring to the IAS 39 incurred loss impairment model, rather than the IFRS 9 expected credit loss model.
Key sources of estimation uncertainty
- Paragraph 125 of IAS 1 requires disclosure of those assumptions and other major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next year.
- We often see disclosures where, based on sensitivity analysis, there does not appear to be a high risk of material adjustment in the next year. We do not discourage highlighting longer-term sensitivities when they are material; however, companies should clearly distinguish these from paragraph 125 disclosures or remove them if uncertainties are no longer material.
Parent company accounts
- We see instances where parent company accounts are prepared under IFRS Accounting Standards; however, UK GAAP offers the alternative to prepare these accounts under FRS 101, ‘Reduced Disclosure Framework'.
- Companies may wish to consider moving their parent company accounts to FRS 101 to simplify their reporting. For example, by applying FRS 101, qualifying entities may take the exemption from presenting (among other things) a parent company cash flow statement, and disclosures in relation to financial instruments and impairment of non-financial assets. 13
Cross referencing
- We note instances in the annual report where the same information is repeated in the front half and back half or between accounting policies and the notes. The use of cross references is often a practical way to avoid duplication while retaining the readability of the annual report.
8. Key expectations
We encourage smaller listed companies to consider the examples included in this publication to maximise the transparency, consistency and accuracy of their annual report, particularly in respect of complex or judgemental transactions and balances. To this end, we expect smaller listed companies to:
- Ensure consistency between the information about revenue provided in the accounting policy, the related notes and the strategic report.
- Pay particular attention to the matters included in the revenue recognition accounting policy, which should include clear explanations of the timing of satisfaction of performance obligations, determination of the transaction price, agent versus principal considerations, and the associated judgements.
- Appropriately classify cash flows as operating, investing or financing, to exclude non-cash transactions from the cash flow statement, and ensure consistency between the amounts disclosed in the cash flow statement and the information disclosed elsewhere.
- Clearly explain significant judgements and estimates and key assumptions, and ensure consistent narrative throughout the annual report, when events and circumstances have triggered an impairment loss on non-financial assets.
- Disclose the nature and extent of risks arising from the financial instruments, such as liquidity and credit risks, and provide tailored accounting policies for more complex financial instruments that clearly describe the bases for the initial classification and subsequent measurement.
- Ensure clear and concise reporting by removing irrelevant detail, keeping accounting policies up to date and avoiding duplication through the use of cross references.
9. Bibliography and glossary
Our previous thematic reviews relevant to the topics discussed in this publication are:
Revenue
- Reporting by the UK's largest private companies
- IFRS 15 'Revenue from Contracts with Customers': A follow up review
- IFRS 15 'Revenue from Contracts with Customers': Review of Disclosures in the First Year of Application
Financial instruments
- Offsetting in the financial statements
- Reporting by the UK's largest private companies
- IFRS 13 ‘Fair value measurement'
- IFRS 9 Thematic Review: Review of Disclosures in the First Year of Application
Impairment of non-financial assets
- Impairment of non-financial assets
- Discount rates
Cash flow statements
- Cash flow and liquidity disclosures
- Appendix 2 Supplier finance arrangements disclosure in the 2024/25 Annual Review of Corporate Reporting
Clear and concise reporting
- What Makes a Good... Annual Report and Accounts
Glossary
Below is the list of IFRS Accounting Standards and UK GAAP referred to in this publication and their full titles:
- IFRS 7 'Financial Instruments: Disclosures'
- IFRS 9 'Financial Instruments'
- IFRS 10 'Consolidated Financial Statements'
- IFRS 15 'Revenue from Contracts with Customers'
- IAS 1 'Presentation of Financial Statements'
- IAS 7 'Statement of Cash Flows'
- IAS 11 'Construction Contracts' (withdrawn and superseded by IFRS 15)
- IAS 32 'Financial Instruments: Presentation'
- IAS 36 'Impairment of Assets'
- IAS 39 'Financial Instruments: Recognition and Measurement'
- FRS 101 'Reduced Disclosure Framework'
Financial Reporting Council
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Birmingham office: 5th Floor, 3 Arena Central, Bridge Street, Birmingham, B1 2AX +44 (0)20 7492 2300
Visit our website at www.frc.org.uk
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The proportion of companies to which we write 'substantive letters' compared to the total number of annual reports we review each year is known as our 'write-rate'. We write these sorts of letters to companies when we need additional information or further explanations to help us determine whether there is a material breach of the relevant reporting requirements relating to a company's strategic report, directors' report or annual accounts. ↩
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ISA (UK) 700 (Revised) ‘Forming an Opinion and Reporting on Financial Statements' and ISA (UK) 540 (Revised) 'Auditing Accounting Estimates and Related Disclosures' ↩
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Paragraph 191 of the FRC's Corporate Governance Code Guidance (published January 2024) ↩
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See Bibliography in section 9 ↩
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Section 414C paragraph 8(b) of the Companies Act 2006 applies to companies on the Official List, those officially listed in an EEA state or those listed on the New York Stock Exchange or Nasdaq. It does not apply to AIM-listed companies. ↩
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Note 5 not reproduced in this example. ↩
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The UK Endorsement Board (UKEB) recently published research findings on the cash flow statement highlighting its importance to users. ↩
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See Bibliography in section 9 ↩
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Appendix 2, supplier finance arrangements disclosure, in our 2024/25 Annual Review of Corporate Reporting explains these new requirements in more detail. ↩
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See Bibliography in section 9 ↩
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See Bibliography in section 9 ↩
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See also our December 2022 publication What Makes a Good...Annual Report and Accounts ↩
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Exemptions in relation to financial instruments and impairment of assets may be available provided that equivalent disclosures are included in the consolidated financial statements of the group ↩