The FRC’s latest Annual Review of Corporate Reporting examined the financial statement disclosures of many FTSE 350 companies, among others, for the 2024/25 cycle. Its findings revealed weaknesses and deficiencies. What were they, and how should your company address them?
The review provides important regulatory insight into areas where reporting continues to fall short of the requirements of IFRS and UK company law. The findings highlight systemic weaknesses and recurring judgemental errors.
This latest edition identified 10 principal accounting areas that generated significant queries during the review process. They underline where companies are still failing to deliver on financial reporting expectations.
Key areas of focus included:
- Impairment of assets, cash flow statements and financial instruments – highest number of significant queries
- Presentation and revenue recognition – deficiencies in clarity, appropriate application of materiality, and alignment with accounting standards
- Strategic reports, judgements and estimates and income taxes – emphasis on transparency and compliance with Companies Act requirements
- Consolidated financial statements – in top 10 areas of regulatory scrutiny for the first time, as a result of challenges with assessment under IFRS 10 concerning control
- Climate-related disclosures.
Despite overall improvements in the quality of narrative and quantitative disclosures, there are still too many restatements from companies outside the FTSE 350.
What were the FRC’s key findings?
- Impairment of assets
Impairment of assets remained the most common source of regulatory challenge, although none directly led to restatements. There were inconsistencies in assumptions used in impairment models and those disclosed elsewhere, particularly in viability statements. Some companies wrongly included cash flows from asset enhancement in VIU calculations, contrary to IAS 36. There was a lack of clarity in disclosures on cash-generating units.
Looking at the findings, it seems many of the issues could have been mitigated through clearer and more concise disclosures on key inputs and assumptions underpinning impairment assessments. Companies could also improve cross‑referencing and consistency between impairment disclosures and other sections of the annual report.
- Cash flow statements
Cash flow statements continued to generate restatements, though fewer than the year before. Misclassification of cash flows between operating, investing and financing activities was still the main issue.
Errors often related to failures to exclude non‑cash items from operating cash flows or the wrong inclusion of accounting entries in investing or financing sections. The FRC stressed the need to apply IAS 7 consistently, avoid offsetting, and ensure narrative descriptions match the amounts disclosed.
- Financial instruments
Financial instruments again featured heavily, reflecting judgements applied in IFRS 9 and IAS 32. All restatements related to inappropriate offsetting of financial instruments without meeting IAS 32’s strict criteria.
Expected credit loss (ECL) disclosures were often incomplete or generic, with insufficient entity‑specific information about models, assumptions and risks.
Companies must clearly explain the nature and extent of risks arising from financial instruments and provide transparent detail on ECL methodologies.
- Presentation of financial statements
The FRC asked fewer substantive questions on the presentation of financial statements than for 2023/24. But more restatements were needed. This was down to inconsistencies in the classification of amounts due from group undertakings between current and non-current. There were also omissions of accounting policies for material transactions or amounts, and inadequate disclosures on complex or unusual transactions and their nature.
It’s important that entities provide disclosures that are sufficiently detailed to enable users of the financial statements to understand complex and judgement‑sensitive transactions. They must clearly articulate accounting policies for all material items, to support transparency and compliance.
- Revenue
Since its September 2020 thematic review on revenue, substantive FRC enquiries have continued to decline during the 2024/25 review cycle.
Most remaining queries were on the clarity and robustness of accounting policies and disclosures of significant judgements.
Insufficient explanation of the basis for revenue recognition was highlighted, along with inadequate disclosure of how performance obligations were satisfied over time or at a point in time, weaknesses in the setting of the transaction price, and insufficient consideration of principal versus agent assessments.
- Strategic Report and Companies Act matters
There were fewer enquiries than for 2023/24, but dividend lawfulness remained a recurring issue. Challenges included insufficient distributable reserves at the point of declaration. There were also failures to comply with Companies Act requirements governing distributions. The FRC emphasised that strategic reports must provide a fair, balanced and comprehensive review of the business and that all dividends must be legally compliant.
- Judgements and estimates
There was stress on the need for high‑quality disclosures that explain significant judgements and sources of estimation uncertainty. Many disclosures lacked detail, particularly on sensitivities and key assumptions. There were inconsistencies between front‑end reporting and notes to the accounts, where a significant judgement was implied but not disclosed. Entities must distinguish clearly between judgements and estimates, provide granular detail, and ensure consistency throughout.
- Income taxes
Queries centred on the recognition of deferred tax assets without adequate evidence of future profitability, and on share‑based payment deductions where timing and forecast taxable profits were not fully considered. Inconsistencies between the tax reconciliation note and other disclosures were also common. The FRC expects transparent and well‑supported IAS 12 disclosures, particularly on the recoverability of deferred tax assets.
- Consolidated financial statements
Consolidation issues featured in the top 10 for the first time in several years. There were weaknesses in companies’ documentation and disclosure of control assessments under IFRS 10, especially in complex structures or transactions that changed ownership percentages without loss of control. Companies should clearly explain all factors considered in determining control and disclose significant judgements.
- TCFD, CFD and climate-related narrative reporting
As companies grow increasingly familiar with reporting rules on climate-related issues, there is less need each year for FRC queries.
There were questions where companies had failed to provide qualitative or quantitative analysis in their business model, and in cases of wrong applications of the small companies’ strategic report exemption, which would have included CFD disclosures, and inconsistent reporting on GHG emissions across the annual report.
Companies must ensure that disclosures are clear, concise and specific to them. They also need to disclose any material impact of climate change in the financial statements and be consistent between climate-related disclosures and others in the annual report.
What are the FRC’s expectations for the 2025/26 reporting cycle?
With few changes for the current period, the FRC’s expectations remain consistent. The UK’s principles‑based framework asks companies to exercise sound judgement in determining recognition, measurement and disclosure. Preparers must focus on what information is necessary to convey a coherent, entity‑specific story rather than producing extensive but immaterial disclosures.
High‑quality reporting depends on clarity and relevance, not volume. The FRC continues to call for elimination of boilerplate disclosures and a sharper focus on significant risks, judgements and estimates.
For 2025/26, the FRC highlights three priority areas:
- Pre-issuance checks: robust internal review processes are essential to identify technical issues and clear, entity-specific accounting policies will reduce queries and restatements
- Judgement, risks and uncertainties: disclosures must be specific, consistent and explain the rationale behind significant judgements, risks and uncertainties
- Narrative reporting: strategic reports need to provide a balanced and comprehensive review of performance, position and prospects, including compliance with climate-related disclosure requirements.
More on investment companies and share-based payments
The FRC also issued two thematic reviews covering investment companies and share‑based payment arrangements. These clarify expectations on recognition, measurement and classification. They are available on the Financial Reporting Council website.
How can we help
The FRC’s latest Annual Review highlights persistent challenges across impairment, cash flow statements, financial instruments, revenue recognition, judgements and estimates, income taxes, consolidation and climate‑related reporting. These areas continue to attract regulatory scrutiny, and companies must ensure their disclosures are clear, consistent and compliant.
Our Financial Accounting Advisory Services team can help you understand these expectations and strengthen the quality of your reporting. Whether you need help reviewing disclosures, assessing significant judgements, improving narrative reporting or carrying out a pre‑issuance technical review, our experts will work with you to ensure your reporting is robust, accurate and aligned with FRC guidance.
For more information or to schedule a consultation, please contact our experts, Imogen Massey or Calum McChrystal.
