As we head into 2024, the one thing we can say with certainty is that there will be a lot of uncertainty. It is (nearly) certain that we will have an election - but uncertain when it will be. It is (nearly) certain that interest rates will start to come down - but when and by how much? It is certain that businesses and individuals will look to understand the new normal, as the impact of immigration measures, cost of living and global conflicts reach an equilibrium - but very uncertain what that ‘normal’ will look like.
The British Retail Consortium have forecast a ‘challenging’ 2024 - almost a self fulfilling prophecy, as uncertainty leads consumers and businesses to be cautious in their spending, impacting economic growth.
Many companies around the country will now be undertaking the process of pulling together their annual accounts; a snapshot of how the company looks at 31 December 2023. While the majority of this annual financial reporting process is backwards looking; considering how the company performed in 2023, there is also a requirement to look forward. How will the state of uncertainty we find ourselves in impact the accounts?
Narrative reporting
The clearest area of impact is in the narrative reporting - the Directors' and Strategic reports that all companies above a certain size have to submit with their financial reports. There is a requirement to give a "fair review of the company's business” along with “a description of the principal risks and uncertainties facing the company”. While it won't be possible to set out exactly how the economy is going to impact a business over the coming years, it is important to describe those uncertainties and the risks they create.
Asset impairment
There are various requirements to consider impairment throughout UK and International accounting standards. Typically, directors are required to undertake an impairment review on goodwill every year, whereas for plant & equipment held at cost they only need to undertake a full review where indicators of impairment exist. Other assets - trade debtors and stock for example - are also subject to annual impairment consideration, although not always thought of in that terminology.
Uncertainty in the economy can make that process more challenging, but also more likely to result in an impairment. Expected future cash flows from an asset need to be discounted at an appropriate rate, and higher uncertainty can increase the time value of money as well as the direct impact of higher interest rates on the discount rate. Even where impairment is not required, an increased level of judgment being applied to these calculations may trigger the requirement for disclosure as a significant judgment.
Going concern
Finally, an unpalatable topic for most business owners, but the going concern status of a business must be assessed when preparing the accounts. Directors have a requirement to prepare accounts on a going concern basis, unless they intend to cease trading or have no plausible alternative but to do so. While its unlikely for most businesses that this threshold will be passed, it is important to note that any material uncertainties in that assessment must be disclosed - for instance, the impact of uncertainty in future trading conditions on revenue forecasts, or of interest rates on available cash flow.
Conclusion
Sitting here in early January 2024, it is challenging to see what the year will bring; and if the past few years have been any guide, some significant events are likely to come out of left field. However, directors shouldn't shy away from those uncertainties when preparing their financial statements: acknowledge the uncertainty, disclose the impact it has on the accounts and set out any significant judgments made.
Shoppers and retailers set for 'challenging' 2024, says BRC