1.06 Note 1.2 says there are no critical judgements and no key estimates, while the auditor's report points to Note 1 for the inventory provision estimate
UK Company A · a UK-listed medical technology group · Regulator-style question
In brief
Note 1.2 states that the Group has [wording masked] of a material adjustment [wording masked] auditor's key audit matter on the US [business unit] [wording masked] says the [wording masked] 1, but the 2025 Note 1 no longer mentions it; the 2024 Note 1.2 did. Note 12 itself says [wording masked], and 2025 also brought a classification change and a [amount] impairment reversal. The question is how the directors reached the nil conclusion.
The evidence, as filed
Screenshot withheld to protect the company’s identity: Annual Report 2025, page 216; Annual Report 2024, page 197; Annual Report 2025, page 201; Annual Report 2025, page 236; Annual Report 2025, page 220; Annual Report 2025, page 235; Annual Report 2025, page 145. Their wording or layout could lead back to the company even with names and figures masked; the evidence list below records what each page shows.
What the report shows, and what the rule requires
| What the annual report shows | What the rule requires |
|---|---|
| What the annual report shows Note 1, critical judgements and estimates: [wording masked] of a material adjustment within the next financial year. Auditor's report: the [wording masked] 1. Note 12: [wording masked]; a [amount] E&O charge was recognised in 2025. The 2024 Note 1 named the E&O provision as an estimate (not critical) and the [business unit] goodwill impairment as a critical estimate. | What the rule requires Either Note 1 identifies the judgements (IAS 1.122) and the sources of estimation uncertainty (IAS 1.125) that the directors consider significant, including the E&O provision as the auditor's report describes, or Note 1.2 explains why none of these meets the thresholds and the auditor's report cross-refers to where the estimate is actually described (Note 12). |
What we checked: Note 1 (all of it), Note 12 inventories, Note 2 legal and other items, Note 11 associates, the auditor's key audit matter, the Audit Committee report and the 2024 Note 1.2
The rule
IAS 1 Presentation of Financial Statements, paragraph 122
Version relied on: UK-adopted international accounting standards (UK Endorsement Board), as in force for financial years beginning in or after January 2025
The accounts must disclose the judgements (other than estimates) that management made in applying its accounting policies and that most affect the amounts recognised.
IAS 1 Presentation of Financial Statements, paragraph 125
Version relied on: UK-adopted international accounting standards (UK Endorsement Board), as in force for financial years beginning in or after January 2025
The accounts must disclose the key assumptions and other major sources of estimation uncertainty that carry a significant risk of a material adjustment to assets or liabilities within the next year.
Why it applies here: IAS 1.125 is limited to a significant risk of material adjustment within the next financial year, and Note 12 deliberately frames the E&O uncertainty as longer term, so the nil statement on estimates may be a supportable judgement; but IAS 1.122 judgements (such as a classification judgement) have no 12-month limit, and the auditor's report describes a Note 1 disclosure that the 2025 Note 1 does not contain.
Why it matters
Readers are told the accounts contain no significant judgements or estimates, while the auditor's report and Note 12 describe a provision with high estimation uncertainty and a cross-reference that no longer lands. The Financial Reporting Council's reviews of judgement and estimate disclosures focus on exactly this consistency.
What the regulator has said on this point
The FRC's thematic review of judgements and estimates (July 2022) asks companies to state explicitly whether an estimate carries a significant risk of a material adjustment within the next financial year, and to describe the specific judgements made in applying their accounting policies ([web address].uk).
Source: FRC publishes review of judgements and estimates, thematic review, July 2022
Exposure
A question for the directors; if the Financial Reporting Council raised it, the realistic outcome would be improved disclosure in the next report, not a restatement.
Our workings
Note 1.2 of the 2025 accounts says there [wording masked] with a significant risk of material adjustment [wording masked] auditor's key audit matter says [wording masked] 1'. The 2025 Note 1 contains no reference to that provision (it is described in Note 12), whereas the 2024 Note 1.2 said other estimates had been identified, not considered critical, for [wording masked]. Note 12 says [wording masked] (more than 12 months); Note 2 records a [amount] excess and obsolescence charge in 2025. The Audit Committee report says management presents a summary of critical accounting estimates at each quarter end. In 2025 the Group also changed an inventory classification policy, and recognised a [amount] impairment reversal.
Removing the 2024 E&O sentence while the auditor's report still relies on it leaves the two parts of the same Annual Report inconsistent.
Management’s best defence, and our reply
Management will say IAS 1.125 is limited to a significant risk of material adjustment within the next financial year, that Note 12 states the inventory provision's range of outcomes is material only over the longer term, and that with the [business unit] goodwill headroom restored no estimate now meets the threshold. It will add that a classification judgement follows a clear policy rather than a case-by-case judgement, and that the associate reversal is booked and therefore no longer uncertain. That is a tenable reading of IAS 1.125, which is why this is put as a question; however, IAS 1.122 judgements have no 12-month limit, the expectation of sale that drives a classification judgement is itself a judgement, and the auditor's report describes a Note 1 disclosure that the 2025 Note 1 does not contain.
The fix
- Add to Note 1.2 the judgements and estimates the directors consider most significant (at least the E&O provision, as described in Note 12, with the reason it is or is not within IAS 1.125's 12-month threshold, and a classification judgement judgement), or state why each falls below the thresholds; ask the auditor to correct the cross-reference to Note 12 if Note 1 is not changed.
Question for the company
How did the directors conclude in 2025 [wording masked], given the high estimation uncertainty described in Note 12 for the excess and obsolescence provision (and the [amount] charge in the year), the classification change based on expected use, and the [amount] impairment reversal; and why was the 2024 Note 1.2 reference to the inventory provision removed while the auditor's report still says Note 1 discloses it?
Evidence relied on
| # | What it shows | Type | Where |
|---|---|---|---|
| 1 | Note 1.2 nil statement for 2025 | Document | Annual Report 2025, page 216 |
| 2 | The auditor's key audit matter says Note 1 discloses the provision as an accounting estimate | Document | Annual Report 2025, page 201 |
| 3 | Note 12 describes high estimation uncertainty in the E&O provision | Document | Annual Report 2025, page 236 |
| 4 | 2025 classification judgement depends on management's expectation of sale | Document | Annual Report 2025, page 236 |
| 5 | Size of the 2025 E&O charge | Document | Annual Report 2025, page 220 |
| 6 | 2025 impairment reversal | Document | Annual Report 2025, page 235 |
| 7 | The Audit Committee receives a quarterly summary of critical accounting estimates | Document | Annual Report 2025, page 145 |
Absence check
- Document
- Annual Report 2025
- Where it would appear
- [n] Critical judgements and estimates
- What is missing
- Any mention in Note 1 of [wording masked] as an accounting estimate, which the auditor's report says Note 1 discloses
- Pages looked at
- p.215-216 (all of Note 1), p.236 (Note 12), p.201 (key audit matter)
- Result
- 'excess and obsolete' hits p.143 (Audit Committee report), [n] (Note 12) and 281 (risk factors); 'obsolescence' hits p.19, [n] (strategic report), [n] (Audit Committee), 202-203 (auditor's report), 222-223 (Note 2 legal and other items), [n] (Note 12) and 290 (other information); 'E&O' hits only the auditor's report p.200-201; 'critical accounting estimate' hits p.145 (Audit Committee) and 302 ([overseas annual filing] cross-reference index pointing to Note 1.2); 'key sources of estimation uncertainty' hits p.206 (auditor, climate) and [n] (the nil statement). None of these places the E&O provision in Note 1.
Prepared by Pramanex from the company’s published annual reports, without the company’s involvement, to show how an annual report review reads. The company is not named, and nothing on this page is a statement about any identifiable company. Observations are not an audit, review or other assurance engagement, and not legal advice. A regulator-style question is a question, not a conclusion.
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