How fire safety remediation impacts financial reporting

Developers are therefore at risk of not only not being able to meet their obligations to the UK government but also of being unable to properly quantify their financial exposure in relation to fire safety remediation and disclose that information timeously in their financial reporting.

Remediation requirements

Under the government’s remediation acceleration plan, all buildings over 18 metres with unsafe cladding in a government-funded scheme will have to be remediated by the end of 2029. All buildings over 11 metres with unsafe cladding must either have been remediated or have a date for completion by the end of 2029 – otherwise, the government has warned that landlords will be liable for “severe” penalties.

In December 2024, the Ministry of Housing, Communities & Local Government sent letters to developers, setting out the expectation for them to start remediation as soon as possible in 2025 where no work had yet begun.

Recent reports estimate that the remediation works could cost between £12.6 billion and £22.4bn in total. The total taxpayer funding commitment to those works is £5.1bn. Developers are therefore exposed to significant financial risks.

Impact on financial reporting and interaction with auditors

There are between 9,000 to 12,000 medium to high-rise buildings that the government expects will need to be remediated. As of August 2024, only 4,771 have been identified, representing about 40% of the total buildings that will require remediation. This suggests a number of developers remain to identify the full extent of remediation works they will be responsible for and to account for that properly in their financial statements.

Crest Nicholson, a major housebuilder, recently delayed publishing its financial results due to the need for more time to assess the financial impact of fire safety improvements. The company has set aside approximately £245-£255 million for fire safety remediation. This significant provision highlights the potential impact on the financial health of building companies, as they must allocate substantial resources to meet remediation requirements.

The uncertainty of the costs associated with remediation will be on auditors' minds when performing audits of developers. There will be extra scrutiny on any provisions, or lack thereof, for developers that need to take part in the government’s remediation program. Auditors will likely give particular thought to the following issues:

Financial provisions

Developers must allocate substantial financial resources to cover the costs of fire safety remediation. This can lead to significant provisions in their financial statements, affecting profitability and cash flow. There is subjectivity involved in assessing what an adequate provision amount should be and auditors want to understand how estimates have been derived. Auditors are likely to scrutinise provision estimates to obtain sufficient comfort that provisions accurately reflect the potential liability the company is exposed to ensure they are not understated.

Operational disruption

The remediation process can cause disruption to day-to-day operations, including delays in project timelines and increased costs. Developers may need to halt or slow down construction activities to address safety concerns, impacting their overall productivity and revenue generation.

Market confidence

Delays in financial reporting and increased provisions for fire safety can affect market confidence and investor relations. Developers must maintain transparency and clear communication with investors to mitigate these risks. A lack of confidence can lead to a decline in stock prices and difficulties in raising capital.

Legal and regulatory compliance

Developers must comply with stringent government requirements and regulations on fire safety remediation. Failure to meet these requirements can result in penalties and legal actions, further exacerbating financial strain.