FRC Lab: COVID-19 – Going concern, risk and viability (Reporting in times of uncertainty – June 2020)
On June 16, 2020, the Financial Reporting Council’s Lab published a report to provide guidance to companies considering their disclosures in light of the COVID-19 crisis in relation to going concern, risk reporting and the viability statement. The report considers these three key disclosure areas, and it highlights key considerations for companies and questions for boards in those areas. It also includes examples of current disclosure practices (from recent annual reports) and highlights what is useful in those particular disclosure examples.
Points made include the following:
- Going concern assessments – The report notes that while boards may be apprehensive about providing overly detailed going concern and uncertainty disclosures, concerned they may trigger action from investors and others, investor expectations are robust and quality disclosure helps them focus on companies most in need of attention and support. It also notes that a company can be a going concern even where there are material uncertainties that cast significant doubt over that going concern status and, in the current climate, investors expect companies to report many areas of uncertainty and estimation.
- Risk reporting – The report comments that while much of the current disclosure around risks focuses on longer-term risks, disclosure of shorter-term situations may be needed and it highlights elements of disclosure that can be useful in that context. It also points out that companies need to consider how to reflect COVID-19 in their half-year report and determine whether they should update their risks for the half-year disclosure. The report also provides examples of reporting where COVID-19 is a principal risk for a company and examples where the risk of COVID-19 is not to the company itself, but has an impact on other risks such as supply chain, cyber security, financing or health and safety.
- Viability statement – While the lack of certainty about the outcomes of COVID-19 on businesses and other matters remains very uncertain, the report notes that many companies are reluctant to provide a perspective on the future. However, the report notes that, unusually, there might be less certainty over a company’s short-term future than its long-term future, and so a combination of going concern and viability statements are needed to show a company’s position and expectations. The report states that investors want to understand the context of short-term and medium-term decisions to reduce costs, cash outflows and ensure the company’s viability, and see enough detail, so they can assess the impacts structural changes might have on the company over the longer-term.
(FRC Lab: COVID-19 – Going concern, risk and viability (Reporting in times of uncertainty – June 2020), 16.06.2020)
FRC Lab: COVID-19 – Resources, action, the future (Reporting in times of uncertainty – June 2020)
On June 16, 2020 the Financial Reporting Council’s Lab published a report to provide guidance and examples to companies seeking to answer questions in an infographic issued by the Lab in March 2020. This raised questions about reporting on three key areas: resources (including the availability of cash); actions to manage short-term expenditure and ensure viability; and the future (how decisions taken now ensure the company’s sustainability and impact customers, suppliers and employees).
Points made include the following:
- Resources – The report notes that the two critical questions investors want answers to are what cash and liquid resources the company has now and what such resources could it get access to in the short-term? In terms of current resources, the report looks at available and current cash, the amount and nature of cash and liquid resources, cash location and barriers to access. In relation to access in the short-term, it looks at debt terms and maturity and short-term availability, as well as the types of information investors might find helpful in this area.
- Action – The report notes that the two critical questions investors want answers to here are what is the company doing to reduce expenditure and cash outflow, and what other actions can be taken to support viability? It considers important disclosures in this area in relation to the short-term, including the impact of management actions (and the impacts on dividends), action in relation to suppliers, action in relation to capital expenditure and expenses, action in relation to government support and other concessions and action in relation to management control.
- The future – The report looks at how decisions made now will affect a company’s future and at a company’s views on the future of the business itself. In this context the report looks at the assessment of whether a company’s “purpose” meets the challenge of COVID-19, as well as the reporting requirements of section 172 Companies Act 2006 which require directors to disclose how they have had regard to stakeholders and factored them in their decision-making. Other areas covered by the report are scenarios and forecasts, and the longer-term future for companies.
(FRC Lab: COVID-19 – Resources, action, the future (Reporting in times of uncertainty – June 2020), 16.06.2020)
