July 23, 2020 High quality disclosures
How has Covid impacted your organisation; its processes, prospects and outcomes? From the lockdown in March to the gradual reopening of business and society the chances are that company boards may well have been more focused on the day-to-day than developing a longer term viewpoint. And even if you are in one of those sectors which were determined to be key to the economy and therefore had to remain open, it’s a fair bet that the pandemic will still have had an impact across multiple areas including staffing, processes, suppliers, customer base and so on.
But while the focus may have been on day-to-day management over recent months, boards also need to take time out to understand the overall impact on the organisation and to effectively communicate this to stakeholders. It’s a point we made in our March 2020 article, Reporting Risk, when we highlighted and for see comment to the effect that companies should consider the possible impact of COVID-19 and any mitigating actions taken when reporting principal risks and uncertainties.
The FRC have now taken this one step further, releasing the results of its first thematic review since the onset of the pandemic. On a positive note, the review concluded that in general companies provided sufficient information to enable a user to understand the impact of Covid on performance, position and future prospects. However they also found that some reports, particularly interim ones, would have benefited from more extensive disclosures.
To this end the FRC has issued a six-point reminder to companies starting with the need to explain significant judgements and estimates made in preparing accounts backed up by meaningful sensitivity analysis. The need for applying consistent accounting policies and ensuring that assumptions apply equally across all areas are also highlighted.
Of course these reporting requirements don’t solely apply to the impact of Covid. At the end of 2020 the UK’s Brexit transition period comes to an end. A recent IoD survey revealed that just 24% of businesses considered they were fully prepared for any changes which might take place in 2021, with 31% of businesses waiting to see what the new rules are likely to be before they take any action. As a result of this survey the IoD has called on the government to putting more resources into providing specialist advice. Nevertheless, this is another area which directors will need to consider in order to provide shareholders with high quality disclosures which present a true and fair picture of the company’s likely future prospects.