October 16, 2020 Reporting uncertainty
How do you report a true and fair picture of your company’s prospects in times of uncertainty? It’s a question which is troubling many organisations as rolling lockdowns and changing consumer preferences impact the business landscape. Local businesses in particular may see their prospects changing dramatically within the space of a week whilst those trading over a wider area still face uncertainties from lock downs affecting their supply chain and customers. And that’s before you take the long term effects of ongoing Brexit transition negotiations into account.
Recognising the difficulty which this can cause across organisations, the Financial Reporting Council (FRC) has issued two short guides to reporting at the end of 2020. The guides amplify some of the Financial Reporting Lab’s previous work, providing additional examples and resources to help companies to deliver true and fair information which is of benefit to investors.
The first guide “Going concern, risk and viability” acknowledges the challenge of meeting investor expectations in disclosing a range of possible outcomes in the light of ongoing uncertainty. It acknowledges that companies may be concerned about providing the level of detail required by investors in the face of rapidly changing circumstances. Whilst events could potentially impact every area of a report the FRC has focused on three areas; going concern, risk reporting, and viability statement.
Advice here includes a clear identification of risk and likely scenarios alongside an explanation of the case for recovery ‘over the short term and into a longer transition period’. Key assumptions and the basis for those assumptions should be included as should ‘the sensitivity of the base case to movements in the key assumptions.’ Managerial control over the assumptions and any review process should also be highlighted.
The second guide looks at “Resources, action, the future.” This highlights three themes which remain key areas of focus to investors. These are then broken down into five questions examining cash and liquidity, managing expenditure, supporting viability and the protection of key assets and value drivers.
Interestingly this guide compares the initial approach taken by companies with changing approaches seen in more recent reports. For example, comments in respect of viability initially focused on actions taken in response to the economy ‘stopping.’ More recently the FRC are seeing commentaries shifting to look at what actions are being taken to ‘restart’ business. In other words, companies have started to look forward rather than merely react to the immediate impact of Covid. Best reporting practices here include the use of comparatives, highlighting the position at different stages of the pandemic, and actions taken by the business that could influence performance; all supported by clearly labelled and relevant graphs.