by Sally Eggeling, Creative Studio Director
With COVID-19 impacting our lives and work enormously right now, it is no surprise that it is now affecting corporate reporting – with institutions and companies seeking to maintain capital markets and investor activity in the wake of its impact.
With a likely impact on performance and potentially on reputation too, what guidance is available for companies about to navigate these challenges and where should they start? The FCA, FRC and PRC last week released a joint announcement which we have distilled the guidance into a set of user-friendly questions to help companies review their approach.
Currently companies are starting to have to consider how they will report this year, and auditors are having to navigate working at a distance, and how to sign off outlooks that are likely to be based on a great deal of rapidly formulated, but hopefully educated, guesswork.
Although many December year end reports are already live, the fall out will take effect immediately on those about to release their financial results over the next few months, and onwards.
So what guidance is available for companies about to navigate these challenges?
Time extensions The FCA, FRC and PRC yesterday released a joint announcement providing a two month extension for companies to publish their audited financial statements; alongside guidance for preparers in the current uncertain environment.
The aim is to help “ provide markets and investors with the information they need to make informed decisions ”.
Reasonable and realistic expectations Overall the guidance state that although Boards cannot predict the extent and duration of the COVID-19 pandemic, or its consequences, it is reasonable for investors to expect companies to be able to articulate their expectations of the possible impacts on their specific businesses in different scenarios.
“Investors and other users of corporate reports want to understand a company’s resilience in the face of current uncertainty and to understand the key assumptions and judgements a board is making when assessing resilience and in preparing company financial statements.”
What does this mean in terms of reporting? The requirement to articulate expectations of the impact of COVID-19 will affect several areas of a report over and above performance, for example:
• CEO/Chair statement – specifically outlooks, but also covering strategy, people and culture • Operational environment – impact and context – how is the company reacting to the changing operational environment, what are the challenges and what are the approaches? • Strategy – is there a requirement for a change in strategy to ensure a sustainable business? • Stakeholder value – what is being done to ensure continued value creation, and a sustainable business in this context/ • Employees- what is being done to support employees through this time, how are companies maintaining their culture, training and development/
So, where do companies start?! The guidance provided by the FCA, FRC and PRC highlights the number of considerations companies need to address to ensure they maintain stakeholder and investor confidence at this time. We have distilled this into a set of more user-friendly questions:
● What is the appropriate reporting response for events after the reporting date?
● What is the assessment of viability looking forwards (describe assumptions and methods)?
● What judgements underlie the assessment of material uncertainties and going concern?
● For the going concern/viability statement – what useful information about stress testing can be provided?
● How resilient is the business model in the current environment?
● What specific resources, assets and relationships are most under threat? What steps are being taken to protect these?
● What expectations are there regarding the impact on the business, in different scenarios?
● What plans are there to mitigate, capacity to implement and level of resource available for these scenarios?
● What Board assumptions and judgements are being made?
● What (cash) liquidity (& ability to re-allocate within the business)?
● People: What protection and retention of staff is in place / intellectual capital for future rebuilding
Board and Governance
● What are you doing in order to continue to operate effectively (business controls)?
● How are you securing reliable and relevant information to manage the business?
● How are you ensuring the company has enough resources to function (capital maintenance as opposed to dividends dividends)?
As with everything right now, the outlook is uncertain but what is clear is that companies and institutions worldwide will need to address these areas if they are to continue to maintain stakeholder confidence from their employees and suppliers to their investors.
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October 15, 2020