29 July 2020

The Financial Reporting Council’s Lab have produced a report on the impact of coronavirus on the disclosure of going concern, risk and viability. The report contains many useful examples of how different companies have dealt with the reporting challenges. FRC’s Lab has also produced a report detailing further reporting expectations of investors during the coronavirus crisis. 

Going concern

A company can be a going concern even when material uncertainties cast significant doubt over that going concern status. Investors recognise that, in the current climate, companies will report many areas of uncertainty and estimation.

Investors would find the following disclosures helpful:

  • clarification of the going concern position and the factors that support it, eg the cash position, support such as Government schemes and current business activity;
  • details of any actions taken or planned;
  • details of the elements of uncertainty (specific to the business) and how these will impact the business; and
  • connections to wider reporting within the report, eg risk and viability disclosures.

Specific elements of uncertainty relevant to the next 12 months might include (but are not limited to):

  • timing of resumption of operations;
  • further restrictions that limit the return to normal operations;
  • continuation of government schemes and support packages;
  • the outcome of capital-raising actions;
  • the outcome of discussions with finance providers and landlords;
  • short-term impacts of pricing changes to revenue and expenses; and
  • impacts on human capital, supply chain and customers.

Practical example - Team17 Group plc

Team17’s annual report highlights that is has considered the impact of coronavirus by carrying out a sensitivity analysis and as a result confirms that sufficient cash is available to meet its obligations over the relevant period.

Practical example - AG Barr plc

A.G. Barr’s annual report highlights that coronavirus has been considered for assessing going concern and medium and longer-term viability. It confirms it has carried out scenario analysis, considering a number of factors. It also states the key assumption (Staying open) and confirms it has sufficient headroom on financing facilities.

Risk reporting

During a crisis, when time horizons become shorter, the level of information investors want increases. Investors would like a focus on shorter-term reporting than the annual report. Such adhoc reporting on risk should reflect and reference the wider annual report disclosures or, where different, highlight and describe the differences. Risk reporting should be specific and detailed explaining why the risk is material, giving timelines and details of mitigating action.

Investors would also find the following useful when reporting on risk:

  • focus on the most relevant issues such as liquidity, solvency and operational matters. As the situation becomes clearer, further information can be provided;
  • clarity on timing of any matter or when the matter will warrant more clarification;
  • clarity on the impact on individual risks, whether those impacts are short or long term and how the risk and any planned mitigation are affected;
  • clarifying any changes made to the level of residual risk and the company’s views on risk appetite; and
  • given that the current issues are both global and local, putting material, relevant risks in the context of specific geographies, operations or segments.

Companies should be considering updating their risks for the half-year disclosures as they are likely to need to provide an update to the market in their half-year report. The most successful risk disclosures are likely to consider the issues raised by coronavirus holistically, and with specific reference to the company’s circumstances.

Practical example - Informa PLC

Informa’s annual report identifies coronavirus as an emerging risk (based on the report timing) and references it as a key element of Major Incident risk.

Practical example – G4S plc

G4S’s integrated report and accounts identifies coronavirus as a specific risk. G4S also highlights some of the actions it has taken, including activating continuity plans and focusing on liquidity.

Viability statement

The current circumstances mean that there might be less certainty over a company's (and the economy's) short-term future than its longer-term viability (with appropriate caveat and context). A combination of going concern and viability statements are necessary to show a company's position and expectations.

Important disclosures might include:

  • specific short and medium-term factors that have been considered, such as availability of government support, employee and supplier-related issues;
  • viability across the group and the ultimate parent, including information on inter-group guarantees and commitments;
  • how the board is monitoring and controlling the situation;
  • the business model resilience and actions taken with reference to situations caused by coronavirus eg consumer trends/supply chain; and
  • how coronavirus has been reflected in scenarios and stress testing of both prospects and viability

The FRC stresses the following points:

  • boards are required to have a 'reasonable expectation' of the company’s viability over the period of assessment. During the current emergency any reasonable level of expectation would naturally carry a much lower level of confidence;
  • being clear on the company’s specific circumstances and the degree of uncertainty about the future is important information; and
  • when presenting a company’s viability statement, boards should draw attention to any qualifications or assumptions. They should describe the limits of the predictions, the level of confidence with which they have been made and the uncertain future events that could prove critical to viability. The Board should also explain any key assumptions made and future scenarios considered.

Practical example – WPP plc

WPP’s annual report combines viability and going concern into a single section. The disclosure highlights some of the key factors that the board considered in relation to coronavirus.

For further information on this or other coronavirus reporting issues please contact Danielle Stewart.

Danielle Stewart
Danielle Stewart OBE
Partner, Head of financial accounting advisory specialists
Danielle Stewart
Danielle Stewart OBE
Partner, Head of financial accounting advisory specialists