FRC guidance for reporting in times of uncertainty

16 July 2020

Attempting to report during the COVID-19 pandemic is complex. Businesses are facing significant challenges, may have material uncertainties over going concern and are, understandably, reluctant to provide disclosures that they feel may have a negative impact on the business. However, investors require clear and transparent information to help them to understand the current risks, planned responses and the longer-term outlook.

As a result, the FRC’s Financial Reporting Lab has issued two reports which provide practical guidance to companies in areas of reporting that investors have highlighted as being most critical. Both reports include a number of real-life examples of good practice.

Five key questions

The first report ‘COVID-19 – Resources, action, the future’, follows the publication of the Lab’s infographic which set out five current questions which investors seek information on. This new report provides additional guidance and examples to help companies make relevant and comprehensive disclosures. The questions are structured into three key reporting areas:

1. Resources

  • How much cash does the company have?
  • What cash and liquidity could the company obtain in the short-term?

2. Action

  • What can the company do to manage expenditure in the short-term?
  • What other actions can the company take to ensure its viability?

3. The future

  • How is the company protecting its key assets and value drivers?

A new focus on going concern and viability statements

The second report ‘Going concern, risk and viability’ takes a more detailed look at the reporting of going concern, principal risks and the viability statement. Since the viability statement was first introduced, the FRC has continued to suggest disclosure improvements. Companies often struggle to differentiate between information required within this statement and the going concern assessment, often adding little detail over and above the short term going concern disclosures.

The global pandemic has brought an increased focus on these areas of reporting – investors expect to see clear disclosures on key risks, their potential impacts and planned mitigation over the short, medium and long term.

Going concern disclosures

The more short term going concern disclosures should provide information on the immediate impact of the virus, the disruption to business models and focus mainly on the availability of cash resources and any current material uncertainties. Clear, transparent disclosure reassures investors that management are controlling what they can and provides a context for understanding a company’s continuing value proposition. Helpful disclosures include:

  • Clarify the going concern position including the factors which support this (cash resources, current trading, support from others such as government schemes)
  • Details of actions taken and potential future actions
  • Details of the elements of uncertainty specific to the business
  • Connections to the wider reporting within the annual report such as the viability statement and risk disclosures.

Viability statement

The aim of the viability statement is to provide additional detail about the longer term prospects of a company and the board is required to have a “reasonable expectation” of the company’s viability over the period of assessment. The Lab Report has highlighted that the nature of the viability statement could assist management when making this assessment. Usually the short term future is more certain than the longer term outlook. In the current environment, this may be the opposite way around and, therefore, the longer-term nature of the viability statement should help management focus on clear, qualitative disclosures for future prospects once the impact of COVID-19 begins to ease.

Stakeholders want to understand the wider assessment and it is expected that the “reasonable expectation” of viability may have a lower level of confidence during this period. It is therefore important that the viability statement is clear on the company’s specific circumstances and suggestions of disclosures could include:

  • How COVID-19 has been reflected in stress testing for both prospects and viability
  • Any necessary adaptations to the business model
  • Board actions to monitor and control the situation
  • Key assumptions applied in the viability assessment and any qualifications to the statement
  • Further fundamental actions required to remain viable.

The Lab report has also suggested that disclosures around uncertainties for both the going concern assessment and the viability statement could include (but are not limited to):

Going concern assessment – uncertainties relevant to the foreseeable future (at least the next 12 months) Viability statement  – uncertainties relevant for the longer-term               
  • The timing of resumption of operations
  • Further restrictions that limit the return to normal operations
  • Restrictions placed on government (or other) capital
  • Timing and continuation of government schemes and support packages
  • The outcome of capital raising actions, discussions with banks, and landlords
  • Short-term impact of pricing changes to revenue and expenses
Short-term impact on human capital, the supply chain and customers.

Same as the going concern assessment plus:

  • Medium-term impact of pricing changes to revenue and expenses
  • Medium-term impact on human capital, the supply chain and customers
  • Acceleration or de-acceleration of trends
  • Disruption and changes to the business model
Interaction of principal risks.

Good disclosures will, therefore, require a combination of (and a link between) the going concern statement, the principal risk reporting and the viability statement to show a company’s current position and its future expectations.

Read the FRC Lab reports at:

COVID-19 – Resources, action, the future

Going concern, risk and viability

Business Edge index