Reporting on risks and uncertainties - EU referendum
04 April 2016
Many companies with December or March year ends will be drafting their strategic report including the principal risks and uncertainties. One of the matters they will need to consider for this year-end is the EU referendum on 23 June 2016 and whether there are any associated principal risks or uncertainties to the business that they should disclose to their shareholders.
The Financial Reporting Council (FRC) has recently issued two letters touching on the matter. On 8 March 2016 the FRC published a letter to audit committee chairs to offer pointers for the 2016 corporate reporting season. The letter was issued in response to requests for guidance on various matters of uncertainty (eg volatile asset prices, oil prices, interest rates and the UK referendum on EU membership). The FRC makes the following points:
- The strategic report provides the opportunity to provide the most current view of prospects
- Disclosure of the directors’ judgements as to the principal risks and their potential impact is key to an understanding of the company’s prospects
- Accounts should be drawn up on the basis of conditions existing at the balance sheet date
- Any material post balance sheet events should be disclosed
- The chair should consider whether the post balance sheet events have a material effect on the going concern basis or if there are material uncertainties relating to the going concern assessment that need to be disclosed.
This letter follows on from publications in late 2015 including the FRC’s 2015 annual report, a letter to audit committee chairs of large listed companies in December 2015, and a letter to accounts preparers of around 1,200 smaller listed and AIM quoted companies issued in November 2015. The December 2015 letter noted, among other things, that companies should consider materiality in reporting ‘principal’ risks in their strategic report, that investors do not expect to see a long list of all possible risks, and highlighted the new longer-term viability statement disclosures (see Business Edge January 2016).
The FRC has also issued a generic letter to investors (on 17 March 2016) encouraging them to engage with companies to provide a steer on what information they believe is relevant and to challenge where reporting falls short of these expectations. The letter includes comments around:
- Risk, internal control and viability
- Alternative Performance Measures
- Audit reporting
- Dividend disclosures
- Governance reporting
- Accounting policies and impact of new standards
- FRC transparency.
The Financial Reporting Council’s (FRC) guidance on the strategic report notes that the report should describe the principal risks that the entity faces and how they might affect its future prospects. That is, those risks considered by the entity’s management to be material to the development, performance, position or future prospects of the entity and hence facts or circumstances that are material to a shareholder’s understanding.
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