Reminders for half-yearly and annual financial reports following the EU referendum
News types: Guidance
Published: 12 July 2016
In light of the referendum vote for the UK to leave the EU and the consequential uncertainties in the political and economic environment, the Financial Reporting Council (FRC) highlights some matters for directors to consider when preparing their forthcoming half-yearly [1] and annual financial reports. The considerations highlighted below are high-level and designed to stimulate thinking and we encourage all companies to instigate early dialogue with their auditors.
Not all businesses will be affected to the same extent. Boards must determine what disclosures, if any, are required to ensure their financial statements and management and strategic reports [2] meet the needs of investors and comply with regulatory requirements.
We draw attention to the importance of high quality narrative information that supplements the financial statements and includes managements’ view of the future outlook of the business.
Business model
We encourage clear disclosure of a company’s business model as part of the strategic report, including a description of the main markets in which the company operates and its value chain. The disclosure should be sufficient to enable readers to make an assessment of the company’s exposure arising from the outcome of the referendum.
Principal risks and uncertainties
Directors must consider the nature and extent of risks and uncertainties arising from the result of the referendum and the impact on the future performance and position of the business. These may also have an impact on reported amounts which could lead to further consequences such as an effect on debt covenants.
Those which the board judge to be principal risks and uncertainties must be disclosed and explained in the company’s interim management [3] or strategic report. The outcome of the referendum may give rise to general macro-economic risks or uncertainties that affect all companies as well as those risks that are specific to a particular company or industry sector. Care should be taken to avoid ‘boilerplate’ disclosures. Company specific disclosures are more informative and useful to investors, for example, the impact of trade agreements for companies with a high level of exports to Europe.
The FRC attaches great importance to Clear & Concise reporting and any risks and uncertainties that are disclosed should enable the reader to understand how those risks and uncertainties are relevant given the specific facts and circumstances of the company. We would also expect boards to provide an explanation of any steps that they are taking to manage or mitigate those risks.
As part of the assessment of principal risks and uncertainties, boards should consider whether the referendum vote gives rise to solvency, liquidity or other risks that may threaten the long-term viability of the business; and any implications for the viability statement in the annual report.
Market volatility
The volatility in the markets following the referendum result may have an impact on balance sheet values at 30 June 2016 or at subsequent reporting dates. For example, financial instruments measured at fair value and discount rates used in measuring pension and other liabilities may be affected by changes in foreign exchange rates, interest rates or market prices. Cash flows included in future forecasts may need to be re-evaluated.
In respect of foreign exchange risk, the board may wish to consider the potential gains or losses arising from transactions in foreign currencies, for example, the impact on future earnings as a consequence of the decline in the value of sterling for non-UK sales.
We encourage directors to consider whether assets may be impaired and/or disclosures made consistent with the requirements of IAS 36 Impairment of Assets , IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. They may need to consider the continued recognition of deferred tax assets. Attention should also be given to the nature and extent of sensitivity disclosures required by IAS 1 Presentation of Financial Statements that support estimates in the annual financial statements where due to volatility, in the short term, ranges may be wider.
Boards should also consider the disclosure of events after the reporting period that have not been adjusted in the financial statements. Examples of such events include abnormally large changes in asset prices or foreign exchange rates.
Going concern basis of accounting
As part of the preparation of the financial statements, directors must consider whether the going concern basis of accounting is appropriate and whether disclosures of material uncertainties are needed particularly where there is a material risk of breach of covenants.
Further guidance on the application of the going concern basis of accounting is included in the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and the FRC’s Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks [4] .
True and Fair
There is an overarching requirement for annual financial statements and half-yearly reports [5] of listed issuers to give a true and fair view. We encourage directors to consider whether additional disclosures are necessary to ensure that this requirement is met.
Half-yearly financial reports
There is a general requirement that the interim management report of listed companies must include disclosure of important events that have occurred during the first six months of the financial year, and an indication of their impact on the interim financial statements.
[1] The Financial Conduct Authority’s Disclosure and Transparency Rule (DTR) 4.2 requires issuers, whose shares or debt securities are admitted to trading; and whose Home State is the United Kingdom, to publish half-yearly financial reports. This must include: a condensed set of financial statements; an interim management report; and responsibility statements.
The condensed set of financial statements can be prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting; or for UK issuers not using IFRS, Financial Reporting Standard (FRS) 104 Interim Financial Reporting issued by the Financial Reporting Council.
AIM Rule 18 sets out the requirements for half-yearly reports for AIM quoted companies.
[2] The FRC’s Guidance on the Strategic Report (PDF) provides more information on the application of the reporting requirements for the strategic report.
[3] DTR 4.2.7 requires that the interim management report includes a description of the principal risks and uncertainties for the remaining six months of the financial year.
[4] Available documents: The FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (PDF) and the Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks (PDF).
[5] DTR 4.2.10 requires directors to confirm that the condensed set of financial statements gives a true and fair view of the assets, liabilities, financial position and profit or loss of the company.
Not all businesses will be affected to the same extent. Boards must determine what disclosures, if any, are required to ensure their financial statements and management and strategic reports [2] meet the needs of investors and comply with regulatory requirements.
We draw attention to the importance of high quality narrative information that supplements the financial statements and includes managements’ view of the future outlook of the business.
Business model
We encourage clear disclosure of a company’s business model as part of the strategic report, including a description of the main markets in which the company operates and its value chain. The disclosure should be sufficient to enable readers to make an assessment of the company’s exposure arising from the outcome of the referendum.
Principal risks and uncertainties
Directors must consider the nature and extent of risks and uncertainties arising from the result of the referendum and the impact on the future performance and position of the business. These may also have an impact on reported amounts which could lead to further consequences such as an effect on debt covenants.
Those which the board judge to be principal risks and uncertainties must be disclosed and explained in the company’s interim management [3] or strategic report. The outcome of the referendum may give rise to general macro-economic risks or uncertainties that affect all companies as well as those risks that are specific to a particular company or industry sector. Care should be taken to avoid ‘boilerplate’ disclosures. Company specific disclosures are more informative and useful to investors, for example, the impact of trade agreements for companies with a high level of exports to Europe.
The FRC attaches great importance to Clear & Concise reporting and any risks and uncertainties that are disclosed should enable the reader to understand how those risks and uncertainties are relevant given the specific facts and circumstances of the company. We would also expect boards to provide an explanation of any steps that they are taking to manage or mitigate those risks.
As part of the assessment of principal risks and uncertainties, boards should consider whether the referendum vote gives rise to solvency, liquidity or other risks that may threaten the long-term viability of the business; and any implications for the viability statement in the annual report.
Market volatility
The volatility in the markets following the referendum result may have an impact on balance sheet values at 30 June 2016 or at subsequent reporting dates. For example, financial instruments measured at fair value and discount rates used in measuring pension and other liabilities may be affected by changes in foreign exchange rates, interest rates or market prices. Cash flows included in future forecasts may need to be re-evaluated.
In respect of foreign exchange risk, the board may wish to consider the potential gains or losses arising from transactions in foreign currencies, for example, the impact on future earnings as a consequence of the decline in the value of sterling for non-UK sales.
We encourage directors to consider whether assets may be impaired and/or disclosures made consistent with the requirements of IAS 36 Impairment of Assets , IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. They may need to consider the continued recognition of deferred tax assets. Attention should also be given to the nature and extent of sensitivity disclosures required by IAS 1 Presentation of Financial Statements that support estimates in the annual financial statements where due to volatility, in the short term, ranges may be wider.
Boards should also consider the disclosure of events after the reporting period that have not been adjusted in the financial statements. Examples of such events include abnormally large changes in asset prices or foreign exchange rates.
Going concern basis of accounting
As part of the preparation of the financial statements, directors must consider whether the going concern basis of accounting is appropriate and whether disclosures of material uncertainties are needed particularly where there is a material risk of breach of covenants.
Further guidance on the application of the going concern basis of accounting is included in the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and the FRC’s Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks [4] .
True and Fair
There is an overarching requirement for annual financial statements and half-yearly reports [5] of listed issuers to give a true and fair view. We encourage directors to consider whether additional disclosures are necessary to ensure that this requirement is met.
Half-yearly financial reports
There is a general requirement that the interim management report of listed companies must include disclosure of important events that have occurred during the first six months of the financial year, and an indication of their impact on the interim financial statements.
[1] The Financial Conduct Authority’s Disclosure and Transparency Rule (DTR) 4.2 requires issuers, whose shares or debt securities are admitted to trading; and whose Home State is the United Kingdom, to publish half-yearly financial reports. This must include: a condensed set of financial statements; an interim management report; and responsibility statements.
The condensed set of financial statements can be prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting; or for UK issuers not using IFRS, Financial Reporting Standard (FRS) 104 Interim Financial Reporting issued by the Financial Reporting Council.
AIM Rule 18 sets out the requirements for half-yearly reports for AIM quoted companies.
[2] The FRC’s Guidance on the Strategic Report (PDF) provides more information on the application of the reporting requirements for the strategic report.
[3] DTR 4.2.7 requires that the interim management report includes a description of the principal risks and uncertainties for the remaining six months of the financial year.
[4] Available documents: The FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (PDF) and the Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks (PDF).
[5] DTR 4.2.10 requires directors to confirm that the condensed set of financial statements gives a true and fair view of the assets, liabilities, financial position and profit or loss of the company.