Blog: Investors set out reporting expectations in times of crisis
News types: Generic Announcement, Guidance, Publications, Statements
Published: 3 July 2020
Blog by Phil Fitz-Gerald, Director of the FRC's Financial Reporting Lab
The COVID-19 crisis and responses to it are creating unprecedented global uncertainty. There is an increasing need for investors to make good decisions in allocating capital and fulfilling their stewardship responsibilities. But to do so, companies need to be transparent about their resources, their strategy for dealing with the crisis and how the decisions made now will affect their future. Although it is challenging for companies to provide reliable information in such an uncertain environment, the information will help to ensure that the capital markets continue to operate effectively through the crisis.
So, in this environment, how can companies best respond and what should they report? That is the question that the FRC’s Financial Reporting Lab sought to answer by speaking to investors to find out what areas they particularly wanted companies to provide information on. Those conversations formed the basis of the Lab’s infographic and, broadly, the answer fell into 3 areas. Firstly, what resources does the company have (cash and access to finance in the short-term). Secondly, what actions are the company taking to manage expenditure (including its dividend policy and supplier financing arrangements) and ensure its viability. And thirdly, in relation to the decisions it is making now, how is the company protecting its key assets and value drivers to ensure it remains sustainable in a new “normal” environment and perhaps a green recovery.
To help, the Lab has produced some practical guidance for companies in two reports. The first, COVID-19 – Resources, action, the future , covers the key areas that companies should focus on in providing market updates. The second, COVID-19 – Going concern, risk and viability , provides guidance to companies preparing their annual or interim reports.
The first report emphasises the need to provide clear and timely information to the market. It includes a number of examples from results presentations, trading statements, dividend announcements and other communications. To respond to the challenges of reporting in such an uncertain time it includes a section on scenario planning and how companies might use plausible scenarios to report on the action that they might take. In addition, the report considers how companies might report on their evolving business model as we move to a new normal.
The second report provides practical guidance and examples of going concern statements, principal risk reporting and viability statements. All of these reporting areas interlink, but may have different time horizons. The going concern statement focuses on the period from one year after the annual report is approved. Companies will need to consider whether or not a material uncertainty exists and disclose the factors that have led them to making that decision (whether or not they conclude that a material uncertainty exists). They will also need to update their principal risk disclosure if there are changes to the company’s principal risks as a result of COVID-19. This may result in a separate risk or may affect existing risks and should be disclosed accordingly either in the annual or interim report. The viability statement considers a company’s prospects and viability over a longer-term horizon and the report continues to encourage companies to provide information about the stress and scenario testing they have carried out as part of their assessment. Again, it is likely that companies will need to reconsider and update this testing in the light of COVID-19.
In an uncertain world, the Lab’s reports aim to provide help and guidance to companies who are navigating through the crisis and help them to report the information investors seek.
The COVID-19 crisis and responses to it are creating unprecedented global uncertainty. There is an increasing need for investors to make good decisions in allocating capital and fulfilling their stewardship responsibilities. But to do so, companies need to be transparent about their resources, their strategy for dealing with the crisis and how the decisions made now will affect their future. Although it is challenging for companies to provide reliable information in such an uncertain environment, the information will help to ensure that the capital markets continue to operate effectively through the crisis.
So, in this environment, how can companies best respond and what should they report? That is the question that the FRC’s Financial Reporting Lab sought to answer by speaking to investors to find out what areas they particularly wanted companies to provide information on. Those conversations formed the basis of the Lab’s infographic and, broadly, the answer fell into 3 areas. Firstly, what resources does the company have (cash and access to finance in the short-term). Secondly, what actions are the company taking to manage expenditure (including its dividend policy and supplier financing arrangements) and ensure its viability. And thirdly, in relation to the decisions it is making now, how is the company protecting its key assets and value drivers to ensure it remains sustainable in a new “normal” environment and perhaps a green recovery.
To help, the Lab has produced some practical guidance for companies in two reports. The first, COVID-19 – Resources, action, the future , covers the key areas that companies should focus on in providing market updates. The second, COVID-19 – Going concern, risk and viability , provides guidance to companies preparing their annual or interim reports.
The first report emphasises the need to provide clear and timely information to the market. It includes a number of examples from results presentations, trading statements, dividend announcements and other communications. To respond to the challenges of reporting in such an uncertain time it includes a section on scenario planning and how companies might use plausible scenarios to report on the action that they might take. In addition, the report considers how companies might report on their evolving business model as we move to a new normal.
The second report provides practical guidance and examples of going concern statements, principal risk reporting and viability statements. All of these reporting areas interlink, but may have different time horizons. The going concern statement focuses on the period from one year after the annual report is approved. Companies will need to consider whether or not a material uncertainty exists and disclose the factors that have led them to making that decision (whether or not they conclude that a material uncertainty exists). They will also need to update their principal risk disclosure if there are changes to the company’s principal risks as a result of COVID-19. This may result in a separate risk or may affect existing risks and should be disclosed accordingly either in the annual or interim report. The viability statement considers a company’s prospects and viability over a longer-term horizon and the report continues to encourage companies to provide information about the stress and scenario testing they have carried out as part of their assessment. Again, it is likely that companies will need to reconsider and update this testing in the light of COVID-19.
In an uncertain world, the Lab’s reports aim to provide help and guidance to companies who are navigating through the crisis and help them to report the information investors seek.