Concern about the impact of coronavirus (COVID-19) on business has reached such an extent that regulators have revealed companies will have to consider whether it is a disclosable risk, while there is potential for audit work to be disrupted.
The Financial Reporting Council (FRC), the UK’s corporate reporting, audit and governance watchdog, has this week issued guidance for companies on reporting material risks associated with the virus.
The advice comes as HSBC reported its profits were down 33% and that the virus outbreak could affect results in 2020 as it causes disruption in Hong Kong and mainland China, two of the bank’s major markets. Apple has also warned the virus and its impact on China may affect its performance in the current quarter.
Observers believe Japan may be heading into recession, at least in part because of the coronavirus crisis.
This week the FRC took steps to warn that companies with operations in the affected region should consider whether the outbreak should form part of their disclosures on material risk.
An FRC spokesman said companies will need to monitor events and keep stakeholders up to date.
“Given the potential for rapid spreading of the virus, required disclosures will likely change over time as more information about the epidemic emerges,” the FRC said.
“Companies will need to monitor developments and ensure that are providing up-to-date and meaningful disclosures to their shareholders when preparing their year-end reports.”
Supply chain risk
The FRC stressed that companies reporting in the UK are, by law, required to disclose their principal risks. However, it pointed out the extent of risk companies face will depend “on specific business circumstances”.
It cited operations in China, possible staff shortages and production delays as causes for coronavirus risk disclosures.
Other companies may not have a presence in the region, but the FRC says “significant trading links or global supply chains” dependent on goods from China could also prove enough to prompt disclosures.
The guidance says: “Companies should consider whether to refer to the possible impact of COVID-19 on their business in their reporting of principal risks and uncertainties. Where mitigating actions can be taken, these should also be reported alongside the description of the risk itself.”
The FRC also warned that the “carrying value” of assets and liabilities may be affected and should be reported.
The ICAEW, a professional body for chartered accountants, was also considering the impact of coronavirus on business last week.
Iain Wright, the ICAEW’s director for business strategy, warned that companies should be undertaking risk assessment to establish the impact of coronavirus. The arrival of the virus in the UK also has implications, he said.
“UK firms whose employers have been travelling to and from China in particular, and Asia in general, as well as those businesses whose supply chains operate in the countries affected, may be particularly impacted,” said Wright.
“However, news that the virus has arrived in the UK should mean that all businesses consider steps to keep their employees safe and their business operations viable.”
Maggie McGhee, ACCA’S executive director, urged companies to face up to the virus as a material risk and heed the FRC’s guidance. “It is important to take all reasonable steps at the earliest opportunity,” McGhee said.
She noted that that travel restriction could “hinder” the work of auditors but suggested communication technology could help. The FRC is currently in discussion with audit firms to monitor the impact on UK listed groups with Chinese subsidiaries.
Apple’s recent statement illustrates the impact corporates face. The company reported that not only had iPhone demand fallen in China—Apple and partner stores have been closed to help contain spread of the virus—but the company has also been hit by supply issues.
Apple said: “The health and well-being of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts.”
On Monday 17th February, the World Health Organisation (WHO) reported there have been 71,429 confirmed cases of coronavirus globally, with most of those in China. So far the WHO has recorded 1,775 deaths. Only three of those were outside China.
*This article was updated on 19th February, 2020.