The UK’s financial reporting regulator expects more companies to report “material uncertainties” about their future prospects in the coming reporting season and warned companies to be clear about the potential for corporate failure.

The Financial Reporting Council (FRC) made the admission while offering guidance to companies on financial reporting during the Covid-19 crisis.

At the same time, the Financial Conduct Authority has granted companies two extra months to complete their audited accounts.

The FRC guidance seeks to clarify the meaning of “material uncertainties” while also stressing that when drafting strategic and viability reports, board’s must be clear on their “specific circumstances” and the “degree of uncertainty about the future”.

Investors have told the FRC that their key “information needs” are statements on liquidity, viability and solvency. They have also stressed the need to know about the prospects of companies under diverse circumstances.

Possible impacts

The FRC guidance states: “Boards cannot predict the extent and duration of the Covid-19 pandemic nor its consequences for the global economy.

“It is however reasonable for investors to expect companies to be able to articulate their expectations of the possible impacts on their specific business in different scenarios.”

David Rule, executive director of supervision, said: “The current Covid-19 pandemic presents very real difficulties to companies and their auditors.

“The package of measures today is designed to give both the ability to consider the impact of Covid-19 more comprehensively in the light of government and other responses and provide markets and investors with the information they need to make informed decisions.”

The guidance stresses the need for boards to disclose the prospect of going bust, warning “…if boards identify possible events or scenarios (other than those with a remote probability of occurring) that could lead to corporate failure, then these should be disclosed.”

Dividend decisions

The FRC has also offered warnings on dividends. Many companies have already decided to halt dividends and hold on to cash.

It warns that decisions on dividends should include consideration of “current and likely operation and capital needs, contingency planning and the the directors’ legal duties. The FRC said directors must abide by capital maintenance rules and Section 172 of the Companies Act, the provisions that set our their duties in British law.

The FRC sets out three core corporate governance objectives in the current crisis:

• Develop and implement mitigating actions and processes to ensure that boards continue to operate an effective control environment, addressing key reporting and other controls on which you have placed reliance historically but which may not prove effective in the current circumstances;
• Consider how boards will secure reliable and relevant information, on a continuing basis, in order to manage the future operations, including the flow of financial information from significant subsidiary, joint venture and associate entities; and
• Pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is paid, not just proposed, and that sufficient resources remain to continue to meet the company’s needs.

Auditors have also received guidance on the evidence they require to reach an opinion where access to information and date might be restricted.