UK companies are under notice to be transparent about their prospects for survival as a result of the Covid-19 crisis.
The warning comes from the Financial Reporting Council (FRC), the UK’s governance and financial reporting watchdog, in guidance issued this week to highlight “key areas of focus for boards”.
In gloomy news for business, the FRC says it expects more companies to disclose “material uncertainties”—events leading to corporate failure—in their going concern statements.
The watchdog stressed the need for companies to supply information to investors and stakeholders, declaring: “At this time, the need for fuller disclosure is paramount.”
The guidance comes against a backdrop of companies contemplating the prospects for recovery as the UK lockdown wears on, though with some restrictions lifted.
The economic news provides a grim setting for business, with data showing an unprecedented downturn. The first quarter of 2020 saw GDP shrink by 2%—not perhaps as much as many expected, but a significant blow all the same.
Office of National Statistics estimates for March suggest the economy contracted by 5.8%, the biggest monthly fall since 1997. The Bank of England has warned the economy could shrink by 14% this year.
Unsurprisingly, investors want to understand company resilience. The FRC warns companies that investors expect corporate reporting to reflect the impact of Covid-19, under different scenarios, on liquidity, viability and solvency, even though boards cannot predict how long the crisis will last or its consequences.
The FRC says it is “reasonable for investor to expect companies to be able to articulate their expectations of the possible impacts on their specific business in different scenarios”.
Statements about a company’s ability to survive are also a key area of focus. This means going public on doubts about a company’s ability to remain a going concern.
“In other words, 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,” the FRC said.
However, the watchdog added that in weighing their decision, boards can consider “realistically possible mitigating responses”.
When compiling viability statements companies must disclose the “specific resources, assets and relationships that are most under threat and the steps being taken to protect them”.
There is also an emphatic alert that companies must be clear about the actions they have taken to protect and retain staff. “All stakeholders, including investors, are concerned about companies’ workforces and seek an understanding of how they are being retained and supported,” the FRC said.
As well as reporting, the FRC also has guidance on corporate governance, warning boards to ensure access to the right information.
But there are also warnings on the payment of dividends. The FRC said boards should consider the position of their companies, not only when a dividend is declared, but also at the time it is scheduled for payment. If a dividend cannot be paid, directors should call a halt and tell the market.
Insolvency and AGMs
The guidance comes in the same week the government revealed new legislation on insolvency and annual general meetings.
The new insolvency regime will include a moratorium offering companies time to find a rescue while protected from creditors as a well as new flexibility for the current insolvency regime.
There are also measures lifting the threat of personal liability for wrongful trading from directors attempting to keep their companies alive.
The new laws will allow electronic AGMs and extending filing deadlines.
Business secretary Alok Sharma said: “The Bill will help companies that were trading successfully before the Covid-19 emergency to protect jobs and put them in the best possible position to bounce back.”