UK corporates facing a significant recession have been warned their financial disclosures must fully recognise the risks to their survival. Investors expect painful transparency for company prospects, according to the UK financial reporting watchdog.
The Financial Reporting Council (FRC) this week issued guidance in two reports for companies about to make financial disclosures that will reflect their position as a result of the Covid-19 pandemic. The reports underline the need to produce detailed going concern statements and the importance of risk information. FRC chief executive, Sir Jon Thompson, highlighted expectations among investors.
“These are unprecedented times and investors rightly expect clear and timely disclosures from companies setting out the impact of Covid-19 on their business and long-term prospects. Good quality reporting is vital in times of uncertainty and will help investors make informed decisions about where support for companies is most needed,” he said.
“As we turn our attention to the recovery, investors have a key role to play in supporting jobs and building resilience in our economy.”
Last week the EY Item Club forecast the UK economy would shrink by 8% in 2020, following a 20.4% reduction in GDP during April. Offering a sign of optimism, the report said the economy would grow 5.6% in 2021.
This week the Treasury published a report showing the economy down 9.2% in the current year after averaging the predictions of 19 independent forecasts. The average growth forecast for 2021 was 6.5%.
Reporting in a pandemic
Since February the FRC has maintained a running commentary on the issue of corporate reporting during the pandemic.
In February the FRC began by calling on companies to consider whether the virus was a disclosable risk. At that time though Covid-19 dominated the news there was still uncertainty about the degree to which it would affect the UK. The government’s pandemic budget offering billions in aid to stricken business and employees did not follow until 11 March, the first acknowledgement that the virus would have an unprecedented impact on the economy.
March also saw the FRC issue guidance for companies on making disclosures about material uncertainties and how to define them. At the time David Rule, executive director of supervision, said the watchdog’s guidance would help companies consider the impact of Covid-19 “more comprehensively” following government policy measures and the demand for information from investors.
In May the FRC called on companies to disclose events that may lead to corporate failure. “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,” it said.
The new guidance focuses on more disclosure and stresses the possibility of companies remaining going concerns “even when one or more material uncertainties exist”.
The report added: “In such circumstances what become important is the disclosures about the uncertainties and management’s consideration of these.”
The FRC also draws attention to the need for comprehensive risk reporting and how Covid-19 may have “caused a consideration of the risk profile”. Investors, it said, want to know how risks have changed and how managers are responding.
The regulator added that the pandemic presents “a test” for viability statements and their ability to convey “longer-term prospects, even when the short-term outcome is uncertain”.
An additional report spotlights reporting practices found by the FRC to be already under way.