Included in this update: Financial Reporting Lab reports on meaningful disclosure in light of COVID-19

FR Lab report: COVID-19 – Reporting on going concern, risk and viability disclosures

The Financial Reporting Lab (Lab) has published a report which focuses on going concern, risk and viability reporting in light of the uncertainty created by COVID-19, responding to the fact that providing detailed and useful disclosures on these issues has proved to be a challenge for many boards.

The Lab report considers each area and highlights some of the key considerations, acts as a reminder of regulatory guidance and commentary, poses questions for boards to address, and provides examples of current disclosure practices, drawing out what is useful about each of them.

The report deals with the following issues:

Going concern assessments 

Business model disruption in the short-term due to COVID-19 has meant that a company's going concern assessment is an even more complex task. However, the Lab points out that the assessment is not a "binary or pass/fail" concept. A company can be a going concern even where one or more material uncertainties exist. In such circumstances, what becomes important is the disclosure about any uncertainties and management's consideration of them.

Helpful going concern disclosures:

• Clarify the going concern position and detail the factors that support that decision, such as the cash position, support from others (including government schemes), current business activity etc. 
• Provide details of the actions (both current and potential future) and their status.
• Provide detail of the elements of uncertainty (specific to the business) and consideration of the impacts on the business where the position is subject to, or impacted by, uncertainty.
• Connect to wider reporting, such as risk and viability disclosures.

Risk reporting 

COVID-19 has created risks for many companies and caused a reconsideration of risk profile and appetite. Investors therefore want to understand how those risks have changed and specifically affect companies, and how management have responded. For some companies COVID-19 represents a significant issue in its own right and warrants a principal risk. For others, the risk may not be COVID-19 itself, but rather its impact on other risks. For the fortunate few, COVID-19 might not be a risk at all.

Discussions with investors as regards shorter-term uncertainty identified the following elements of useful disclosure:

• Consistency in reporting – in uncertain times, there is a need to focus on shorter-term reporting, ensuring that ad-hoc disclosure on risk reflects and references the wider annual report.
• Focus on the big picture, for now – in the short-term, investors highlight that they need big-picture information and accept that the current level of disclosure may not be perfect.
• Focus on timing issues – clarifying the timing of any matter or the point at which more clarity will be needed constitutes very useful disclosure.
• Provide movement – Providing clarity on the impact of COVID-19 on individual risks is useful, as well as whether those impacts are short or long-term.
• Clarify changes in risk appetite – severe shocks make companies re-evaluate levels of residual risk and their view on risk appetite. Clarifying changes is helpful to investors.
• Think about a split that makes sense – current issues are both global and local. Therefore, material, relevant risks may need to be put in the context of specific geographies, operations and market segments.

Given the timing of the reporting cycle, a significant number of companies will now need to consider how to reflect COVID-19 risks in their half-year report.

Viability reporting 

The Lab believes that the current crisis is a test of the value of viability statements. A viability statement with realistic scenarios and clear assumptions provides boards with an opportunity to communicate their longer-term prospects, even when the short-term outcome is less certain.

In addition to a reminder of the constituent elements of a good viability disclosure, the Lab believes that COVID-19 adds a number of specific elements that may also need to be considered when framing useful narrative. In particular, investors want to understand the context of medium-term decisions of a fundamental or radical nature that ultimately go to a company's ability to remain viable. Important disclosures might include:

• Specific short- and medium-term COVID-19- related factors that have been considered, such as availability of government support, employee and supplier-related issues.
• Information on viability across the group, and within the ultimate parent, including on inter-group guarantees and commitments.
• Details of how the board is monitoring and controlling the situation.
• Details on business model resilience and actions with reference to the situations highlighted by COVID-19 (e.g. consumer trends/supply chain).
• Details of how COVID-19 has been reflected in scenarios and stress testing of both prospects and viability

Lab report: COVID-19 - Reporting on resources, actions and the future

The Lab has also published a report to provide detailed guidance on its COVID-19 infographic. In doing so it considers the answers to the questions that, in its opinion, investors want answers to now, as well as examples of current reporting practice. The report also covers some of the practical issues regarding reporting in light of COVID-19 and the balancing act between providing timely information and ensuring that there is sufficient oversight of that information to ensure that it is good quality.

Subsequent sections are structured around the three key reporting areas highlighted in the original infographic, namely:

Resources

Investors want to understand quickly what resources and liquidity the company has access to. While ultimately company resources such as technology, employees and the supply chain will be important, it is its cash position (and its utilisation) that is critical in the short term.

The two questions that investors are seeking answers to are: 

• What cash and liquid resources does the company have now? 
• What cash and liquid resources could the company get access to in the short term?

As well as understanding the level of cash that a company has, investors also want to understand the level of debt and other facilities that the company has access to. Companies might wish to consider if enough detail about such instruments is already available (through annual report disclosure), or whether additional information would be useful.

Action: signalling in the short term 

As crucial as currently available cash are the actions that management can take to sustain, extend, and support the company's ability to remain viable.

The Lab's discussions with investors identified two distinct objectives for disclosure. First, to provide the details of actions actually taken, and, second to provide information that helps investors understand possible future actions depending on the plausible scenarios that it might face.

Two critical questions that investors are trying to answer are:

• What is the company doing to reduce expenditure and cash outflow?
• What other actions can be taken to support viability?

The report also acts as a reminder of investors' desire to understand a company's dividend policy, and not least the impact of COVID-19 on it.

The future

Decisions made now will affect the future of the company. Whether those decisions affect stakeholders, the ongoing business model and value drivers, or other areas, they are likely to have long-lasting impacts and investors are trying to understand them. Investors are also interested in the company's views on the future of the business itself, including what different scenarios might mean, and how the company is responding to the crisis and related circumstances.

The report highlights that current circumstances also offer an opportunity for companies to assess whether their "purpose" meets the challenge of COVID-19: comparing decisions taken against a company's purpose can ensure it continues to live up to it and also precipitate an evaluation of whether that purpose needs to change.

In the context of reporting on how its directors have had regard to stakeholders and other interests in accordance with section 172 of the Companies Act 2006, COVID-19 provides an opportunity for companies to demonstrate how they have taken into account a wider range of stakeholders in their decision-making, and how the views of these stakeholders have been considered as the board has faced the difficult questions the pandemic has raised. Understanding how the company has regard for its stakeholders is critical for investor decisions regarding whether they retain trust in management.

Other issues dealt with in this section include the importance of scenario analysis and approach to forecasting as well as the impact of COVID-19 on business models in the longer term.