Companies need to clearly state the assumptions over issues such as whether the business is a going concern due to the impact of the Covid-19 pandemic, according to the Financial Reporting Council (FRC).
While most companies had provided sufficient information to the users of their statements to understand the impact of Covid-19 on their “performance, position and prospects, the regulator said many companies had room for improvement.
“Companies should aim to ensure that not only mandatory disclosure requirements have been met but that sufficient explanations have been included within the financial statements to enable a user to understand how Covid-19 has affected both the amounts presented and the company’s future prospects,” said the report.
Assumptions
Companies should explain their key assumptions and judgements over going concern disclosures in interim and annual financial statements, it said. This was particularly important in areas where there was material uncertainty. In fact, the FRC said that since businesses could be less sure of future outcomes they should not to gloss over their thinking on such issues.
“We expect sensitivity analysis or details of a range of possible outcomes to be provided for areas subject to significant estimation uncertainty,” it said. “The number of disclosures in this area is likely to increase as a result of Covid- 19.”
Principal risks
The FRC also looked at organisations’ strategic reports. These require companies to describe the principal risks and uncertainties and how these are mitigated.
“Given the company specific nature of Covid-19, we expect companies to consider the specific resources, assets and relationships that are most under threat,” said FRC, “and the steps being taken to protect them when setting out their principal risks and uncertainties.
The FRC found the quality of principal risk disclosures variable. The better disclosures clearly explained the specific risks Covid-19 posed and outlined their risk strategies to deal with them. Others were vague and failed to either identify the specific risk and its mitigation.
Good practice
The guide has many examples of good practice. In risk disclosures, these included:
- Covid-19 risks identified were company specific, rather than generic, and clearly explained how the risk could impact future financial performance.
- Mitigations identified covered all the Covid-19 specific risks disclosed.
- Risks identified were linked to strategy, business model and key performance indicators.
- The future outlook of the risk was discussed.
- The impact of Covid-19 on the risk profile of pre-existing risks was explained.
- Existing risks were amended to take account of the impact of Covid-19 meaning risks remained focused to the company.
