FRC publishes thematic review of going concern and viability disclosures

The UK’s Financial Reporting Council (FRC) has issued new guidance designed to help companies boost their viability disclosures by providing additional data, stress testing and analysis.

At the end of September, the FRC finally unveiled its long-awaited report, entitled: “Thematic Review: Viability and Going Concern”. The relatively lengthy report was produced as a result of a previous review that regulators had conducted into the annual reports and annual accounts of a number of Main Market and Alternative Investment Market (AIM) listed companies.

Why going concern and viability disclosures have come under the spotlight

The reason the FRC opted to review the financials of those companies was to understand how strategically important businesses, and the industries in which they serve, were working to navigate and overcome the intensive pressures and uncertainties that had been unleashed upon them as a result of the global COVID-19 pandemic.

Specifically, the FRC wanted to develop a firm picture of how these big companies are intending to maintain their solvency and liquidity over the short-term, medium-term and long-term.

Yet in assessing these reports, regulators found a severe lack of information and disclosure around corporate viability to explain exactly what measures were in place and what evidence there was to suggest those measures were going to be effective.

Not only has that lack of information caused anxiety amongst wary investors and stakeholders, but the failure of businesses to disclose this essential strategic information could also inevitably lead to market uncertainty for consumers.

That’s why Mark Babington, the FRC’s Executive Director of Regulatory Standards explained it was time for companies to make a fundamental change to how they report on their financial viability.

“High-quality viability and going concern disclosures are vital for investors and other users of accounts to help them make informed decisions about a company’s liquidity, solvency, and longer-term viability,” he said in a statement.

“This is particularly important during times of uncertainty and economic volatility.”

Bearing that in mind, the FRC’s thematic review has called on corporations across the UK to introduce a range of new data and analysis within their existing viability reports — or for those lagging behind the curve, to introduce viability reports with the following standards.

What has the FRC said?

First, regulators are recommending companies start to include sufficient qualitative and quantitative data. By “sufficient”, the FRC means it needs to see enough hard data and analysis to ensure that those reading the reports fully understand what it’s saying and why.

Simply put: viability disclosures need to speak for themselves plainly and clearly.

To achieve this, company-specific data needs to be provided alongside information about reliance on any government grant or support programmes. Likewise, in the future companies are being told they should include information about any post-balance sheet changes to liquidity that could impact the company’s overall financial positions.

Second, viability disclosures need to be based on assumptions that are wholly consistent with all of the other forecasting sections of a company’s financial statements — for example, when it comes to impairment testing or the assessment of the recoverability of deferred tax assets.

This is simply to eliminate any disagreement between various aspects of a company’s financials to ensure that all reports are on the same page.

Third, it’s been recommended that any and all viability disclosures now clearly explain the inputs and assumptions that accounting teams use in forecast scenarios.

Likewise, the disclosures must start to explain the sensitivity analysis stress tests and reverse stress tests a company has carried out to support its assessments. This needs to include measures such as providing details on all the inputs and outcomes of those analyses and whether that data is quantitative or qualitative.

Finally, the FRC has used its Thematic Review to call on corporations of all shapes and sizes to use their disclosures as a means to clearly justify the periods of assessment that have been used. Moving forward, regulators want companies to better consider their debt repayment profiles, planning and investment periods, and capital investment.

More important still, businesses are being asked to add context around the nature of a business and its stage of development, to demonstrate assessments and analyses have been conducted in the right way.

In turn, these justifications are meant to draw attention to any qualifications or assumptions on which assessments are dependent — which should help auditors to better understand how accurate reports and studies are likely to turn out to be.

In addition to corporate viability disclosures, the FRC’s Thematic Review also called on businesses to think about so-called “concern disclosures” and the information being included within those reviews.

Moving forward, the FRC is recommending that companies clearly identify any and all material uncertainties that could be related to the events or conditions taking place that might cast doubt on a corporation’s ability to handle those concerns.

Any concern disclosure a business produces also needs to pinpoint and assess any significant judgements that the company’s management has made in trying to decide whether an ongoing concern basis has been appropriate. Similarly, the disclosure should highlight whether there are any important uncertainties the company has yet to address.

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