Financial Reporting Breaking news November 2020
The title of the third volume is:
Disruption in Financial Reporting: A post-pandemic view of the future of corporate reporting
The chapters are about to be handed over to Routledge for production.
It brings up-to-date and post pandemic views on the way financial reporting and corporate reporting should develop,
There is much wrong with the system at the moment. It is not all bad, just the real world events have overtaken what was designed a long time ago.
Updates to September 2020
June/July 2020: Revisions to Going Concern, Risk and Viability statements (COVID-19)
During the 2007-2009 crisis, we were told by a number of interviewees that a cross-sector wave of warnings did not happen, This is confirmed by Tabby Kinder in the FT. The FRC obviously heeded her warnings that auditors have a backlog of annual reports that are likely to question the ability of companies in the hardest hit sectors during the pandemic to continue trading as a going concern for the next 12 months. Tabby Kinder writes:
A flood of going concern warnings or qualified audit opinions — in which an auditor says there are misstatements or that they could not obtain enough evidence to sign off the accounts with a clean bill of health — could spook markets. There is also expected to be a rise in “emphasis of matter” audit reports, which highlight serious uncertainties around matters such as property or inventory valuations.
Tabby goes on to report:
The head of audit at one large firm said some major businesses had approached the government’s department for business in recent weeks to complain that their auditors were putting too much pressure on them. “They have complained that we’re being overly prudent,” the auditor said, adding: “However, it’s clear that none of the stress tests we forced companies to do back in February and March look so crazy now.”
He said his firm was forcing all consumer-facing companies it audits to stress-test being closed until September and a phased recovery for a further 12 months. He said that travel and leisure companies had been told to “assume no European summer revenues and no winter sun revenues at all”.
So firms believe the auditors are putting too much pressure on them in what is often regarded as a pass or fail type test (going or not going concern). The FRC has clarified that there are ways in which the survival of a company can be graded with different possibilities.
The FRC responded with two reports: Covid 19 – going concern, risk and viability and Covid 19 – resources, action, the future
The reports consider that investors are fully aware that the levels of uncertainty are unprecedented and, to a large extent, outside companies’ control. The FRC encourage Boards of companies to consider plausible scenarios and report on how they intend to respond to these going forward. Examples of good practice reporting were included to assist companies.
Specific elements of uncertainty relevant to the next 12 months might include (but are not limited to):
a) Timing of resumption of operations.
b) Further restrictions that limit the return to normal operations.
c) Restrictions placed on government (or other) capital.
d) Timing and continuation of government schemes and support packages.
e) The outcome of capital raising actions, discussions with banks, and landlords.
f) Short-term impacts of pricing changes to revenue and expenses.
g) Impacts on human capital, the supply chain, and customers.
The FRC summaries of these issues are provided below:
Locating and obtaining short-term cash resources is often about building resilience and flexibility but, for some, it is ultimately about survival. In such circumstances, reporting ongoing concern and uncertainties becomes more important. The disruption to business models in the short-term might mean that the going concern assessment is more complex task. However, going concern is not a simple binary or pass/fail concept. A company can be a going concern even when one or more material uncertainties exist. In such circumstances what becomes important is the disclosure about the uncertainties and management’s consideration of these.
Reporting by companies on principal risks provides investors with key information about the resilience and adaptability of a company’s business model and strategy to internal and external shocks. 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 how they specifically affected companies, and how management have responded.
The viability statement was introduced following the 2008 financial crisis to provide investors with a better view on the longer term prospects and viability of a company’s future. The current crisis is a test of the value of viability statements. Availability statement with realistic scenarios and clear assumptions provides boards an opportunity to communicate their longer-term prospects, even when the short-term outcome is less certain.