The UK's Financial Reporting Council (FRC) issued Wednesday guidance for companies to improve their disclosures on viability and going concern, following a review of a selection of main market and Alternative Investment Market (AIM) listed companies' annual reports and accounts.
Mark Babington, the FRC's executive director of Regulatory Standards, said: "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 added: "This is particularly important during times of uncertainty and economic volatility."
The global pandemic and the accompanying economic events have made viability and going concern a prominent issue for companies and investors alike over the last few years. Amidst these conditions, the FRC's Thematic Review: Viability and Going Concern includes recommendations for both types of disclosure. They should:
- Include sufficient qualitative and quantitative information to enable a reader to fully understand the assessment. This requires detailed, company-specific information to be provided. These disclosures may, for example, include details of drawn and undrawn facilities in place and reliance upon such facilities; explanation of any reliance on any government support programmes; details of covenants including headroom; and information on post-balance-sheet changes to liquidity.
- Be based on assumptions that are clearly consistent with those used in other forward-looking areas of the financial statements such as impairment testing and the assessment of the recoverability of deferred tax assets.
- Clearly explain the inputs and assumptions used in forecast scenarios (providing quantitative as well as qualitative information).
- Explain the sensitivity analysis, stress, and reverse stress tests carried out to support the assessment and provide details of the inputs (quantitative as well as qualitative detail) and outcomes of any such analysis.
Further, the FRC said viability disclosures should:
- Clearly justify the period of assessment. Companies should consider debt repayment profiles, the nature of the business and its stage of development, planning and investment periods, strategy and business model, and capital investment when selecting the viability assessment period. The FRC also encourages companies to provide longer-term information where possible, which investors find more helpful.
- Draw attention to any assumptions or qualifications on which the assessment is dependent.
In addition, the FRC said going concern disclosures should:
- Clearly identify any material uncertainties related to events or conditions that may cast significant doubt on an entity's ability to continue as a going concern.
- Highlight the significant judgements made by management in determining whether the adoption of the going concern basis is appropriate and whether there are material uncertainties in respect of going concern to disclose.
— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.