Corporate reporting: challenging times – the only certainty is uncertainty
In troubling times, the value of clear, thoughtful communication that meets investors’ needs only increases. Thomas Toomse-Smith introduces two key reports from the Financial Reporting Lab.
Unprecedented, once in a lifetime, unimaginable, epoch-making – one can hardly open a newspaper, company announcement or regulatory guideline without seeing such language. But from a communication perspective is the current situation that unique? At one level, the capital market has always been about change and making a judgement against an uncertain outlook.
However, what is different this time is that no company, no business model, and no strategy is likely to be unchanged. In such a tumultuous market, what should you communicate? The Financial Reporting Lab spoke to investors to find out, and has recently released two reports that provide examples of how many companies are meeting those needs.
Transparency through communication
Our discussions identified that investors expect clear and timely disclosures from companies setting out the impact of COVID-19 on their business and long-term prospects. Good quality reporting is vital in times of uncertainty and will help investors make informed decisions about where support for companies is most needed.
Our report COVID-19 – Resources, action, the future covers the key areas that companies should focus on in providing market updates, and emphasises the need to provide clear and timely information to the market. It includes several examples from results presentations, trading statements, dividend announcements and other communications. It also includes a section on scenario planning and how companies might use plausible scenarios to report on the action that they might take. The report also notes the need to focus disclosure on evolving business models and strategy as we move to a new normal and perhaps a green recovery.
Our second report COVID-19 – Going concern, risk and viability provides practical guidance and examples of going concern statements, principal risk reporting and viability statements. All of these are interlinked but may have different time horizons.
The going concern statement focuses on the period from one year after the annual report is approved. Companies will need to consider whether or not a material uncertainty exists and disclose the factors that have led them to make that decision (whether or not they conclude that a material uncertainty exists). They are also very likely to need to update their principal risk disclosure to include a reference to the potential impact of COVID-19. This may result in a separate risk or may affect existing risks.
The viability statement considers a company’s prospects and viability over a longer-term horizon, and the report continues to encourage companies to provide information about the stress and scenario testing they have carried out as part of their assessment.
Again, it is likely that companies will need to reconsider and update this testing in the light of COVID-19.
Focusing on what matters
As well as the content of reporting, our discussions with investors also covered some practical elements on timing, uncertainty and method of communication.
- Focus on the big picture, for now – In the short term, investors highlight that they need information on the most significant areas. Companies should concentrate on the most relevant issues such as liquidity, solvency and operational matters.
- Recognising uncertainty – Companies and boards are absorbed in ensuring that communications are accurate and provide clarity. However, a desire for certainty might limit detailed disclosure. Any information gap caused by limited disclosure is likely to be filled by third parties. Investors, data providers and hedge funds are already creating models (often using alternative data sources) of the impact COVID-19 has had on individual companies and using these to invest.
- Annual reports are not the only mechanism – Investors note that maintaining transparent communications on COVID-19 is crucial, not just for their understanding, but also for suppliers and employees. Companies should consider all the channels of communication at their disposal, and embrace the value of the website as a hub.
- Consistency in reporting – While much of the FRC and Lab guidance is on the annual report, in times of uncertainty, there is a need to focus on shorter-term reporting. Ensuring that such ad-hoc reporting presents information that is consistent with a company’s annual reporting (such as the KPIs used) is helpful for investors. Where differences do occur, a clear explanation of why this is appropriate in the circumstances should be highlighted and described.
What is next?
Our reports represent a snapshot of practice at a moment in time, and we fully expect that great examples of disclosures will continue to come out into the market. As such, we plan to add examples to our report throughout the year.
The Lab’s two new reports can be found on the FRC website
Thomas Toomse-Smith is project director at the Financial Reporting Council’s Financial Reporting Lab.
This article was first published in the Summer 2020 issue of Informed, the IR Society's quarterly journal.
Published 15 July, 2020