The Financial Reporting Lab of the Financial Reporting Council (FRC) has published a thematic review of companies’ viability and going concern disclosures, highlighting areas for improvement and offering examples of best practice.
The report recognises that Covid-19 and its economic effects continue to impact companies and explains that investors appreciate more tailored, detailed explanations of how management intends to deal with challenges to solvency and liquidity over the short, medium and long term.
Key recommendations in the review include:
- Inputs and assumptions – Companies should provide more granular qualitative and quantitative detail of the inputs used and assumptions made in each scenario and how they have been determined.
- Principal risks and uncertainties – Disclosures should be explicitly linked to particular principal risks and uncertainties, and indicate how those risks have been modelled in viability scenarios. Investors also want to understand how resilient the company is to risks that could threaten its going concern status or long-term viability and what mitigating actions could be taken.
- Period of assessment – For both the viability and going concern disclosures, the period of assessment should be specifically identified and justified by reference to as many company-specific factors as possible, including the company’s business model, strategy and development, any investment or capital allocation plans and its debt profile and expected repayments.
- Significant judgements – Any significant judgements that have been applied in determining whether the company is a going concern, or whether there was a material uncertainty in respect of going concern, should be disclosed clearly, with an explanation as to why such judgement has been deemed appropriate.