Corporate governance and reporting by companies
Updated as of 14 May 2020
The Financial Reporting Council (FRC) issued guidance in March 2020 entitled Guidance for companies on Corporate Governance and Reporting, highlighting ways to maintain strong corporate governance, and giving guidance on issues arising when preparing annual reports and other corporate reporting, during the Covid-19 pandemic.
The FRC has published an updated version of its guidance, including a new section dealing with matters which directors will need to take into account when preparing interim reports. The updated guidance can be found here.
The FRC’s new guidance on interim reports considers in particular the requirement for the directors to consider the “going concern” basis for presenting their accounts. IAS 1 requires financial statements to be prepared on a going concern basis unless management intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. In relation to the going concern assumption, the FRC’s guidance states:
- Directors need to exercise judgment about the nature and extent of the procedures they apply to assess the going concern assumption at the half-year date. This might include disclosures of any material uncertainties; assumptions made about the future path of COVID-19 and the public health responses; the projected impact on business activities; use of government support measures; and access to bank and other financing.
- Issues which might trigger a need to re-examine the going concern assumption and going concern and liquidity risk disclosures include: a significant adverse variation in operating cash flows between prior budgets and forecasts and the outturn in the first half of the year; a significant reduction in projected revenues for the second half of the year based on plausible scenarios for the COVID-19 pandemic and public health responses, taking into account government support measures; a failure to obtain renewal or extension of committed financing facilities; and a failure to sell capital assets for their expected amounts or within previously forecast time-frames.
- If going concern has become a significant issue since the time of the previous annual financial statements, directors should undertake procedures similar to those they would have carried out for annual financial statements to ensure that all relevant issues have been identified and considered.
- It is up to companies to decide whether to engage their auditors to perform an interim review; feedback from investors indicates that such a review provides valuable assurance, particularly in the current environment.
If you require assistance with matters of corporate governance or corporate reporting, please get in touch.
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