In October 2020, the Financial Reporting Council’s (FRC) Lab in the UK published a report related to the evolution of financial reporting in times of uncertainty: COVID-19 Resources, actions, the future.
The report summarises the key messages from the FRC Lab’s previous report, published in June 2020, and provides an update on current disclosure practices, sets out guidance to companies and provides ideas on what disclosures may look in the future.
It gives examples of reports published since June 2020 that showcase best practices in financial reporting, as reporting continues to evolve to meet the challenges of the pandemic. The main three key themes previously identified in June’s report have been updated to reflect current disclosure practices and are as follows:
- Resources
- Actions
- The future
Resources
In terms of Resources, investors are now looking to understand not only the cash balance and short-term liquidity of companies but also their evolving cash position, how they use cash and the company’s future plans for that cash.
Actions
For Actions, the main concerns investors have pivot around how companies reduce expenditures and cash outflows to support future viability. Now further disclosures are required to describe the actions taken in response to the pandemic, and the steps taken to adjust their operations amid government restrictions. A good practice would be for companies to provide a summary of these actions taken in different stages in the recovery process with an update on the progress and the impact on their stakeholders.
Section 172 disclosure continues to be one of the most important sections in an annual report as it assists investors in developing and understanding the holistic picture of a company. Well managed companies prioritise stakeholder engagement, take stakeholders’ interests into account when making decisions, and make sure that they communicate this effectively in their financial reporting.
The future
Finally, investors want to know how companies will protect their key assets and value drivers going forward.
The key decisions that companies make in the present affect their future. The recent communication by companies focuses on making additional disclosures around these decisions, followed by explanations of how these are expected to affect the company’s future business, purpose and business model. The FRC suggests more granular information could be provided, such as explanations of management’s view of a company’s future, the challenges faced by each operation, and in different geographical locations as well as the opportunities that may exist.
The silver lining
The pandemic indeed wreaked havoc on the economy, negatively affecting companies, leading to insolvencies and economic distress.
The silver lining to the COVID-19 reality is that it has led companies to rethink the efficiency of their business models, to prompt them to strive for better governance, control systems, and practices that have never been thoroughly considered before. The new reality has forced companies to think of ways to be more resilient and more frugal in the management of their resources and prompted them to adapt to the situation by considering new opportunities that may have arisen.
Financial reporting goes along with these changes.
In its role as a springboard for companies to push toward better practices, financial reporting provides the framework and guidance towards a better financial world.
The FRC’s Lab has published a guidance note on section 172 statements to help companies with the content to include in the section, how to present it and how to facilitate the process.
If you are interested in further discussion about how the COVID-19 pandemic has increased the importance of better financial communication, and the opportunities it has presented companies, please get in touch with us to find out more.