A Tale of Two Crises
Financial Reporting Brief June 2020
This month’s article ‘A Tale of Two Crises’ considers continuing developments in Climate Change and the inter-action with Covid-19; it also takes a glimpse at interim reporting in Covid-19 conditions.
Is it true what many say that every cloud has a silver lining?
Difficult to contemplate in these extremely challenging times with everything turned upside down. Yet, there is a positive if we can think past our current travails and see further out than our road to recovery, whilst maintaining our hopes of either or both controlled eradication/mitigation or an effective vaccine to Covid-19.
Planet Earth is recovering from greenhouse emissions and their inevitable consequences which have wreaked havoc in many parts of the world. This is not just in the more remote corners, with recent viewing of the writer including a California forest fire destroying all in its wake including total evacuation and destruction of a town with a population of 40,000. Drying out of the forest from abnormal sunshine in recent years coupled with exceptionally strong winds were largely to blame. Many contend that weather patterns closer to home are strongly affected, with recent day(s) of bright sunshine and gale force winds in May perhaps bearing witness to that as have many other occasions in recent times.
We may yet be fortunate enough to find a relatively quick fix to the pandemic but there will be no such luck with climate change. It will take many years to reverse and undo the damage already done by climate change, if ever. The consequences of not doing so will lead to mass loss of lives, destruction of property and irreversible damage to our eco-systems. The words of a leading speaker at the World Economic Summit in January ring loud – ‘climate change will not destroy the planet, it will destroy the people on the planet’.
In early March, plans were being laid to draft an article on Climate Change for publication on the first Monday of April. Then, disaster struck in the form of Covid-19 when it really came into our full realisation that this was major with Government announcements leading to school and office closures and other previously unthinkable developments. Since then our lives have changed utterly. As with the world in general, financial reporting topics and narratives have been largely dominated ever since by the accounting implications of Covid-19. Both challenges remain and will continue with us.
For many calendar year end reporters, their first experience of external financial reporting in the midst of Covid 19 conditions is almost with us in the form of interim reports. We shall take a brief glimpse at some of the considerations which have taken on greater significance during these challenging times. These considerations have significance for all companies, not only listed companies. We are in an era when financial reports are in demand from a range of stakeholders, way beyond shareholders.
Guidance continues to be published on the accounting implications of Covid-19, with Regulators having a particular focus on interim reporting in recent weeks with useful guidance from both the European Securities and Markets Authority (ESMA) and the UK Financial Reporting Council (FRC). Going concern and exceptional items are two of the main topics in the guidance. The Accountancy Bodies continue to publish valuable advice and guidance, and to act as a reservoir for a wide range of publications from the world of accounting and financial reporting.
Deloitte has continued with its publications and webcasts. In May, an updated edition of IFRS in Focus — Accounting considerations related to the Coronavirus 2019 Disease was published with a range of insights and observations. It includes substantial comment on IFRS 9 and also includes comment on interim reporting. Our webcast series has been extended with a number of new topics – covenants, onerous contracts and employee benefits.
The Covid-19 pandemic has elicited a response throughout the Globe unlike anything we've seen before. Many aspects of the Covid-19 response are similar to the types of changes we need as part of a comprehensive climate-change response. Much remains uncertain about what the world will look like when we emerge from the Covid-19 pandemic. It is clear that we have many of the tools to make major advances in addressing climate change; what we need now is the political and societal will to apply them.
In November 2020, world leaders were scheduled to come together to discuss how to tackle climate change on a global scale, with more than 30,000 to attend CoP 26 in Glasgow. Due to the Global pandemic this event has been cancelled, or at least postponed.
In February, the CoP agenda was launched in the UK with the objective of helping private finance support the whole economy transition to net zero greenhouse gas emissions by 2050. The objective is that every professional financial decision will need to take climate change into account. To achieve net zero by 2050, every company, bank, insurer and investor will need to adjust their business models for a low carbon world.
Governance and Reporting: Climate Change
One of the biggest topics in financial reporting in recent years has been climate change reporting, reflecting the growing concern of major economies and leaders. Since March it has perhaps taken a backseat as the global pandemic took over, but it has not gone away, and won’t.
While developments in financial reporting take place globally, it is of concern that a recent report by the Climate Disclosures Standards Board based on a survey carried out of leading European companies indicates that 78% are falling short of EU requirements. There is much work to do and it is of interest to consider UK developments as a prime example of regulatory activity and one which is reflective of actions being taken by many other economies.
April 2020: Financial Conduct Authority statement setting out key actions it proposes taking including:
- Consulting on new rules to improve climate-related disclosures by certain firms and clarifying existing obligations
- Finalising rule changes requiring Independent Governance Committees (IGCs) to oversee and report on firms’ environmental, social and governance (ESG) and stewardship policies, as well as separate rule changes to facilitate investment in ‘green’ capital opportunities
- Publishing a feedback statement in response to a joint Discussion paper with the FRC on Stewardship setting out actions to address the most significant barriers to effective stewardship
- Clarifying its expectations around consumers’ access to green financial products and services and taking appropriate action to prevent consumers being misled
February 2020: The FRC announced a major review of how companies and auditors assess and report on the impact of climate change. The review will consider how the quality of information can be improved to support informed decision-making by investors and other stakeholders.
The FRC will also consider how investors are addressing the climate challenge in the stewardship of their investments and in their response to systemic and market risks when it monitors the first reports under the new Stewardship Code, which will be issued from the beginning of 2021.
October 2019: The FRC Financial Reporting Lab published its report ‘Climate-related Corporate Reporting’ which indicates that companies are falling short of investors’ expectations. The Lab’s report highlights the gap between current reporting and investor expectations and calls on companies to bridge this gap.
It provides practical guidance about where companies can improve their reporting. The report also outlines what investors want to understand, questions companies should ask themselves, recommended disclosures, and a range of examples of the developing practice of climate-related reporting. The Lab recommends companies use the Task Force on Climate-related Financial Disclosures (TCFD) framework to report on climate-related issues and the UK Government.
The August 2019 article in our Financial Reporting Brief series Climate Change – Planet Earth does not have time for excuses! commented on reporting and related developments up to then, with developments continuing since.
The overarching objective in IAS 34 Interim Financial Reporting is that the interim financial report should provide an explanation and an update to the relevant information included in the annual financial statements.
The statement recently published by ESMA highlights:
- The importance of providing relevant and reliable information;
- The importance of updating the information included in the latest annual financial statements to adequately inform stakeholders of the impacts of COVID-19, in particular in relation to significant uncertainties and risks, going concern, impairment of non-financial assets and presentation in the statement of profit or loss; and
- The need for entity-specific information on the past and expected future impact of COVID-19 on the strategic orientation and targets, operations, performance of issuers as well as any mitigating actions put in place to address the effects of the pandemic.
Directors will need to exercise judgment about the nature and extent of the procedures that they apply to assess the going concern assumption at the interim date.
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, and 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 previous annual financial statements, directors should undertake procedures similar to those that they would have carried out for annual financial statements to ensure that all relevant issues are taken into account.
The FRC has also issued further guidance in relation to the treatment of exceptional items and alternative performance measures given the extreme conditions that prevail arising from the pandemic.
Entities are confronted by challenging times at an extreme level. Covid-19 has placed demands on all involved to focus on key accounting considerations with quite often a changed focus. Measurement and recognition are key to the provision of quality information, but in these very uncertain times every effort must be made to achieve adequate disclosure to ensure investors and other stakeholders can understand the main messages.
Companies must bear in mind that the ‘old issues’ have not gone away, with climate change being a prime example. They should ensure that their interim reports make adequate disclosure of their initiatives in relation to managing climate change risk.
Monthly Reporting Pack - May 2020
Irish/UK GAAP & Related Developments
- Amendments to UK accounting standards
- ICAEW and ICAS produce guidance for SME businesses on going concern and COVID-19
- FRC updates its COVID-19 guidance for companies to include reporting of exceptional items and APMs
- FRC updates its COVID-19 guidance for companies to include going concern considerations for interim reporters
- Financial Reporting Lab publishes first newsletter of 2020
- Corporate Governance update
- COVID-19 Q&As Highlighting Ethics & Independence Considerations
IFRS & Related Developments
- ESMA statement on the implications of the COVID-19 outbreak on the half yearly financial reports
- IASB publishes amendment to IFRS 16 regarding COVID-19-related rent concessions
- Accountancy Europe podcast on corporate reporting and the coronavirus crisis
- Collections of COVID-19 resources
- AAOIFI statement on COVID-19 accounting implications for Islamic financial institutions
- EFRAG issues annual review for 2019
- IIRC publishes consultation draft of its revised Framework
- IASB concludes the 2018-2020 annual improvements cycle
- IASB publishes amendments to IFRS 3 to update a reference to the Conceptual Framework
- IASB finalises amendments to IAS 37 regarding onerous contracts
- IASB proposes to defer effective date of IAS 1 amendments
- IFRS in Focus — IASB publishes package of narrow-scope amendments to IFRS Standards
- IFRS in Focus — IASB proposes to defer effective date for 'Classification of Liabilities as Current or Non-current'
- IFRS in Focus — Accounting considerations related to the Coronavirus 2019 Disease
- IFRS on Point
- Accounting Roundup - April 2020
Previous Financial Reporting Briefs
- May 2020 - Covid-19 The Epic Battle Continues
- Quarterly Financial Reporting Brief: April 2020
- April 2020 - Covid-19 - The New Normal
- March 2020 - Sustainable activities - A need for Transparent Reporting
- February 2020: Corporate reporting - delivering the message
- Quarterly Financial Reporting Brief: January 2020
- January 2020: ESG Risks - The reporting challenge
- December 2019: Financial Reporting – Promote Public Confidence and Trust
- November 2019: Regulatory Environment - Lessons for All
- Quarterly Financial Reporting Brief: October 2019
- October 2019: Taxation - A Financial Reporting Challange
- September 2019: Corporate Reporting – A Continuing Challenge
- August 2019: Climate Change – Planet Earth does not have time for excuses!
- Quarterly Financial Reporting Brief: July 2019
- July 2019: Integrated Reporting – Corporate Strategy and Long-Term Value
- June 2019: Lease accounting - IFRS 16: A new age
- May 2019: Corporate Balance Sheets – The Full Picture?
- April 2019: Sustainable Development – A Goal for All
- Quarterly Financial Reporting Brief: April 2019
- March 2019: Reporting on Success - Getting the Balance Right?