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Newsflash – FRC issues COVID-19 guidance for companies on Corporate Governance and Reporting

March 2020

The FRC has today issued guidance which highlights some key areas of focus for boards in maintaining strong corporate governance and when preparing their annual report and other corporate reporting. The FRC’s guidance for companies has been published alongside guidance for auditors and also an FCA Statement of Policy which extends temporarily the deadline for annual company accounts during the coronavirus crisis (see below for further detail).
 

Corporate Governance

Management information - boards must consider how they can maintain and/or complement the usual flows of information as they plan their route through the current emergency towards reactivation of their full business activities.

Risk management and Internal controls systems - relocation of staff and the inaccessibility of some business locations may lead to risk management processes and internal controls becoming unworkable or otherwise relaxed. Boards should monitor such changes carefully, introducing alternative mitigating controls where necessary and practicable to support the operation of an effective control environment.

Dividends and capital maintenance - directors need to consider not only the position of the company when a dividend is proposed but also when it is made. Where the company is no longer able to pay a dividend, directors should halt any dividend and communicate as appropriate to the market. The assessment of whether a dividend is appropriate should include consideration of current and likely operational and capital needs, contingency planning and the directors’ legal duties, both in statute and common law.

Corporate Reporting

Liquidity, viability and solvency - investors and other users of corporate reports want to understand a company’s resilience in the face of current uncertainty and to understand the key assumptions and judgements a board is making when assessing resilience and in preparing company financial statements. Of particular importance is the availability of cash within a group of companies, the ability to transfer such resources around the group to where it is needed, given operational, regulatory and legal constraints, and the access to further cash through existing and potential financing facilities.
 

Strategic Report and Viability Statement

Principal risks and uncertainties - a company should consider the specific resources, assets and relationships that are most under threat and the steps being taken to protect them. All stakeholders, including investors, are concerned about companies’ workforces and seek an understanding of how they are being retained and supported.

Viability statement – the Code asks boards to state that they have a “reasonable expectation” of the company’s viability over the period of assessment – during the current emergency and unprecedented pace of change, any reasonable level of expectation would naturally carry a much lower level of confidence. Disclosures should be clear on the company’s specific circumstances and the degree of uncertainty about the future is important information and draw attention to any qualifications or assumptions as necessary. At this time, the need for fuller disclosure is paramount.
 

Financial Statements

Going concern and material uncertainties - the FRC thinks it is likely that more companies will disclose “material uncertainties” to going concern in current circumstances but is concerned that this term may not be widely understood. They remind directors that it refers to uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. In other words, if boards identify possible events or scenarios (other than those with a remote probability of occurring) that could lead to corporate failure, then these should be disclosed. When assessing whether material uncertainties exist, boards should consider both the uncertainty and the likely success of any realistically possible response to mitigate this uncertainty.

If a material uncertainty does exist, then the company should disclose it in terms that are as specific to the entity as possible. Users will wish to know how and when the uncertainty might crystallise and its impact on the resources, operational capacity, liquidity and solvency of the company. If the board concludes that there is not a material uncertainty that meets the criteria for disclosure, but this conclusion required the application of significant judgement, then this judgement should be disclosed in accordance with paragraph 122 of IAS 1.

Significant judgements and estimation uncertainty - at this time, the FRC encourages companies to provide as much context as possible for the assumptions and predictions underlying the amounts recognised in the financial statements, irrespective of any narrow interpretation of the requirements. Such information will help users to understand the amounts presented.

Relevant judgements and assumptions might include the:

  • availability and extent of support through government support measures that have been announced;
  • availability, extent and timing of sources of cash, including compliance with banking covenants or reliance on those covenants being waived;
  • duration of social distancing measures and their potential impacts.

In the absence of any consensus view of the future path of the COVID-19 pandemic and its impact on the economy, users cannot expect all companies to apply consistent assumptions when there is such uncertainty. This lack of consistency makes the need for full disclosure of judgements, assumptions and sensitive estimates significantly more important than usual.

Events after the reporting date - there is a general consensus that the outbreak of COVID-19 in 2020 was a non-adjusting event for the vast majority of UK companies preparing financial statements for periods ended 31 December 2019. Companies will need to judge how much of the impact of COVID-19 should be considered to arise from non-adjusting events for subsequent reporting dates. This will be highly dependent on the reporting date, the specific circumstances of the company’s operations and the particular events under consideration.
 

Guidance for auditors

The FRC has also issued a non-exhaustive list of factors auditors should be considering when carrying out audit engagements in the current circumstances, along with guidance on how they might be addressed. This will be useful reading for audit committee members (link provided below). In this guidance the FRC confirms that the provision of support to companies in making applications to any of the business support schemes announced by government in response to COVID-19 would be covered by the Ethical Standard’s permission for auditors to support a public interest entity in addressing a time critical and price sensitive issue.
 

FCA Statement of Policy: Delaying annual company accounts during the coronavirus crisis

The FCA has announced temporary relief for listed companies which will permit listed companies which need the extra time to complete their audited financial statements an additional 2 months in which publish them. There is a reminder that the Market Abuse Regulation remains in force and that companies are still required to fulfil their obligations concerning inside information as soon as possible unless a valid reason to delay disclosure under the regulation exists. The FCA has also confirmed that the moratorium can end on 5 April 2020.
 

Certain other recent announcements about reporting matters

  • The Government Equalities Office and the Equality and Human Rights Commission (EHRC) have jointly announced that gender pay gap reporting deadlines will not be enforced this year – there is no expectation on employers to report their data for 2019 / 20. 
  • Companies House will grant automatic three month extensions to filing deadlines for companies that apply for a first extension before the filing date citing Covid-19.
     

Regulatory resources

The joint regulators’ statement is available here.

The FRC’s press release is available here, guidance on Corporate Governance and Reporting can be found here and the bulletin for auditors is available here. The FRC’s other materials for auditors and companies on the impact of Covid-19 can be found here.

The FCA’s announcement on a preliminary announcements can be found here. Its letter is available here and the technical Q&As are here.

The FCA’s Primary Market Bulletin 27 – Coronavirus update can be found here.

The Government Equalities Office press release on gender pay gap deadlines is here.

Companies House has published details of how to request a delay to the filing of accounts due to Covid-19 here.

ICSA and Slaughter & May’s Guidance Note on AGMs and the impact of Covid-19 can be found here.

Deloitte resources

Deloitte’s Need to know on the accounting considerations relating to Covid-19 can be found here.

You can sign up for Deloitte’s weekly Responding to Covid-19 webinar here.

Our library of governance publications is available to help you at www.deloitte.co.uk/governancelibrary.

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