UK companies urged to improve long-term viability disclosures to investors

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Companies must improve the quality of information they disclose to investors about their ability to continue as a going concern and their longer-term viability, the UK accounting regulator has said.

A Financial Reporting Council review of information published by 30 main market and Aim-listed companies found that many were failing to properly explain the assumptions and judgments underlying their disclosures on going concern status and the longer-term viability of their businesses.

The regulator said “companies can, and should, do a better job of providing more granular information” and that there was a particular onus on companies facing greater uncertainty to provide more detail in their accounts and annual reports.

Going concern statements cover a company’s ability to continue in business and material uncertainties about its future for a period of at least 12 months. Viability statements address longer-term prospects, typically over a period of three years.

The disclosures are of particular importance to investors now as they try to understand how companies plan to navigate the economic uncertainty created by the pandemic.

“High-quality viability and going concern disclosures are vital for investors and other users of accounts to help them make informed decisions about a company’s liquidity, solvency and longer-term viability,” said Mark Babington, executive director of regulatory standards at the FRC.

“This is particularly important during times of uncertainty and economic volatility,” he added.

The review of annual reports for companies with financial years ending between December 2020 and March 2021 found examples where companies failed to disclose significant judgments they had made about material uncertainty as to going concern, even where the accounts suggested that such a judgment had been made.

The FRC said some companies were also failing to take account of significant events that could affect their liquidity and that these should be considered even if they were more than 12 months away.

Its review identified three companies that failed to explain why they had chosen to assess going concern over a period that ended before liquidity events such as large debt repayments or covenant tests for loans.

As part of a planned shake-up of UK corporate governance rules, the government is considering whether to proceed with a proposal to require companies to publish a resilience statement assessing their viability over a five-year period.

In the meantime, companies should extend their viability statements and provide longer-term information where possible, the FRC said.

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