2020/21 Reporting Season: both a challenge and an opportunity
3 November 2020: Reporting on 2020 will be a challenge. The Financial Reporting Council Lab acknowledges this but also flags opportunities for the development of investor information despite the uncertainty.
The Lab has published two guides with this aim in mind: COVID-19: Resources, action, the future - a look forward and COVID 19: Going concern, risk, and viability - a look forward. Both these reports update the Lab’s June guidance. Further information on helping companies make Section 172 statements more useful is also available.
How should companies approach the guidance? “It partly depends on where you are in your reporting cycle,” says Fitz-Gerald. “One of the reports is very focused on the disclosures you would include either in your annual report or your interim report – that’s the ‘Going concern, risk and viability’ one. If you’re at the point where you’re pulling together your interim report or your annual report, then that’s probably the one to start with.”
He continues: “The other one – ‘Resources, action, the future’ – is focused on providing information to the market on a more up-to-date basis. For example, if you’re planning to issue a trading update or do an investor presentation, this report helps with more immediate reporting needs”.
The reports are aimed at those preparing investor communications. This may be a combination of CFOs, the investor relations team, the company secretary and anyone else within companies that pull together the relevant information for the market. Companies, investors and other stakeholders have all contributed to the guides through their participation in one-to-one meetings, round table events and bespoke research.
“The reason we talk to investors is that we want to identify from them what they’re looking for in corporate reporting. Then we work with companies to try and find best practice examples of good reporting from the perspective of investors and other stakeholders,” says Fitz-Gerald.
He points out that the Lab responded swiftly at the start of the COVID pandemic to help companies report in these challenging times. This has meant working with other regulators and other parts of the FRC to produce guidance for companies to help them decide what to report.
“The purpose of the two reports is to say there are lots of things companies could report on, but these are the particular areas that investors want companies to focus on,” says Fitz-Gerald. “We recognise that companies may have to pull together reporting in a very short space of time in a very different working environment and therefore we wanted to focus them on the specific areas that investors want information on.”
Evolution of thinking
There has been an evolution of thinking about corporate reporting during the COVID months of 2020. The upshot is that it is now clear that investors are looking for three things.
The first – resources – is to understand what access to cash companies have, their liquidity position and how they will survive in the short term.
The second area is the actions companies are taking in relation to the crisis. “This could be decisions on furloughing employees, dividend policy, capital expenditure, for example,” says Fitz-Gerald.
The third area is the future. “Once companies have stated what resources they have and what actions they have taken in response to the crisis, the next thing to do is to set out how they will position themselves up for the future,” he says. This could be a shift in business model to digital, for example, or developing strategies to support a green recovery.
“If companies can give investors some information about how they’re adjusting their business to be greener in the future, then, at this time, they are more likely to attract investment and be successful, sustainable companies in the future,” says Fitz-Gerald.
Brexit is a further challenge companies are facing. Fitz-Gerald points out the tips around Section 172 reporting issued by the Lab relate to Brexit. “One of the tips in that guidance is around managing stakeholders: what they are doing in relation to their customers and suppliers, and what they are doing in relation to the environment they are operating in. One of the things it is important to think about in the midst of all that is the effect that EU Exit might have on supply chains, the customer base and trading between different countries,” he says.
“Investors will not expect companies to be able to predict the future accurately. What they will want to understand is how companies are planning for the different scenarios that might play out.”
Specific reporting requirements
The Lab is uniquely placed to evaluate how well companies are doing under specific reporting requirements. For example, how well they are disclosing scenarios considered, and stress testing undertaken, as part of their consideration of the long-term viability of the business.
Fitz-Gerald responds: “This is something we have been encouraging companies to do more of over the last few years. The changes to the Corporate Governance Code encouraged companies to think about the business’s prospects, and also to identify the risks in achieving those future prospects in preparing their viability statement.”
He points to the discussions at boardroom level about the different risks and how the various scenarios play out. “We’ve heard from companies that have run some really good stress and scenario tests in preparation for the viability statement requirement. However, we don’t always see them reported well. It is still an area that is developing,” he says.
So how could the information disclosed on the impact of the pandemic on the performance and prospects of the business be improved? “What we have tried to do with our reports is to pick out the best examples of reporting in response to COVID. Those are the examples that we would like everyone to work towards,” Fitz-Gerald says.
“One of the means of disclosure that has been useful is for companies to lay out their performance pre-COVID and their performance during COVID. It is then very transparent what the impact on the business has been. Then you need some sort of indication of what things might be like in the future, recognising the uncertainty.”
So, what does poor reporting look like? Fitz-Gerald is quick to point out that the Lab focuses on good reporting. “Sometimes you read an annual report and it does not hang together very well as a single coherent story,” he says.
“We think that the strategic report – which is where the company sets out its strategy and how it measures itself against that strategy – is a good starting point. Then you can build a coherent story that flows all the way through your annual report and provide consistency.”
Is there such a thing as too much information? “Yes,” responds Fitz-Gerald. “We do see boilerplate information in annual reports.”
He reminds us that the annual report is a report to members – shareholders of the company – but the Lab has been encouraging companies to think about other stakeholders, like investors, suppliers, customers and the workforce as audiences for the reports. The challenge is to strike the right chord across all these groups.
What is more, the method of reporting is evolving and the Lab has also produced a report on Video in corporate reporting. “Over the COVID period, we have seen some developments in the use of video in reporting. That can be for either presentations on launching a new product or on how the company plans to become more sustainable. We’ve also started to see companies do AGMs through video and also interactive video,” he says
So, what do companies need to do now? Reading the FRC Lab reports is an obvious first step.
The FRC has also published its review of where company reporting needs to improve. The Annual Review of Corporate Reporting shows that the quality of corporate reporting has remained consistent in recent years. Of the 216 company accounts reviewed, the FRC wrote to 96 companies with substantive questions about their reporting and, looking ahead, says that COVID-19 disclosures should be sufficient for users to understand the impact on a company’s performance, cash flows and financial position.
ICAEW has a range of relevant resources available and will continue to prioritise and develop these in response to the evolving situation. We offer specific online technical resources relating to COVID-19, including items for preparers and auditors, which are freely available to all.