The update (FRC PN 349) is designed to be relevant to annual and half-yearly financial reports issued by companies in the UK listed on a regulated market in the coming months. In summary, the issues directors could consider include:
The various reporting requirements set out below are derived from different sources and relevant disclosures may often appear in different parts of an annual or interim report. However, it may be helpful to investors and other users if they are brought together in one section of the annual or interim report so that all of the effects and risks of the most recent crisis can be more easily understood.
The FRC published an update to the UK Corporate Governance Code in June 2010. This Code requires directors of listed companies to provide a balanced and understandable assessment of a company’s position and prospects and to comment specifically on how the company operates for the long term and whether there are risks to it continuing as a going concern.
A company that has significant trading relationships with businesses or governments facing increased uncertainty should explain how its business model and financial position might be affected by a default or other significant event.
The listing rules require directors of listed companies to make certain disclosures about going concern [Listing Rule 9.8.6R(3)].
The Companies Act also requires directors to describe the principal risks and uncertainties facing their business [Companies Act 2006 Section 417(3)(a)].
IFRS requires directors to make an assessment of the entity’s ability to continue as a going concern [IAS 1.25-26].
Where a company is significantly exposed to increased country risks, directors may need to enhance their disclosures in this area including how these risks are mitigated.
IFRS contains specific requirements to test non-financial assets for impairment [IAS 36]. In relation to goodwill and intangibles which are not amortised they must be tested at least on an annual basis. Other non-financial assets should be tested whenever there is a trigger for impairment. A material exposure to adverse developments in country and/or currency risk is likely to trigger an impairment assessment.
IFRS provides specific procedures to be undertaken when assessing whether a non-financial asset has been impaired [IAS 36.12-14]. In summary the approach is to make a best estimate of future cash flows and to discount these cash flows at the rate that would be required at the balance sheet date by an investor.
In relation to goodwill, IFRS requires management to stress test their impairment assessments using reasonable possible adverse changes in the assumptions used to generate the forecast cash flows [IAS 36. 134(f)]. If an impairment would have been recorded under these reasonably possible adverse assumptions, then additional disclosures are required to explain this.
IFRS 7 requires detailed disclosures to be made of provisions made against loans and receivables [IFRS 7.16] as well as disclosures about any loans and receivables that are past due at the end of the period [IFRS 7. 36-37].
IFRS 7 also requires detailed disclosures about concentrations of risk [IFRS7.34(c) and IFRS 7 B8] highlighting that directors should apply judgement when identifying concentrations of risks and describing the circumstances of the company that would need to be taken into account.
Directors should consider changes to significant concentrations in the context of these requirements. IFRS 7 also requires detailed disclosures about credit risk, liquidity risk and other market risks. Directors need to consider the impact of the economic conditions on such disclosures.
IFRS contains a disclosure requirement in relation to the sources of estimation uncertainty in the carrying amount of assets and liabilities [IAS 1.125]. If there is a significant risk that there could be a material change in the carrying amount of an asset or liability due to changes in uncertain estimates within the following twelve months, then the fact needs to be disclosed.
For example, a provision may not be required against material amounts (to the extent it is not carried at fair value [IAS 1.128]) due from a government in turmoil, but disclosure would be warranted of the amounts outstanding [IAS 1.125-133].
Similar guidance was issued by The European Securities and Markets Authority (ESMA) in November 2011.
On Friday 13 January Standard & Poor’s downgraded the credit rating of France and eight other eurozone countries. Standard & Poor’s ratings services criteria is the written guidance that governs the analytic basis for determining the S&P credit ratings.
ACCA has produced a number of Guides To on subjects relevant to these issues. These cover the following topics: