ACCA survey reveals companies acknowledging material uncertainties but greater consistency in reports ‘desirable’ amid need for maximum transparency
A review of corporate financial reports prior to or just after the onset of the Covid-19 pandemic reveals companies disclosing material uncertainties over going concern and impairment of assets. However, there was a lack of consistency in the reporting of events after the end of the reporting period.
ACCA analysed the financial statements of 35 corporates, 20 with a pre-pandemic year-end and 15 with a post-pandemic year-end. Some 27 of these were in sectors that would have been expected to be hit hard by the pandemic, while eight were in neutral sectors.
Of the 35 companies, the survey found 10 cases of material uncertainty disclosure and emphasis of matter. In 19 cases, the assessment of the going concern basis was highlighted as a key audit matter (KAM) by the auditors.
As the report says: ‘Given all the uncertainties it was rather surprising that there were nine cases where there was neither a material uncertainty disclosed by the company nor a KAM on going concern, seven of which were from companies in the hard impact sectors.’
- Most of the uncertainties concerned refinancing by, or to general continuing financial support from, shareholders or lenders. In other cases, the issues were the risk of breaches of covenants related to borrowings.
- Going concern KAMs were not restricted to companies in the hard impact sectors – six out of eight of those in the neutral sectors had a going concern-related KAM.
- For December period ends the Covid-19 impacts were clearly non-adjusting and the March ones clearly adjusting, but there was some divergence for the February ones with two treating it as an adjusting event and four as non-adjusting.
- Given the widespread large impacts of the Covid-19 measures, it would be expected that all of the pre-Covid-19 sample of 20 would have disclosures on events after the reporting period end included in the financial statements. In five instances this was not the case.
- For those where the Covid-19 measures were reflected in the financial statements, only two out of 15 did not report any impairments of assets related to Covid-19. One of these was a February year end and the other was in a neutral sector.
- The most common, but often not the largest, impairments were of financial assets, mostly against trade receivables or amounts owed by joint ventures.
- A number of companies reported the increased uncertainties involved in some of the impairment calculations.
- A number of companies reported on the extent to which they had made use of government assistance, but few reported much impact in the financial statements.
- In the great majority of cases there was discussion of the impacts looking forward in the management report and how the company was responding to the changed environment. But there was a significant minority (10) where there was little or no discussion.
The report called for maximum transparency from companies to their shareholders and markets. It said: ‘In difficult and unprecedented times, information supplementing the financial statements will be more important than ever, especially of the business’ strategic responses and giving indications of performance and prospects.’
Richard Martin, ACCA’s head of corporate reporting, said: ‘It is important for directors to say clearly how they have considered the impact of Covid-19, and demonstrate a robust process in this consideration. They need to answer the key questions that users of financial statements will have about the impact of Covid-19, the steps taken to mitigate that impact and whether the company has the where withal to survive.’