In September, the Financial Reporting Council (FRC) published their thematic review of viability and going concern. The review looks at the viability and going concern disclosures from a selection of annual reports and accounts with year ends between December 2020 and March 2021.
These particular disclosures are key to providing the regulator with an understanding of how a company intends to maintain solvency and liquidity over the short, medium and long term. However, as a result of Covid-19, these disclosures have become increasingly important as companies continue to operate in a period of great uncertainty and severe economic pressure.
The report analyses the FRC's findings using the following classifications:
- Disclosure that represents good quality application that we would want other companies to consider when preparing their annual reports
- Disclosure that represents opportunities for improvement by companies to move them towards good practice
- Disclosure that represents an omission of required disclosure or other issue. We want companies to avoid such issues in their annual reports
The report highlights the need for companies to provide clear and concise disclosure, avoiding unnecessary clutter. In their review, the FRC stated that companies lacked sufficient qualitative and quantitative detail regarding the inputs and assumptions used in their assessments. In addition, where significant judgement was used, there was an absence of disclosure to this effect.
Similarly, where a viability statement was produced, there was not enough disclosure around how risks and uncertainties had been modelled in the viability scenarios, or indeed how resilient they were to these risks. Many businesses had also failed to explain how the viability time period was determined, which in most cases was three years.
On top of this, the FRC discovered that in many cases the viability and going concern disclosures lacked adequate details to allow a reader to assess whether the assumptions used were in line with those applied in the rest of the financial statements.
For more information, the full report can be found here.