FRC: Update for directors of listed companies in the UK responding to interim financial reports

15 June 2012

The purpose of the FRC's further Update for Directors of Listed Companies is to draw directors' attention to the importance of conveying in their Interim Reports a balanced and understandable assessment of a company's position and prospects in the context of heightened country and currency risk.

This Update draws together a number of significant issues directors may need to consider in preparing interim reports in the context of heightened economic uncertainty. These include, where relevant:

• the company’s exposure to country risk, direct or to the extent practical indirect, through financial instruments, through foreign operations, and through exposure to trading counterparties (customers and suppliers);
• the impact of austerity measures being adopted in a number of countries on the company’s forecasts, impairment testing, going concern considerations, etc.;
• the possible consequences of currency events that are not factored into forecasts but mayaffect reported exposures and the sensitivity testing of impairment or going concern considerations; and
• post balance sheet date events that require enhanced disclosures to adequately inform investors and other users.

Analysts and investors will pay particular attention to disclosures about risks (e.g. country and currency risks, high volatility in prices in the commodity markets) in interim reports given the very high level of uncertainty about further developments. Thus, it is particularly important that directors focus sufficient attention on the relevant strategic, operational and financial risks facing their companies and that they make clear the nature and scope of their direct and, to the extent practical, indirect exposures to these country and currency risks. A statement that certain risks are absent or not significant is also helpful.

Interim reports are an opportunity for directors to explain how risks are managed so that markets do not misunderstand exposures. Clear explanation of relevant material risks and how management is mitigating them will enable markets to be kept up to date as further developments arise. It is important to avoid boilerplate and focus on company specific issues.

Particular care should be taken with segmental disclosures. IAS 34, paragraph 16A, sets out the required disclosure for segments in interim reports, as users may use these to quantify risk in the absence of other information.

The various reporting and disclosure requirements derive from different sources and may often appear in different parts of an interim report. However, it may be helpful to investors and other users if they are brought together in one section of an interim report so that all of the effects and risks of the current uncertainties can be more easily understood.

Audit committees are likely to need a detailed understanding of country and currency risks facing the business in order to review whether there are material risks and the reported level of mitigation actions taken. For material exposures they are likely to want a full understanding of how those risks have been identified, assessed and managed, their impact on the reported level of assets and liabilities, and how sensitive those amounts are to reasonably possible changes in the estimates and assumptions used by management when preparing the interim report.

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