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The considerations highlighted below are high-level and designed to stimulate thinking and the FRC encourages all companies to instigate early dialogue with their auditors.
Not all businesses will be affected to the same extent. Boards must determine what disclosures, if any, are required to ensure their financial statements and management and strategic reports meet the needs of investors and comply with regulatory requirements.
The FRC draws attention to the importance of high quality narrative information that supplements the financial statements and includes managements’ view of the future outlook of the business.
Business model
The FRC encourages clear disclosure of a company’s business model as part of the strategic report, including a description of the main markets in which the company operates and its value chain. The disclosure should be sufficient to enable readers to make an assessment of the company’s exposure arising from the outcome of the referendum.
Principal risks and uncertainties
Directors must consider the nature and extent of risks and uncertainties arising from the result of the referendum and the impact on the future performance and position of the business. These may also have an impact on reported amounts which could lead to further consequences such as an effect on debt covenants.
Those which the board judge to be principal risks and uncertainties must be disclosed and explained in the company’s interim management or strategic report. The outcome of the referendum may give rise to general macro-economic risks or uncertainties that affect all companies as well as those risks that are specific to a particular company or industry sector. Care should be taken to avoid ‘boilerplate’ disclosures. Company specific disclosures are more informative and useful to investors, for example, the impact of trade agreements for companies with a high level of exports to Europe.
The FRC attaches great importance to Clear & Concise reporting and any risks and uncertainties that are disclosed should enable the reader to understand how those risks and uncertainties are relevant given the specific facts and circumstances of the company. The FRC would also expect boards to provide an explanation of any steps that they are taking to manage or mitigate those risks.
As part of the assessment of principal risks and uncertainties, boards should consider whether the referendum vote gives rise to solvency, liquidity or other risks that may threaten the long-term viability of the business; and any implications for the viability statement in the annual report.
Market volatility
The volatility in the markets following the referendum result may have an impact on balance sheet values at 30 June 2016 or at subsequent reporting dates. For example, financial instruments measured at fair value and discount rates used in measuring pension and other liabilities may be affected by changes in foreign exchange rates, interest rates or market prices. Cash flows included in future forecasts may need to be re-evaluated.