Businesses should reflect on new guidance issued by the UK's Financial Reporting Council (FRC) to better understand the disclosures they may need to include concerning the coronavirus in their annual accounts and accompanying reports, a corporate law expert has said.
Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said the impact of the virus on business is potentially wide-ranging, and that the FRC's new guidance is a reminder of the need to monitor developing risks, keeping investors informed.
This is best seen as a reminder, as we enter reporting season, of the virus’ wide-reaching impact on business and therefore the utility for investors of understanding, distinctly, that impact on a company by company basis
Public listed companies are obliged under the UK Companies Act to include details of the principal risks and uncertainties facing the company in their annual reports. The FRC's guidance reflected on this obligation in the context of coronavirus, which is officially named Covid-19, as well as the changes businesses might need to make within their balance sheets.
"Companies should consider whether to refer to the possible impact of Covid-19 on their business in their reporting of principal risks and uncertainties," the FRC said. "Where mitigating actions can be taken, these should also be reported alongside the description of the risk itself. As well as possible inclusion within a company’s disclosures of principal risks and uncertainties, the carrying value of assets and liabilities might also be affected with a need to perform additional impairment tests and to assess whether leases have become onerous."
"For December year-end reporters these events would be likely to represent non-adjusting post balance sheet events as at 31 December 2019, given that, at that date, few cases had been confirmed and the virus only just identified. However, for companies with later reporting dates, year-end balances might be affected," it said.
The FRC provided examples in its guidance of the areas in which Covid-19 might impact businesses. It said businesses with "extensive operations or manufacturing in China, with consequential staff shortages and production delays" are among those likely to be exposed to risk, as well as other businesses that "have significant trading links or global supply chains that are dependent on Chinese-manufactured goods". The FRC urged UK businesses to "monitor developments and ensure that they are providing up-to-date and meaningful disclosure when preparing their year-end reports".
However, Proverbs-Garbett said: "Given the rapidly changing global situation, a disclosure that is sufficiently up to date to be meaningful clearly won’t be possible in all cases. The FRC acknowledges that the extent of the risk and the degree to which it might crystallise depends on particular circumstances. Where the impact has been felt by year end and is quantifiable – the examples given by the FRC are around staff shortages and production delays – one would expect this to be reflected in relevant disclosures without intervention."
"This is best seen as a reminder, as we enter reporting season, of the virus’ wide-reaching impact on business and therefore the utility for investors of understanding, distinctly, that impact on a company by company basis," he said.
