In September 2014, the FRC issued a revised version of its UK Corporate Governance Code (the 2014 Code). It introduced, among other things, additional annual report disclosure requirements about the directors’ assessment of, and approach to, the principal risks faced by the company and their views on its viability over the longer term. The effective date for the 2014 Code was periods beginning on or after 1 October 2014.
In September 2014, the FRC issued a revised version of its UK Corporate Governance Code (the 2014 Code). It introduced, among other things, additional annual report disclosure requirements about the directors’ assessment of, and approach to, the principal risks faced by the company and their views on its viability over the longer term. The effective date for the 2014 Code was periods beginning on or after 1 October 2014.
The 2014 Code requires directors to make two new statements in the company’s annual report, namely that:
They have carried out a robust assessment of the principal risks facing the company, and
They have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over a specified period of assessment of their own choice.
These two new and explicit confirmations mean that directors will need to consider whether they have appropriate processes in place to enable them to justify them and may mean that some boards will have to take a more structured approach to their risk assessment process.
The 2014 Code also requires that these confirmations are accompanied by descriptions and explanations that should make clear to shareholders that the directors have undertaken a thorough process in drawing their conclusions and highlight the key factors that have led to them. In many cases, this will require a richer description of the risks identified, their potential impact and whether and how the directors have sought to mitigate them than may previously have been the case.
The interrelationships between the new requirements may also necessitate a more integrated approach to the disclosure of principal risks, internal control, going concern and longer-term viability. This may mean that companies applying the 2014 Code will also need to reconsider the structure of the disclosures in their next annual report.
Few companies have chosen to adopt the 2014 Code in advance of its mandatory effective date. Of those that have, initial indications suggest that directors are basing their longer-term viability statements on their mid-term forecasts (generally three to five years). Clearly, however, it is too early to say whether this will ultimately be considered typical.
Initial indications suggest that directors are basing their longer-term viability statements on their mid-term forecasts (generally three to five years). Clearly, however, practice may develop in this area as the disclosure requirement becomes more established.
The FRC has also published Guidance on risk management, internal control and related financial and business reporting, which includes some guidance on these new disclosure requirements. The BDO flyer Reporting on principal risks and longer-term viability summarises this guidance and also highlights some early examples of the longer-term viability statement. Further examples of longer-term viability statements are also available in a separate document.
The drafting of an appropriately detailed and sufficiently balanced and supportable longer-term viability statement that takes into account commercial sensitivities and the directors’ own personal exposure may take a considerable amount of time. Similarly, drafting principal risk disclosures that meet the enhanced expectations of the 2014 Code may also be time consuming. It is essential, therefore, that directors think about these disclosure requirements as early as possible in their reporting process.
View the Business Edge 2015 index
Subscribe to receive the latest BDO News and Insights
Please fill out the following form to access the download.