This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

The Investment Association publishes Guidelines on Viability Statements

  • Book badge (green) Image

30 Nov 2016

The Investment Association has published guidelines setting out institutional investors’ expectations with respect to the longer-term viability statement introduced as part of the updates to the UK Corporate Governance Code in 2014.

The requirements for the longer-term viability statement come from Code provision C2.2 which states: 

Taking into account the company’s current position and principal risks, the directors should explain in the annual report how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate.  The Directors should state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, drawing attention to any qualifications or assumptions as necessary. 

The Financial Reporting Council (FRC) has published its Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (link to FRC website) to assist directors when preparing the longer-term viability statement. 

The Investment Association highlights that the Guidelines have been developed with the benefit of one year’s experience of company’s producing longer-term viability statements and will be reviewed in light of best practice as it evolves.  Although the Guidelines are directed at companies whose shares are admitted to the Premium segment of the Official List of the UK Listing Authority, the IA does indicate that they can be considered best practice for other companies. 

The Guidelines include:

  • Period for the viability statement. The IA highlights that the majority of companies have adopted a three year timeframe with a few adopting a longer term of five years.  The IA indicates that “three or five years seems to have become standard practice” and encourages companies to consider longer term time frames “given the long-term nature of equity capital and directors’ fiduciary duties”.  The IA also highlights that it is important that directors are clear in why they have selected a particular timeframe.  It states that investors value disclosure that make it clear how directors have considered wider factors such as specifics of a company’s business and sector rather than that the assessment is purely based on the medium-term business plan which is what the IA has seen frequently so far.
  • Consider prospects and risks when assessing viability. The Guidelines:
    • recommend that directors do not limit the consideration of viability to medium or long-term risks but should also look at the current state or affairs of the business. Investors would also welcome the viability assessment addressing the sustainability of dividends.
    • indicate that it is the risks that threaten the day to day operations and the company’s existence that should be considered for the longer-term viability statement. These risks should be distinguished from those that impact its performance and which could prevent it from delivering its strategy.
    • Highlight that investors would welcome disclosure that address the likelihood of risks occurring and possible impact.
  • Description of risks. The IA indicates that “too often the description of risks lacks structure or is presented as a shopping list to cover all bases”.  It indicates that risks should be prioritised and should only include “those that are most pertinent to the business and the company’s strategy”.  The IA note that directors should exercise judgement in determining which principal risks are important and it is helpful if disclosure includes ranking of risks (for example low, medium, high) and changes in the level (e.g. likelihood) from a previous period.
  • Stress testing. Investors would welcome greater transparency around the stress testing that has been undertaken by the company in assessing viability. 

The Guidelines are available on the IVIS website.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.