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FRC’s Financial Reporting Lab issues report on risk and viability reporting

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28 Nov 2017

The Financial Reporting Council’s (FRC’s) Financial Reporting Lab (“the Lab”) has published a report on risk and viability reporting. The report seeks to understand the views of companies and investors participating in the project on the key attributes of principal risk and viability reporting, their value and use. The report also provides illustrative examples of the types reporting that investors favour in this area.

The report reflects the views of 25 representatives from companies and 27 members of the investment community. The Lab also carried out a survey of approximately 200 private investors.

The report indicates that “investors are unanimous that understanding those principal risks faced by a company is important both before making an investment and during the holding of that investment”. It highlights that, in response to an increased focus on risk management, there has been an improvement in the reporting of principal risks. This enhanced reporting and better engagement with companies has led to an increased understanding by investors as to how boards are identifying and managing risks to protect the sustainability of the company.

However, the report highlights that further improvements can be made to ensure that there is an appropriate balance in the disclosure; managing the conflict between providing succinct and useful information to investors whilst attempting to avoid disclosures that may give away competitive advantage.

Attributes of good principal risk disclosure include:

  • Reporting risks that are specific to the company that avoid jargon and are not boilerplate.
  • Highlighting the principal risk and how it is being managed by the company including how the risk links to the company’s ‘story’ and mitigating actions.
  • Linking principal risks to the business model and how they have changed year on year including potential impact.

The report finds that, since the introduction of the viability statement, most companies have placed greater focus on risk management at board level. It indicates that “performing stress testing and scenario analyses has improved decision making and helped companies determine their risk appetite”. However, it continues that “the value of this greater focus is often not reflected in the viability statement disclosures themselves” with investors looking for better explanation of the long-term prospects of the company. The Lab notes that “the current practice is often that viability statements are prepared as longer-term going concern statements with a focus on liquidity rather than as a means to communicate how the company will remain relevant and solvent in the long-term and be able to adapt to emerging risks”.

The report encourages companies to develop their viability statements in two-stages – firstly to assess prospects, and secondly to make their statement of viability. It indicates that investors are not looking for a viability statement which covers the period over which they assess their investments. They are actually encouraging companies to consider prospects over a longer-term relative to their specific business.

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