Reporting in Uncertain Times
Author:
Aidan Lambe
The tightening of finance - the key feature of the credit crunch - means some companies will face increased uncertainty as they approach the end of their financial year. Such uncertainties, where they have the potential to affect a company's going concern, will need to be disclosed in an open and transparent manner. Directors should be thinking about these issues now, well ahead of their annual reports, advises Aidan Lambe.
In buoyant economic conditions, with ever-improving company performance, consideration of going concern issues become less problematic. In more stressed economic times, however, directors' judgments become more difficult and uncertain.
Such uncertainties may relate to:
• bank lending intentions;
• the impact of the recession on a company's business; and
• the impact of the recession on others, including customers and suppliers.
Directors must consider the appropriateness of the use of the going concern basis and whether disclosures in this regard are adequate. Commercial sensitivities surrounding such disclosures may need to be set aside to present accounts that give a true and fair view.
Addressing these issues well before the preparation of annual reports will help companies avoid nasty surprises that may unsettle investors and lenders. Early discussions with independent auditors will also help to minimise this risk.
Auditors are also likely to want to consider cash-flow forecasts and understand the availability of external finance. This may lead to auditors seeking detailed evidence on the status of a company's negotiations with its bankers regarding loan renewals or overdraft facilities. They may also need direct dialogue with the company's bank.
Whether banks are prepared to comment on future lending intentions remains to be seen, even regarding profitable companies with relatively small borrowing needs.
The issue of risk will also need to be considered. Section 13 of the Companies (Amendment) Act 1986 requires disclosure by directors of the principal risks and uncertainties companies may face.
It is difficult to envisage risks and uncertainties relating to current conditions not being disclosed. This will depend, however, on individual circumstances.
Auditors are required to consider whether a material uncertainty exists that may cast doubt on a company's ability to remain as a going concern. A key determinant of this will be the quality of disclosures made by directors.
It is important to note that such disclosures do not mean that the company concerned will cease to be a going concern.
It is therefore crucial that the wider stakeholder community ¬shareholders, lenders, analysts and the media - understand the context in which going concern disclosures are made.
Directors need to start thinking about these issues now. It is timely that the UK Financial Reporting Council has recently issued two important pieces of guidance for directors and audit committee members.
Given that Irish-listed companies must comment on compliance with the Combined Code, that identical financial reporting standards exist between Ireland and Britain, and the similarity of Irish and British company law on these issues, Irish directors are likely to find this material of value. It can be accessed at www.frc.org.uk
Investor confidence is already at a low ebb; a proper appreciation of the issues in question may help prevent it falling even further.
Aidan Lambe is Director of Representation and Technical Policy at the Institute of Chartered Accountants in Ireland.