Brexit: Initial considerations and an FRC reminder for directors

Brexit FRC image
30 July 2016

For many companies, the current economic and political uncertainties about the detail of our future relationship with the EU make it difficult to take practical action in relation to trading and strategic direction. For others the potential changes signal the possibilities of new opportunities, but this is again subject to the future relationship with the EU and other trading nations.

 
However, in the immediate aftermath of the EU referendum there are general things that a board can do in order to prepare for what is on the horizon:
  • Risks and opportunities – consider and understand what these might look like for their business
  • Mitigation – consider actions that can be taken to minimise risk or take advantage of opportunities
  • Current business – analyse the EU aspects of the business and review or revise these to take account of Brexit. Directors should consider whether the strategic plan is still valid
  • Dialogue – engage in dialogue with suppliers, staff, investors and clients to understand the impact for them.
 

A reporting “reminder”

The Financial Reporting Council (FRC) has issued a reminder to directors of matters they may wish to consider in relation to Brexit in their half-yearly and annual financial reports.
 
They suggest:
  • Early dialogue with auditors
  • Consideration of what disclosures are required to ensure financial statements meet the needs of investors and comply with regulatory requirements
  • Use of high quality narrative reporting (in addition to financial statements) to provide management’s view of the future outlook of the business.
 
The following matters are included in the FRC reminder:
 

Business model

The FRC encourages clear disclosure of a company’s business model as part of the strategic report. The disclosure should be sufficient to enable readers to make an assessment of the company’s exposure arising from the outcome of the referendum.
 

Principal risks and uncertainties

Directors must consider the nature and extent of risks and uncertainties arising from the result of the referendum and the impact on the future performance and position of the business. Those which the board judge to be principal risks and uncertainties must be disclosed and explained. Company-specific disclosures are more informative and useful to investors, for example, the impact of trade agreements on companies with a high level of exports to Europe. If there are opportunities to mitigate risks, these should be explained.
 

Market volatility

The volatility in the markets following the referendum result may have an impact on:
  • Balance sheet values at 30 June 2016 or at subsequent reporting dates
  • Financial instruments measured at fair value and discount rates used in measuring pension and other liabilities may be affected by changes in foreign exchange rates, interest rates or market prices 
  • Cash flows included in future forecasts may need to be re-evaluated
  • The directors may wish to consider the potential gains or losses arising from transactions in foreign currencies
  • Directors should consider whether assets values may be impaired.
 

Going concern basis of accounting

As part of the preparation of the financial statements, directors must consider whether the going concern basis of accounting is appropriate and whether disclosures of material uncertainties are needed particularly where there is a material risk of breach of covenants. 
 

True and fair

There is an overarching requirement for annual financial statements and half-yearly reports of listed issuers to give a true and fair view. Directors are encouraged to consider whether additional disclosures are necessary to ensure that this requirement is met.
 

Half-yearly financial reports

There is a general requirement that the interim management report of listed companies must include disclosure of important events that have occurred during the first six months of the financial year, and an indication of their impact on the interim financial statements.
 
For the full statement, please see the FRC’s website.
 
Phil Kershaw
July 2016
 
Aritcle provided by Capita Asset Services