Top tips for 2020/21 annual reporting

At our Corporate Governance and Reporting Forum webinar, we discussed the pressures and challenges that companies, particular listed and AIM, are facing this year with their annual reporting.

This article sets out our top tips for 5 significant areas of disclosure in your annual report for this year; these being based on our experiences from working with our clients and using guidance from the Financial Reporting Council (“FRC”)’s latest Annual Review of Corporate Reporting.

That’s said, if there is one fundamental take away, we recommend that your annual report focuses on the key issues that have affected your business the most. This will help to provide direction and emphasis for your investors.

1)  Impact of Covid-19

Covid-19 has had a profound, and largely negative, effect on revenue and profit for a huge range of businesses; with some sectors significantly affected and others not as much. The effect was sudden and, in many cases very large.

So, to help users of your annual report understand the impact of Covid-19 on your business, consider the following elements:

• Affect or no affect – For businesses that have been affected, the guidance is very clear and abundant: to explain the full impact consistency and transparently within the front-end reporting and the financial statements. However, if your business is fortunate enough not to be affected by Covid-19, and this isn’t completely obvious, say so.  You are in the minority and it’s worth explaining why to aid context and understandability.
• Phasing – Reporting only on the entire financial period is likely to be unhelpful. Consider, for example, a company reporting in March 2020 and showing 0% growth in revenue on the previous year. Is this 51 weeks of 2% growth year-on-year followed by no revenue at all for the last week or was the business unaffected? If you’re unaffected see our first bullet above, but if you’re significantly affected consider finding a way to show the effect: report on pre-Covid-19, lockdown and recovery phases (plus possibly further lockdown and recovery phases). By way of a good example, in Next plc’s interim reporting, the group show a weekly plot of sales. Not all companies may want to go this far, but a quarterly split might well give sufficient detail in the first part of 2020.
• Operations not just finances – Do not solely talk about finances; give quantitative information on operational effects too. For instance, useful metrics will include:  how many shops, or manufacturing facilities; were closed and for how long; how many staff were furloughed?

2)  Going concern and liquidity

Rightly so, and for obvious reasons, more attention is being giving to going concern assessment statements. There have been many calls for more detail, although some of the things called for would be highly sensitive, possibly damaging, if disclosed.

So, there are some simple disclosures that can be made to more effectively communicate to users. Use these questions below to help provide explanations:

• Actions – What actions on liquidity have already been taken and are included in the going concern model? Does the going concern model include new government schemes, new loans or repayment of old ones?

• Model start point – Is the base case run-rate for your model trading before Covid-19 or the most recent weeks of training post year-end?

• Assumptions – What assumptions are you making about the future, particularly in the base case scenario? How long have you assumed government support or lock downs will continue?

• Mitigation – What mitigating actions are included in the base case and in your downside scenarios? How much do they save, reduce risks and change capacity?

3) Section 172 reporting

Whilst providing a Section 172 statement is coming up to its second year, it is still considered “a new statement”, particularly given most companies have found the reporting a difficult task.  This, we believe, is principally due to the requirements being viewed by many as a ‘tick-boxing exercise’ and as a need to ‘state compliance’, which of course they are not.   Accordingly, we have prepared our own guidance to help understand the requirements.

The FRC notes in its annual review that connection of the importance of stakeholders to strategy and the effect of engagement and the information gained from it on decisions were often not well disclosed.  They also note an unwillingness to admit to negative consequences of decisions.  As stakeholders’ interests (and those of the environment and the long-term interests of the company) are often not aligned in the short-term, some negative impacts should be expected and, if ever there was a time when companies could admit to having to balance competing interests while making difficult decisions, this year has surely been it.

So, our tips for reporting on your Section 172 responsibilities, in addition of course to reading our own “how to” guidance (as noted above) are:

• Be focused and tailored – Do not regurgitate the list of components to the directors’ duty under Section 172.  Select the ones that are important to your business.
• Link with business strategy – Explain why the stakeholders or resources you’ve chosen are valuable to your business strategy.
• Provide a balanced view – Admit that there have been hard decisions this year (we are all, rightly so, expecting it).  Therefore, provide case studies and mention the negative impacts as well as the positive ones. This will provide credibility.
• Useful guidance – Read the FRC Lab’s summary guidance: How to make Section 172 statements more useful – it’s only two sides of A4!

4) Climate change reporting

Energy and carbon reporting (Streamlined Energy and Carbon Reporting (“SECR”)) for 2020/21

For large AIM companies, reporting on energy and carbon emissions has been a new requirement for 31 March 2020 year ends.  For quoted companies, it’s less new but its importance is increasing each year.  You will have seen, even under this unprecedented Covid-19 year, how the climate change agenda maintains momentum.

So, our top tips for meeting the SECR requirements are as follows:

• If the requirements are new to you this year, the government conversion factors are a really handy place to start for preparing the UK calculations.
• Having calculated the figures, provide discloses that explain why the figures change year-on-year and what the major sources of emissions are for your business.
• If energy and carbon emissions is a major issue for your business, build CO₂ reporting into your management information systems and your business strategy to assist with the on-going reporting requirements and planning for the long-term.

Climate change reporting in the future

The Financial Conduct Authority (“FCA”) has already announced that premium listed companies will have to report under the Task force on Climate related Financial Disclosures (“TCFD”) framework.  The government has recently added to this scope with a roadmap on mandatory disclosures showing other UK registered companies being brought into scope in 2022.  The precise scope of companies affected isn’t yet clear, but while it seems it will be pitched to larger companies like the current energy and carbon reporting requirements, it will clearly bring more companies into the reporting net.  We expect to learn more about how prescriptive the obligations will be and exactly which of the TCFD headings will be covered in the coming months.  More on this will follow, so watch this space ….

What is clear is that this reporting will only satisfy investors and produce useful information if the response to climate change becomes part of business’ strategy.  Bolt-on reporting, without building it in to strategy and management information, isn’t going to deliver either the information or the response that investors, regulators, customers and the rest of the world are looking for.

So, our top tip is to start (if your business hasn’t already done so) considering climate change as being part of your business’ long-term viability, rather than viewing it as short-term reporting objective.

5) Accounting judgements and estimates

With the FRC identifying in its annual review for the third consecutive year, that disclosures surrounding judgements and estimates is the number one top area of concern within annual reports, we couldn’t leave this area out of our top tips!

This, of all years, means explanations about the significant judgements and key sources of estimation uncertainty that have been applied in preparing the financial statements will help investors and other users to understand the areas most impacted by the likes of Covid-19, climate change, and of course, the UK EU’s exit.   

So, when preparing your explanations for judgements and estimates, consider the following:

• Be specific – Do not simply regurgitate text from the relevant accounting standard; instead state explicitly how the requirements have been applied to your business’ circumstances.
• Consistency with front-end reporting – Where the front-end reporting has discussed a significant issue, for example the uncertainty regarding the recoverability of debtors due to the impact of Covid-19, ensure the financial statement disclosures link-up and support the discussions.
• Explanations of judgement made – Do not simply state the judgement that has been made, provide explanations about the effects that the judgements have had on your business.
• Quantifying inputs and assumptions – Remember to provide quantitative information and assign values to the qualitative inputs and assumptions disclosed. This will aid understandability.
• Sensitivity analyses – Quantitative information and assigning values must be provided for areas of estimation uncertainty and will be of most use this year to provide transparency and install confidence in the reported figures.

Further information

If you would like further information on any of the areas we discuss in this article, please listen to our in-depth financial reporting update, or contact us in the Accounting Technical Services team.