Reporting Amidst the Storm Clouds

Financial Reporting Brief May 2022

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‘All has changed, changed utterly!’ One of Ireland’s greatest poets wrote that in one of his most famous poems over a hundred years ago – going on to say that ‘a terrible beauty has been born’.

One hundred years on, one can relate to those words, except that ‘beauty’ can be replaced with something quite the opposite, which will test our resilience to the utmost. In 2019, the world was battling to develop a strategy to combat climate change and, nearer home, the impact on trading and the economy in general of impending Brexit was of great concern. They continue to challenge greatly, but since then the clouds have darkened many times over with the unforeseen global COVID-19 pandemic which continues, and even more recently the pressures of soaring inflation exacerbated by the societal and economic impacts of the Russia-Ukraine war which has brought the world to a point where it probably hasn’t been in eighty years.

Amidst all this uncertainty – economic, social and governance/political – the need for reliable and transparent corporate reporting is of fundamental importance to how markets, the flow of funds and other economic consequences impact on investors and other stakeholders.

Many see corporate reporting in today’s environment as being like a puzzle where pieces are spread across a table waiting to be fitted together to form a clear picture. It is essential that this is addressed and it is greatly encouraging that real progress is being made towards developing a comprehensive corporate reporting framework. European development of sustainability standards is meeting the targets set by the European Commission. Globally, the International Sustainability Standards Board (ISSB) is putting the building blocks in place and we may expect to see further solid progress being made this year in the development of a global baseline for sustainability reporting. Already we have seen publication of exposure drafts on ‘General Requirements for Disclosure of Financial-related Disclosures’ and ‘Climate-related Disclosures’. The deadline for submitting comments on both is 29th July.

What of the now – as we await the maturing of these developments. The important principle is that corporates should use this waiting period well. Two important things that can be done are:

Contribute to what is being developed by offering considered comments during the consultation periods to assist with making sustainability reporting as comprehensive and robust as possible;
Examine what is currently available to deal with the puzzle spread across the table and focus on the opportunity to engage with investors and other stakeholders with clear messaging and avoid seeing reporting as only a compliance exercise.

The Shape of Reporting

Some of the factors that are shaping and will continue to shape corporate reporting for the foreseeable future include:

Investor demand for more detailed, substantive disclosure about ESG and sustainability factors – environmental practices, social policies and corporate governance represent both risks and business opportunities that can have a substantial impact on a company’s performance;
Investors, led by global funds, have adopted stewardship principles to concentrate on long-term performance of portfolio companies and their response to ESG factors – demanding information relating to corporate purpose, corporate culture, human capital management and reputation management for their investment decisions and oversight;
Stakeholders, not just shareholders, now define the audience for corporate reporting – technology and social media are expanding the audiences, their means of access and their ability to influence how a company conducts its business;
Regulators around the world are giving more attention to ESG disclosure – in Europe, the EC has moved forward towards new Directives on accounting and corporate governance which will extend to embrace a wider spectrum of European companies.

When the dust settles on comprehensive reporting, companies should have a regime that provides a framework of fit-for-purpose disclosures to enable them to tell their own unique story.

Interim Reporting

Companies should consider their responsibility to report to investors and other stakeholders as being a continuing cycle to provide information which is up to date and relevant to the investment and business process. For many, the next step in the cycle is interim or half-year reporting. The opportunity to engage with the marketplace should not be missed and there will be a firm expectation that corporates will deliver, particularly in these most uncertain times.

Our Financial Reporting Brief (FRB) article in June 2021 'Interim Reporting - Opportunity for Stakeholder Engagement’ summarised the approach to interim reporting and its main features. Our publication, ‘2021 update on half-yearly financial reporting’ provides substantial guidance, including an illustrative half-yearly report. One year on, the approach and the main features remain the same. The cloud of uncertainty also remains the same, or has even further deteriorated, and companies must meet the challenge.

While the overall framework continues to be the same as in 2021, it is worthwhile reflecting on areas where improvements to reporting could be made. The thematic review carried out by the UK Financial Reporting Council (FRC) and reported on in May 2021 is an additional valuable reference point and draws attention to the following:

The management commentary should appropriately describe events, including the impact of wider events, that have occurred during the first six months of the financial year, and their impact on the financial statements;
A comprehensive update should be provided of the principal risks and uncertainties for the remaining six months of the year;
Detailed disclosure should be included on any changes to key judgements and estimates that enable users to understand management’s views about the future, and their impact on the financial statements;
Going concern disclosures should be given that explain the basis of any significant judgements, including whether there are any associated material uncertainties, and the matters considered when confirming the preparation of the financial statements on a going concern basis;
Alternative performance measures (APMs) should be clearly explained, reconciled to IFRS measures and not given undue prominence;
There should be a focus on providing material disclosures, in a clear and concise manner, in areas such as impairment, movements in fair values, contractual commitments becoming onerous and their impact on the performance and financial position of a company, with the better disclosures updating relevant information disclosed in the last annual report.

In these times of great uncertainty and major challenges, companies may be required to go that extra mile to ensure that clear communication has been provided to investors and other stakeholders.

A Sharp Focus

From a brief review of the half-yearly reports of Irish listed companies made public in the past year, there is as expected an increased focus on certain areas, which include:

Health and safety – COVID-19 has been very much in focus, and it still should be as we recover in this part of the world from its worst impact – although some companies may be continuing to struggle while other parts of the world are still experiencing its worst ravages. In this context, attention might also need to be focussed this year on the potential consequences of the mental strain on employees brought about by spiralling inflation and exacerbated by the Russia-Ukraine war;
Sustainability – the importance is recognised of decarbonisation in addressing the challenges of climate change – the need for companies to ensure that their environmental and related programmes are consistent with globally adopted ‘Net Zero’ objectives. The prospect of new sustainability standards will require additional commitment from companies to the reporting process.

Conclusion

A challenging environment, full of risks and business opportunities – the world that we live in.

Companies should seize the opportunity to demonstrate their resilience and ability to cope with the challenges.

The interim reporting season should not be let pass by – reliable and transparent information must be provided to an anxious marketplace.