On November 23, 2017 the Financial Reporting Lab (the Lab) published a report on ‘Risk and viability reporting’. The project on risk and viability began in May 2017 and the Lab report examines the views of those companies and investors that participated in the project on the key attributes of principal risk and viability reporting, their value and use. It also provides illustrative examples of reporting favoured by investors.
Principal risk reporting
The Lab found that, since the financial crisis, companies have made enhancements to their risk reporting and investors have seen better engagement with them on how they are managing their risks. A number of developments have been made:
- Principal risk disclosures have increased in length.
- More information on the risk management process is being disclosed.
- A greater contextualisation of risk (including risk movement; the categorisation of risk; the identification of the risk owner; more links to other parts of the annual report; and diagrams and visual aids).
In terms of risk reporting generally, the report notes that:
- The best risk disclosures are specific to the company as they allow investors to identify risks in enough detail to make an informed assessment of how the risks may impact the company’s business model.
- The quality of disclosure is more important than the number of risks disclosed.
- Investors want to understand the reasons why assessments of principal risks that have previously been disclosed have changed during the financial year.
- Further improvements could be made and the report provides guidance and practical examples of how companies can find a balance between reporting that is specific, whilst not revealing commercially sensitive information.
On the viability statement, companies have found the process of developing their statement to be helpful in better analysing their risk appetite, particularly by incorporating stress and sensitivity analyses into their risk management processes.
In terms of viability statement reporting, the report notes:
- Investors want companies to focus on long-term prospects more clearly and state how the company will remain relevant and be able to adapt to emerging risks.
- Viability statements should not be prepared as longer term going concern statements that focus on liquidity.
- Investors find descriptions of the work performed by the directors around the viability statement as being helpful in providing context for the disclosure.
- Investors highlight the sustainability of the business model as a key consideration when discussing long-term prospects of a company and they expect directors to be able to discuss its resilience to risk and adaptability to market challenges.
The Lab report encourages companies to refer to the Investment Association’s Guidelines for Viability Statements and the Financial Reporting Council’s (FRC) Developments in Corporate Governance and Stewardship where the FRC notes that there is room for improvement in explaining what qualifications and assumptions have been made and the quality of reporting of the principal risk linkages.
The Lab urges companies to be bolder in their viability report disclosures to ensure that they provide investors with better information on the company’s longevity and relevance in the market. The report encourages companies to develop their viability statements in two stages: first companies must assess prospects; and second make their statement of viability.
The Lab is keen to hear from readers of the report and asks for comments on its content and presentation. Comments will be taken into consideration when producing future Lab reports.
(FRC, Risk and viability reporting, 23.11.17)