On 26 March 2020, the FCA, FRC and PRA released a joint statement setting out actions to ensure a continuity of information flow to investors and to support the continued function of the UK's capital markets during the ongoing COVID-19 outbreak. This is further to the FCA's announcement last week around new financial reporting emergency measures.
The key actions taken are:
Listed companies will be given an additional two months to publish their accounts. This means that results must be published within six months from the end of the company's financial year. The FCA urges all companies to review their publication timetables, and to utilise the additional two months where they feel it appropriate.
This follows the publication of guidance by Companies House and the Department for Business, Energy & Industrial Strategy stating that businesses will be given an additional three months to file their accounts with Companies House. Please refer to our industry update from last week here for further information.
The additional two months to publish accounts is likely to be of limited use given the requirement in section 336(1) of the Companies Act 2006 that all UK incorporated public companies hold an annual general meeting (AGM) within six months of the end of its financial year. As three weeks' notice of the AGM has to be given to shareholders, and the full printed report and accounts is supplied to shareholders with this notice, companies are still likely to need to have their results ready for the normal four-month deadline.
A number of public sector bodies will also have their reporting deadlines extended. In particular, the deadline for publication by local authorities of their final report and accounts has been extended by two months to the end of September 2020.
Companies are also encouraged to delay tendering for new auditors, even when they are required to do so under the mandatory rotation rules. The FRC suggests that it will consider using its statutory powers to extend auditor mandates in this situation.
Where a key audit partner is due for rotation on a five-year cycle, the FRC suggests that audit committees use their ability to extend the term for up to a further two years where there is 'good reason' (such as maintaining audit quality in the current circumstances) to do so.
The FRC has stated that (i) it has paused for at least one month on writing new letters to companies following its review of their annual reports and accounts; (ii) it will (where possible) delay or extend the deadlines for consultations; and (iii) it will pause any requests on supervisory initiatives for at least one month.
The FRC is also considering how it can adjust its audit quality work to reduce demands on audit firms. The measures in relation to delayed reporting and auditor rotation are also intended to reduce demands on audit firms at this time.
The FRC has provided new guidance to companies who are facing unprecedented uncertainty and disruption. The key messages to boards are to:
The difficulty in making forward-looking statements is acknowledged. The guidance highlights the need for specific narrative reporting and an explanation of the significant judgements and assumptions which have been made. It is clear that "at this time, the need for fuller disclosure is paramount."
The guidance also highlights that "in these difficult times, the need for clear leadership, strong governance and effective decision making based on reliable information is stronger than ever."
The FRC expects that more companies will need to disclose "material uncertainties" to their ongoing concern status in the current situation. This means that where a board identifies non-remote possible scenarios that could lead to the company failing, they should disclose this in a specific way, taking account of potential mitigating actions, including accessing government support.
When publishing their financial statements, companies will also need to decide whether adjustments need to be made in respect of the COVID-19 pandemic. It is generally accepted that for financial statements for periods ended 31 December 2019, the outbreak is treated as a non-adjusting event which arose after the balance sheet date. However, for subsequent reporting dates it may be considered to be an event which requires adjustments to be made to financial statements, depending on the specific circumstances of the company's operations and the events under consideration.
The PRA has published guidance intended to complement that given by the FRC described above, to set out the approach that should be taken by banks, building societies and investment firms regarding their response to covenant breaches related to COVID-19 and the application of IFRS 9, including the extent to which payment holidays should constitute an event of default (or otherwise attract a lifetime expected loss provision).
The PRA states that it expects lenders to treat breaches of loan covenants that arise from COVID-19 generally differently to those arising as a result of borrower-specific issues. Lenders are expected to consider granting a waiver in good faith, and not to impose new charges and restrictions on borrowers that are unrelated to the facts and circumstances that led to the breach.
The FRC has issued guidance to auditors which is intended to provide practical assistance in overcoming the current obstacles to obtaining the sufficient, appropriate audit evidence required to give an audit opinion.
The FRC is keen that audit opinions are not subject to disclaimers or scope limitations as a result of the COVID-19 pandemic. It highlights that the flow of audited information is of fundamental importance to the functioning of the capital markets. A non-exhaustive list of factors to be considered, along with guidance on how they might be addressed, has been provided, along with a 'health warning' that these should not be considered to be enduring or long-term solutions once normal circumstances resume.
The use of technology is encouraged, but it is specifically highlighted that where audit evidence is provided through these means, the auditor must assess both the sufficiency and appropriateness of the evidence provided and document the basis of this assessment on their file.
It is also confirmed that auditors can support companies in making applications to any of the business support schemes announced by governments in response to COVID-19 under the Ethical Standard that permits the provision of non-audit services in addressing a "time critical and price sensitive issue where that service would not undermine the auditor's independence".