Coronavirus (COVID-19)—company disclosure and reporting obligations

Background

The escalation of the coronavirus outbreak and the global response of governments to the crisis has caused market turbulence in recent days. Travel restrictions, social distancing measures and large–scale quarantines are expected to precipitate a sharp decline in consumer and business spending and impact on many companies’ trading performance and viability.

This analysis considers how companies should be reporting on these risks in their financial reports and, in the case of publicly-traded companies, keeping investors informed through market announcements.

Disclosure of inside information

Under the Market Abuse Regulation, listed and AIM companies have a general disclosure obligation (subject to some exceptions) to inform the public as soon as possible about any inside information which directly concerns them. Broadly speaking, inside information is information which if made public would be likely to have a significant effect on the price of the company’s securities. AIM companies also have a similar disclosure obligation under the AIM Rules for Companies. The Disclosure Guidance and Transparency Rules (DTRs) contain additional guidance on the disclosure requirements under the Market Abuse Regulation.

The board of directors of a listed or AIM company will need to carefully monitor the impact of the coronavirus pandemic in particular on:

• the performance, and expectation of the performance, of the company’s business

• the company’s financial condition

• the course of the company’s business

• information in previous company announcements disclosed to the market

and consider whether any disclosure to the market is required.

Companies are required to have in place procedures for identifying inside information and the robustness of those procedures will be particularly important at this time as the situation quickly evolves with the daily announcements being made by the government.

For more information see Practice Note: Continuing obligations—disclosure and control of ‘inside information’.

The Financial Conduct Authority (FCA) issued Primary Market Bulletin 27 on 17 March 2020 reminding issuers about their obligations under the Market Abuse Regulation and that despite the challenges presented it expects the disclosure obligations to be met in a timely fashion. For further details, see LNB News 18/03/2020 3.

Disclosure of principal risks

The Companies Act 2006 (CA 2006), the UK Corporate Governance Code (UKCG Code) and the DTRs contain overlapping requirements for companies to disclose the principal risks facing their business in their annual and interim financial reports:

• the CA 2006 requires all UK incorporated companies (except for small companies) to prepare a strategic report for each financial year of the company. This report must include, among other things, ‘a fair review of the company’s business, and a description of the principal risks and uncertainties facing the company’

• the UKCG Code requires the board of directors of a premium listed company to carry out a robust assessment of the company’s emerging and principal risks and to confirm in the annual report that it has completed this assessment, including a description of its principal risks, what procedures are in place to identify emerging risks, and an explanation of how these are being managed or mitigated

• the DTRs require that the annual financial report and the half-yearly report contain a description of the principal risk and uncertainties facing the issuer

The UKCG Code also requires the boards of premium listed companies to establish procedures to manage risk and oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives.

With the governments around the world announcing a range of measures to mitigate the impact of the virus, including bans on non-essential travel, closures of non-essential service and advice for individuals to practice self-isolation, the crisis clearly presents a significant risk to a large number of companies who will need to consider how to report on these issues in their financial reports.

For further details, see Practice Notes: The strategic report and Risk management and internal control—corporate governance issues.

Going concern statement

Premium listed companies significantly impacted by the coronavirus situation will need to consider how the crisis impacts the ‘going concern’ statement that the UKCG Code requires them to include in their annual and half-yearly financial statements. The going concern statement should:

• state whether the board considers it appropriate to adopt the going concern basis of accounting in preparing the financial statements

• identify any material uncertainties to the company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements

The UKCG Code requirements are reinforced by the Listing Rules, which require a premium listed company to include a statement from the directors in its annual report on:

• the appropriateness of adopting the going concern basis of accounting (containing the information set out in Provision 30 of the 2018 UKCG Code)

• their assessment of the prospects of the company (containing the information set out in Provision 31 of the 2018 UKCG Code)

For further details, see Practice Note: Going concern and longer term viability statements—Going concern statement.

Longer term viability statement

Premium listed companies will also need to consider the impact that the coronavirus situation has on their longer-term viability. Under the UKCG Code premium listed companies must include in the annual report a statement by the board:

• explaining how the board has assessed the prospects of the company, over what period it has done so and why it considers that period to be appropriate (in each case taking account of the company’s current position and principal risks)

• state whether the board has a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, drawing attention to any qualifications or assumptions as necessary

There is a degree of overlap between companies reporting of principal risks, the going concern statement and the longer-term viability statement, and companies should consider how best to link these disclosures.

What if companies need more time to publish and file their accounts?

Companies House has shared guidance for companies that need more time to file their accounts owing to the impact of the coronavirus pandemic. Filing accounts late will result in an automatic penalty, so companies should apply to extend the period allowed for filing where it becomes apparent that accounts will not be filed on time owing to issues arising from the coronavirus pandemic.

In a related development, the FCA has said in its Primary Market Bulletin 27 that it expects issuers to put in place contingency plans to mitigate the logistical issues that coronavirus may create when producing accounts for upcoming reporting periods. The FCA comments that ‘such planning could consider, for example, whether there are non-essential parts of their report and their reporting cycle they can deprioritise’. If an issuer does not believe it is able to meet its continuing obligations it should take appropriate advice and contact the FCA to discuss. Issuers should also engage with their auditors, who should contact the FRC, as appropriate. For further details, see LNB News 18/03/2020 3.

Update: On 21 March the FCA wrote to listed companies requesting that they delay announcement of preliminary financial accounts in light of the coranavirus pandemic. The request does not apply to AIM companies. The FCA noted that the current ‘unprecedented events’ mean that the basis on which companies are reporting and planning is changing rapidly. It is important that due consideration is given by companies to these events in preparing their disclosures, and ‘observing timetables set before this crisis arose may not give companies the necessary time to do this’. The FCA also announced that it was in talks with the FRC and the Prudential Regulation Authority about a package of measures aimed at ensuring companies take the necessary time to prepare appropriate disclosures and address current practical challenges. The FCA reminded companies that the Market Abuse Regulation remains in full force and listed companies are still required to announce inside information to the market as soon as possible unless a valid reason to delay disclosure under the regulation exists. For further details, see: LNB News 23/03/2020 45.

What guidance has the FRC issued?

On 18 February 2020 the Financial Reporting Council (FRC) issued disclosure guidance to companies and auditors on disclosure of risks and other reporting consequences arising from the emergence and spread of coronavirus. For further details on this guidance together with some early examples of company reporting in this area, see News Analysis: Coronavirus and corporate financial performance.

More recently, the FRC published updated guidance on audit issues arising from the coronavirus pandemic. For further details, see LNB News 16/03/2020 25.