UK Corporate Update

FRC publishes update for directors on reporting on country and currency risk

26 January 2012

The FRC has published an update to assist directors of listed companies in reporting on increased country and currency risk in their annual and half-yearly financial reports. This stresses the importance of conveying a balanced and understandable assessment of their company’s position and prospects.

The update draws together significant reporting requirements that may be relevant. Since these derive from a number of legal and regulatory sources (UK Corporate Governance Code, Companies Act 2006, Listing Rules and IFRS), the FRC suggests that it may be helpful to draw all disclosures together in one section of an annual or half-yearly report. It also notes that, given the overarching requirement that financial statements give a true and fair view, additional disclosures may be required even when not addressed specifically by law.

The FRC emphasises that companies should make clear the nature and scope of their direct and, if practicable, their indirect exposures to country and currency risks. Consistent with previous FRC and FRRP guidance, directors should focus on the relevant strategic and operational risks and explain how they are being mitigated.

The guidance includes a number of helpful examples to illustrate the FRC’s comments:

• A company that has significant trading relationships with businesses or governments facing increased uncertainty should explain how its business model and financial position might be affected by a default or other significant event;
• When describing the principal risks and uncertainties in the business review, companies should include an explanation of actions taken and processes adopted by management to mitigate them;
• Where a company is significantly exposed to country and currency risks, directors may need to enhance their disclosures. For example, a company that has significant balances outstanding or business relationships in a country in severe financial difficulties and/or implementing austerity measures will need to disclose that fact and indicate the future events that could impact on amounts outstanding and future trading volumes. Consideration may also need to be given to going concern disclosures such as the key assumptions made by management as part of the going concern assessment.

The update also contains a number of reminders of the procedures and disclosures that may be required under IFRS, including in relation to impairment of financial and non financial assets (IAS 36 and 39), disclosures in relation to financial instruments (IFRS 7) and the carrying value of assets (IAS 1). Companies may also want to take into account ESMA’s November 2011 public statement on accounting issues in IFRS in relation to sovereign debt.

The FRC update can be found here.

ESMA’s statement can be found here.