The Directors’ reports are a select group of pages in a UK companies’ financial statements which sets out the latest view of the Finance Director or CEO. These form two key reports: the Strategic Report and the Directors’ Report.
Company directors, particularly private company directors, wish for their thoughts to remain, as the name suggests; private. That’s why the Companies Act sets out legal requirements for the content that must appear in the Strategic Report and the Directors’ Report. These rules ensure that such reports fulfil their desired ambition of informing investors and external stakeholders of the operational performance of the business, the risks faced by the company and other important matters of concern.
The current situation in Ukraine is casting political and economic shockwaves that are hurting British businesses already. In this article, we’ll look at what Directors should consider in the preparation of their annual financial statements in light of these very unfortunate circumstances.
Statement of Going concern
A key requirement of the Directors’ report is to make a statement as to whether, in the view of the Directors, the company continues to operate as a going concern. This statement should, if applicable, raise concerns if the company may not continue to operate as a going concern in the twelve months following the approval of the financial statements.
This ‘look ahead’ period of twelve months will present a significant challenge for Directors who, when making such assessments just one month ago, would have been unable to foresee the events of February and March 2022.
Directors are not expected to possess a crystal ball, or exhibit levels of political punditry as seen on 24-hour news channels. Instead, they are expected to make reasonable forecasts which factor in risks and consider the insurances, hedges and mitigative strategies that the company could employ if things get worse.
Examples may include cash flow forecasts based upon worst-case revenue predictions, but factoring in any secured but unused sources of finance such as revolving credit arrangements or overdraft facilities with their bank.
So long as the Directors believe that their firm has a good chance of withstanding a bad year, they should have a clear conscience when writing their Statement of Going Concern in a deteriorating world.
Financial review & disclosure of significant risks and uncertainties
The strategic report should include a meaningful review of the company’s performance and refer to Key Performance Indicators used by the company to measure its financial success.
This commentary should point to any deterioration in margin caused by the increase in input costs.
The report should also give a frank assessment of the risks and uncertainties facing the company. Companies are no stranger to risks, and investors will appreciate this fact. That being said, Directors have the tendency of downplaying risks, and this should be challenged in the current scenario.
Consumer confidence, general price inflation, the stability of currencies and even national security cannot be taken for granted over the next twelve months. Whether a business is directly exposed to the Eastern European region currently at war, or whether it merely faces questions over demand levels from UK customers, these are real risks that stakeholders should be made aware of.
