The Financial Reporting Review Panel (FRRP) of the Financial Reporting Council has expressed concern about how companies are reporting the principal risks and uncertainties facing their business.
The Companies Act 2006 (section 417) requires companies, other than small companies, to include in the directors' report a business review. The Act states that the purpose of the business review is to inform members and help them assess how the directors have performed in their duty to promote the success of the company under section 172. The review must contain a fair review of the company's business and a description of the principal risks and uncertainties facing the company. There are enhanced disclosure requirements for quoted companies – the business review must, to the extent necessary for an understanding of the development, performance or position of the business, include (i) the main trends and factors likely to affect the future development, performance and position of the business, (ii) information about environmental matters, employees and social and community issues, and (iii) information about persons with whom the company has contractual or other arrangements that are essential to the business (unless such disclosure would in the opinion of the directors be prejudicial to that person and contrary to the public interest).
In highlighting its concerns about how companies are reporting the principal risks and uncertainties facing their business, the FRRP states that it has challenged a number of companies where, for example:
- the directors' report does not clearly identify which risks and uncertainties are the principal ones facing the business;
- a long list of principal risks and uncertainties is given and the list raises a question as to whether all the risks and uncertainties on the list are actually principal ones;
- the description given of a risk or uncertainty is in generic terms and it is not clear how that risk or uncertainty applies to the company's circumstances;
- the disclosure is of a risk framework rather than of risks or uncertainties themselves;
- the principal risks and uncertainties disclosed are not consistent with other information given in the report and accounts; and
- the directors’ report does not state how the company manages its principal risks and uncertainties. As the purpose of the business review is to inform members of the company and to help them assess how the directors have performed their duty to promote the success of the company, the FRRP believes that a Board should state how the company manages its principal risks and uncertainties.
The FRRP sets out in its announcement a range of questions that it encourages directors to consider in disclosing the principal risks and uncertainties facing their business:
- do the disclosures state clearly which are the principal risks and uncertainties facing the business?
- are those risks and uncertainties described as principal the main risks and uncertainties that currently face the business? For example, have the risks and uncertainties listed as principal been the subject of recent discussions at board or audit committee meetings? Are these risks which have been the subject of such discussions the risks which should be considered as principal?
- is the description of each principal risk and uncertainty sufficient for shareholders to understand the nature of that risk or uncertainty and how it might affect the company?
- are the principal risks and uncertainties described in a manner consistent with the way in which they are discussed within the company?
- are the principal risks and uncertainties shown consistent with the rest of the report and accounts? Are there risks and uncertainties on the list which are not referred to elsewhere or are there significant risks and uncertainties discussed elsewhere which do not appear on the list?
- is there a description, in the directors’ report, or elsewhere in the report and accounts and explicitly cross-referenced from the directors’ report, of how the company manages each of the principal risks and uncertainties?
View the FRC Press Release (web page).