What investors want from risk and viability reporting
The Financial Reporting Lab has published a report on risk and viability reporting. This examines the views of companies and investors on key attributes of principal risk and viability reporting and provides illustrative examples of reporting favoured by investors.
Principal risk disclosures
The Lab found that, since the financial crisis, companies have made enhancements to their risk reporting, leading to better engagement with investors on how they are managing their risks. However, further improvements could still be made and the report provides guidance and practical examples on ways to do this. For example, companies should:
- identify how principal risks are specific to the company;
- avoid boilerplate and jargon;
- be clear how the company categorises and prioritises principal risks;
- explain movements in principal risks, including movements into and out of the principal risk classification;
- be clear how the principal risks link to other parts of the annual report and accounts, especially the viability statement, business model, strategy,KPIs and the risk reporting in the financial statements; and
- include specific information on mitigating activities that allows the reader to understand the company’s response. One way of illustrating this is by disclosing the person or body responsible for each principal risk.
- investors are looking for companies to explain the long-term prospects of the company more clearly and how the company will remain relevant and solvent in the long term. Too many viability statements focus on liquidity and are effectively longer-term going concern statements;
- investors would like the board to explain how it looks beyond three to five years and show it is thinking about the company’s future beyond the tenure of the current executive management;
- disclosure should differentiate between the directors’ assessment of long-term prospects and the statement on the company’s viability;
- boards should consider stewardship responsibilities, previous statements made especially in raising capital, the nature of business and its stage of development and its investment and planning periods when disclosing long-term prospects;
- qualifications and assumptions should be disclosed when explaining the directors’ reasonable expectation of the value of the company;
- the link between principal risks and viability statement should be clear specially in relation to scenario analyses; and
- stress and scenario analyses should be disclosed in sufficient detail to provide investors with an understanding of the nature of the scenarios and the likelihood of mitigating activities.