Summary of COVID-19 disclosures in company annual reports
Alan Simpson CA summarises the findings from a review of the disclosures in annual reports and accounts on the effects of the COVID-19 pandemic.
This article looks at a selection of companies’ disclosures in their annual report and accounts of the sweeping effects of the COVID-19 pandemic on business, markets, stakeholders and society. It covers key issues as:
- Where did this disclosure appear in the annual report?
- How did they report the effects of COVID-19 on their operations and finances?
- What actions did they take to mitigate the effects of COVID-19?
- What work was done by directors to justify preparing their recent financial statements on a going concern basis?
A selection of 10 recent annual reports of UK listed companies were reviewed whose financial year ends fell between January 2020 and June 2020.
Where in the annual report did the COVID-19 disclosures generally appear?
COVID-19 disclosures were generally to be found in four sections of the annual report, namely
- Strategic report.
- Governance/corporate governance statement.
- External auditor’s report.
- Financial statements and the notes to these.
Each of these sections is considered further below.
COVID-19-related disclosures located throughout the Strategic report. For example, one entity with a year end of January 2020, whose annual report was published in April 2020, referred to COVID-19 in: the Chairman’s introduction; the Chief Executive’s review; the financial review; the risk management section; and the viability statement.
Another entity, with a year end of March 2020, whose annual report was published in May 2020, had a four-page section dedicated to COVID-19 within in its strategic report. This section also cross-referenced to other pages which dealt with the topic within the annual report providing a helpful signpost to the reader.
A section dedicated to how another company responded to the COVID-19 pandemic was included within its strategic report.
A further example of COVID-19 disclosures was located within the financial review section of an organisation’s strategic report. It provided information on two specific exceptional COVID-19-related operating items. This report was published in August 2020.
Governance/corporate governance statement
Disclosures related to COVID-19 were found within the following areas of the annual report:
- Chairman’s report.
- Main areas of focus for the board during the year.
- Audit committee report (especially on significant issues such as response to COVID-19, going concern and viability)
- Remuneration committee report.
- Directors’ report.
For example, in the annual report for a technology group with a year end of March 2020, COVID-19 was mentioned in several places within the overall governance section including the board leadership section, the audit risk and internal controls section; the audit committee report; and the remuneration committee report.
A transport company provided details of the matters considered by its board during year ended 31 March 2020, whilst also looking ahead to early 2021, and included reference to COVID-19 related matters including:
- Assessing the impact of COVID-19 and the various government support measures.
- Cash flow and cash reduction measures.
- Financial stress testing.
- Financial modelling and covenant testing.
- Review of liquidity headroom.
External auditor’s report
The findings of our review highlighted that, from an audit perspective, COVID-19 was generally addressed under the key audit matters section in the audit report. Often these were referred to in the going concern assessment.
In our sample of company annual reports only one bore an audit qualification. This was in the form of a material uncertainty related to the effects of COVID-19 and the entity’s ability to continue as a going concern.
The financial statements and accompanying notes
In our sample of annual reports, we found the notes gave readers information on how COVID-19 had impacted on the financial statements as follows:
- The basis of preparation and going concern - all of the companies sampled prepared their statements on the belief that use of the going concern basis was justified and referred to more detailed disclosure on this within other parts of the annual report, for example, within the strategic report and viability statement.
- Within specific parts of the financial statements - one entity, with a year-end of March 2020, gave a summary of some of the judgements exercised when assessing the impact of COVD-19 on its financial statements. These included contract loss provisions, one-off charges, cash flow implications and the impact on its expected credit losses.
Other entities made reference in the notes to the accounts to exceptional items and adjusting events after the balance sheet date.
- Disclosures around events after the balance sheet date - non-adjusting events - were identified and disclosed across the various entities and examples of such disclosures referred to post-year end receipt of government grants and other financial support.