The Financial Reporting Council’s (FRC) Corporate Reporting team’s thematic review of going concern and viability is the latest of several reviews bringing back into focus this important topic. 

Issued in September 2021, the review advances and reiterates guidance communicated by the Financial Reporting Lab’s ‘Risk and viability reporting’ and ‘Going concern, risk and viability – COVID-19’ reports. While the focus is broad, across a range of Main Market and AIM listed companies, there are key takeaways that should be adopted by the investment trust sector to further enhance stakeholder transparency through the annual report.

Recent history

It’s worthwhile looking at recent history, and one thing that is clear is that the FRC’s focus on going concern and viability is not just from a corporate reporting perspective. High profile corporate failures such as Carillion, BHS and Thomas Cook have seen the FRC’s lens focus firmly on the audit profession and the role they have in highlighting going concern issues. Revisions to ISA (UK) 570 (the auditing standard on going concern), effective for periods commencing on or after 15 December 2019, represented a watershed moment in the audit profession and now requires auditors to conduct far wider-reaching procedures over going concern. These include greater challenge and scepticism of management’s going concern assessment and a move away from the long-standing approach - where auditors reported on going concern by exception - to a requirement to include a positive going concern conclusion in the audit report.

These changes are now well embedded in our audits and the investment trust sector has generally responded well to the requirements for more detailed assessments supporting their going concern and viability conclusions. The mix of stress-testing, cashflow forecasting, revenue forecasting, liquidity assessments and much more, evidence comprehensive processes and assessments supporting going concern and viability conclusions. There are however opportunities to further improve disclosures within annual reports and to take full credit for the good work that goes on behind the scenes.

Key takeaways

Boards and management will need to finely balance the competing goals of providing concise, clear and company specific disclosures with the need to reduce duplication and clutter. We have reviewed the latest corporate reporting guidance and summarise below some of the key takeaways that we think are most relevant to the investment trust sector:

• Clearly explain the qualitative and quantitative detail used as inputs in your assessments, for example details of drawn and undrawn facilities and reliance upon such facilities; details of covenants including headroom; and information on post balance sheet changes to liquidity. 
• Explain the assumptions used in preparing your stressed scenarios and forecasts.
• Explain why principal risks have been included in or excluded from your assessments.
• Disclose how principal risks and uncertainties have been modelled in your assessments.
• Explain resilience to the principal risks and uncertainties and how these could be mitigated if they crystallised.
• Consider use of a five-year viability period and justify the period of assessment chosen.
• Ensure that the assumptions underpinning your assessments are consistent with those used in other forward-looking areas of the financial statements.

The overarching themes of these observations are, firstly, providing more granular detail to explain how the assessments are conducted and the assumptions that underpin them, and secondly, ensuring there is appropriate linkage to other areas of the annual report to ensure that the report taken as a whole is consistent.

Concise, clear and entity specific disclosures

In most cases the going concern and viability of an investment trust should be comparatively easy to assess compared to listed entities in many other sectors. The observations summarised above can be seen as an opportunity for boards and management to ensure that the disclosures within their annual reports continue to improve, with focus being on concise, clear and entity specific disclosures.

Get in touch

If you would like to hear more about our work in the investment trust sector, please don’t hesitate to get in touch with me at richard.sutherland@jcca.co.uk, or or any of the senior members of our Investment Trusts team: Scott Holmes, David McBain, or Dean Moore.