Brexit – uncertainty does not mean inactivity

25 August 2016

It may be stressful now, but maybe we can find a crumb of comfort in the idea that dealing with Brexit will one day be an interesting case study to reflect on from a reporting point of view.

Different approaches being taken

One view of Brexit is that it’s the classic ‘external risk’, foist upon companies against their will: all they can do is recognise it, influence where they can, and wait until the impact becomes clearer before they can do much else about it. And indeed this is what we have seen reflected in quite a number of the half-year reports that have been published in recent weeks. Many of them include an explanation of the regulatory/political risk and its macroeconomic effects, and note the general uncertainty about how the situation will play out.

Others, in contrast, have managed to be significantly more company-specific and insightful about the impact of Brexit and we’re very much in this camp. Companies that have done this sort of analysis are often able to provide striking insights which send a powerful message about their state of preparedness.

For the same reason companies should be clear about what processes and procedures are being used to manage and govern the relevant risks – whether they are new or adapted versions of existing processes. Uncertainty really does not mean inactivity; in fact it will often mean more activity as companies work to get into as good a position as possible to deal with the situation as it develops.

Our new framework

Based on our experience so far, we’ve put together a simple framework to help management teams and boards think about how it can be dealt with in half-year and annual reports. This framework encourages meaningful information be identified and we’re starting to see some good disclosures being published that analyse the effects of Brexit more rigorously: one key distinction is between the longer-term, more uncertain impacts and those that are already a reality – like the impact on exchange rates and credit ratings. Some of these are of course the result of speculation, and could well reverse, but they are having tangible effects on companies today.

Our framework is based around five questions that lead users through from risk assessment to risk identification and analysis, risk management and governance, and reporting.

The Financial Reporting Council has issued a string of communications over the past few months reminding companies of their reporting obligations on Brexit and risks in general[1], so we hope our framework will be a source of practical help for preparers and reviewers.

Clarity on the extent of the possible impact

One final point: where companies are very confident that Brexit does not result in a major change in their overall risk profile, they are generally being quite clear on this. However, in too many other cases – often where the situation is less clear-cut – the extent of the potential impact is not really discussed. In extreme cases (where the business model is particularly dependent on some aspect of EU regulation for instance), Brexit could have a direct effect on going concern or viability. For those companies in particular, but also for many others, Brexit disclosures will be an important part of a fair, balanced and understandable piece of reporting.

 

[1] See for instance: https://www.frc.org.uk/FRC-Documents/Audit-and-Assurance-Council/Letter-to-ACC-on-relevant-reporting-considerations.pdf

 

John Patterson | Corporate Governance Consultant
Profile | Email | +44 (0) 1223 55 2413

 

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