Is 3 years long enough for a Viability Statement?
It is a sign of uncertain times when the viability of a company is given such scrutiny. Investors, shaken by the financial crisis, stung by the disappearance of household names and mistrustful of what is hidden behind clever accounting techniques, want a longer term commitment from company bosses on the future of their business.
The recent changes
Recent changes to the UK Corporate Governance Code require that companies discuss the viability of their business over a specified time period in their Annual Reports. The ‘viability statement’ as it is now known, was introduced in addition to the ‘going concern statement’. This requires companies to report that the company is able to meet its obligations and continue trading for the ‘foreseeable future’. The intention was that the viability statement would give investors a longer-term assurance. However, the legislation has been controversial and the concern was that, rather than providing more assurance, it would provide less. That rather than being a commitment from the Board to investors, that the company is viable within a broad context, it would actually focus more narrowly on the main risks and whether or not these would impact on a company’s ability to exist.
When did the legislation come into effect?
The legislation came into effect on 1st October 2014 but there were almost no early adopters. It wasn’t until the September and December year ends published their 2015 Annual Reports earlier this year, that we began to see what time period companies covered in their viability statement and how they reported. The majority opted for a three-year period with some reporting on five years.
It’s debatable whether or not this gives a longer outlook than the statement of going concern but it seems likely that there was a mismatch between how a company and an investor defines ‘the foreseeable future’. Certainly, the viability statement does seem to have put more focus on risk reporting but that is no criticism. There’s no doubt that companies still shy away from forward-looking statements, even with the safe harbour provision which limits directors’ liability. Consequently, the viability statement, even though sometimes rather boilerplate, is probably the most forward-looking piece in many Annual Reports. This is illustrated by PwC’s findings that, while 98% of FTSE 350s have a three to five-year viability period, only 11% of them discuss strategy beyond the next 12 months.
There’s value in the process
Now that there are templates out there on how to approach the viability statement, it will be interesting to see how much change there is in the next round of Reports both in terms of content and positioning of the statement. And, as with so much of corporate reporting legislation, the real value may be in the processes that companies have developed to make the statement, rather than in the statement itself. The necessity of having to commit to a specific time period will have initiated debate internally and focussed attention at least a bit further into the future for many reporters.
For guidance on the viability statement see Equiniti’s December 2015 publication.