The Viability Statement

It is no secret that both public companies, and the corporate reporting sector as a whole are currently in the throes of adapting to what would appear on the surface to be a fairly trivial new regulation from the Financial Reporting Council (FRC) in the statement of viability, but in reality is something far greater.

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The requirement for this viability statement, to be included in all Annual Reports with reporting periods beginning or after October 2014, is now a key focus for many companies. This is despite superficially appearing to be no more than an issue of semantics in terms of what is stated in the risk section of a report, or perhaps an additional short disclosure to be made afterwards.

The viability statement is best considered an attempt by the FRC to instil a mindset of realistic long-term risk management in businesses, many of which currently neglect to plan much further than one year ahead (excluding those operating in industries where long-term planning is of the essence - fossil fuels for instance).

The prevalence of this culture of myopic planning practices became especially apparent during the 2007-2012 financial crisis, and could be argued to have precipitated the demise of countless companies; many of which were formerly large and well-established. For the most part this epidemic of collapses was the driving force behind the introduction of the viability statement as a new regulation in corporate reporting.

Whilst many elements of the viability statement itself, including its wording, approximate length and location within the Annual Report, are likely to be reasonably consistent across the corporate domain, it is the series of procedures that companies are forced to perform in order to arrive at this short passage of prose that is of by far the greatest importance.

By forcing companies to conduct a rigorous and, conceivably, potentially alarming assessment of their likelihood of survival in the mid- or long-term, the FRC intends simultaneously to force them to take greater responsibility for their future viability on the basis that this is not only of benefit to stakeholders, but also to the economy as a whole. The statement itself has to be shown, through cross-referencing, to be supported by evidence from the performance and risks sections of the Annual Report along with the statement of any assumptions made in arriving at it, and so cannot be made lightly.

It remains to be seen whether the FRC’s initiative will have any significant impact on long-term business planning or will simply become another arduous compliance requirement to be satisfied. However, few can challenge the sentiment behind the introduction of the viability statement, and if successful it would represent a rare example of how corporate reporting is able to impact significantly upon the mechanics of business, rather than the far more conventional inverse.

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