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Brexit in Strategic Reports: Looking forward through uncertainty

Looking forward through uncertainty

How can organisations prepare Strategic Reports to offer investors clarity over risks, and opportunities, while the outcomes of Brexit are still uncertain?

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The FRC have reminded boards that upcoming Strategic Reports should reflect the Company’s latest analysis of the potential impact of Brexit on the business. Pamela Taylor sets out some of the factors companies should consider when preparing a Strategic Report that helps investors to look forward through periods of uncertainty.

The UK is due to leave the EU in just under 15 months. That is increasingly imminent and, for companiesapplying the Corporate Governance Code, falls well within most Viability Assessment periods. From regulatory changes, to staffing and talent, to supply chains, Brexit-related risks may emerge.

The question companies must consider in preparing Strategic Reports is how they can offer investors clarity over risks, and opportunities, while outcomes are still uncertain.

Insight throughout the Strategic Report

The multiple uncertainties Brexit poses can be seen as a test of the quality of a company’s Strategic Report. Investors want to understand how a company might be exposed to risks, or is positioned to exploit any emerging opportunity. Companies can help investors to understand this through a combination of Strategic Report attributes:

  • Business model and strategy
    Transparent business model disclosure and clarity over the company’s longer term strategy can offer a picture of the relative importance of the UK-EU relationship, now and in the future, as well as of plans that underpin future operational continuity
  • External factors and performance
    Articulation of factors that may affect the future performance of the business and links between this and the business model disclosures can be very useful.
  • Risks and Governance
    Updates to Principal Risk disclosures to reflect the latest view of any company-specific risks that relate to, or are affected by, Brexit. These risk disclosures will naturally be in the spotlight. They are also an important opportunity for the board to explain their response to any such risks, and to draw links to assessments made that underlie the Viability Statement.

Code adopters: A ‘robust assessment’ of risks, considering ‘severe but plausible’ scenarios

The Viability Statement is underpinned by management’s robust assessment of principal risks, and consideration of severe but plausible scenarios. There may well be a number of plausible brexit scenarios, since we don’t know yet what the final Brexit deal or transition will look like – or indeed whether or when either will be agreed. If potential outcomes could have a severe effect on the business they will be relevant for the viability assessment.

In some cases, the Viability Statement might be based on assumptions as to the nature of the final arrangements. In such cases those qualifications or assumptions should be clearly explained in the Viability Statement.

What about a ‘cliff edge’?

A no-deal scenario remains a possibility, although talks continue and have been judged by the EU to have made “sufficient progress” to move on to the next stage. The implications of a cliff edge could be significant. For example: the sudden imposition of tariff and non-tariff barriers – with a potential knock-on impact for the speed of deliveries, import and export costs, pressure of working capital and so forth. Or perhaps gaps in regulatory oversight that might emerge while new bodies are set up. The point is that there are potentially a broad range of scenarios and outcomes may be relevant.

Investors will want clarity as to scenarios that could significantly affect the company’s prospects. Strategic Reports help companies to help investors understand the board’s views and concerns as they look forward at a time of uncertainty.

For further insight

Fundamental to explaining the potential implications to investors is understanding potential exposures, opportunities and planning accordingly. That is step one, and the strategic report is the way for management to articulate this to investors.

For more insight and guidance on Brexit and what it might mean, including a Brexit navigator setting out steps businesses could take, see KPMG's Brexit site. More guidance on corporate reporting can be found on KPMG’s Better Business Reporting site.

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