Budgeting in a bubble - Forecasting and financial reporting in volatile markets

Practical approaches for effectively engaging with lenders.

Come prepared

• Demonstrate a robust financial model and ensure appropriate scenario testing.

• Articulate your risks clearly to the bank, don’t sugar coat.

• Ensure appropriate downside cash flow forecasting has been completed and provide financiers with sufficient information that provides confidence in the models and predicted outcomes. 

• Be prepared to talk through plans to deleverage.

• Banks also want to see that Boards review and challenge opex and capex line items.

Be clear on your expectations

• Having a clear understanding of your credit risk, or shadow credit rating, is a key benchmark in obtaining a fair outcome.

• Don't be blinded by a seemingly low cost of financing. 

• Ask banks about your risk grade, its impact and, if necessary, how that can be improved.

• Review liquidity policies and ensure the relevant benchmark is applicable to the business. 

Understand your lenders’ position and what they want from the relationship

• Understand the lender’s credit appetite under all scenarios.

• Robust governance is key for lenders. Banks want to see strong Boards, risk and advisory committees, well defined risk management procedures and capable management teams.

• Bank lenders are showing an increased preference for syndicated facilities and for less lending appetite than previously seen.

Engage regularly

• Treat banks more like you do your investors - ARC members should be part of semi annual presentations / updates to the banks 

• Bring lenders into your strategy tent and make them part of your crisis solution. 

• Lender update presentations: Banks take comfort with an increased level of communication and disclosure of forward strategy and scenario planning in these uncertain times.

Key financial reporting considerations for Non-Executive Directors regarding impairments and disclosure.

Reflecting business uncertainties and challenges in an impairment assessment

• Don’t reinvent the wheel. When you are preparing an impairment test, leverage what you are doing within the business.

• When preparing impairment cash flows, consider using a multiple scenario approach to impairment testing, probability weighting these scenarios to derive a single set of cash flows which incorporate risks and uncertainties. 

Developing quality accounting papers to support your position as Directors

• Ensure to have sufficient evidence to support key assumptions and judgements made, keeping in mind that external evidence is king. 

• Challenge whether the accounting paper is balanced;  consider not only evidence to support assumptions reached, but also any counterfactual evidence.

Preparing high quality financial statement disclosures

        1.Keep it Simple

Recent FMA guidance emphasises the importance of preparing high quality disclosures that meet the requirements of the standards. However, it also emphasises that key material information should not be lost in unnecessary detail.  

        2. Make sure disclosures are fit for purpose

Use the disclosures in the financial statements to tell your story; how has COVID-19 impacted the business, the key risks and uncertainties facing the business and how this may impact future financial statements.  

Materiality is not just a number in isolation. Consider qualitative matters and whether these are important to disclose. 

        3. Sweat the inputs; refine the outputs

It is important that entities disclose the key assumptions underpinning impairment models. This means that you need to be comfortable that key assumptions input into forecast models are reasonable and supportable, and are realistic in the current environment. 

        4. Importance of sensitivity and scenario analysis

Disclose the impact of COVID-19 under the various scenarios the entity is considering, along with relevant and appropriate sensitivity and probability analysis. 

        5. Disclosure is king

There won’t necessarily be a right answer in this current environment, but in keeping with the principles set out above, you will be preparing a financial reporting outcome that ensures your stakeholders are informed - and importantly, responds  to our regulators' communicated expectations at this time.