Summary and implications
The UKLA has published a special edition of List! (List! 24) focussed entirely on working capital statements and risk factors.
The UKLA views working capital statements and risk factors to be two of the most important disclosures in prospectuses and circulars. Given the potential for overlap and inconsistencies, the UKLA pays particular attention to risk factors that suggest the issuer will or may run out of working capital in the next 12 months.
For those regularly working on documents reviewed by the UKLA, little of what is said is likely to come as a big surprise and List! 24 largely confirms UKLA practice. The UKLA is keen to stress that its role is to challenge inconsistencies, not to redraft the risk factors for issuers and their advisers.
The key principles and guidelines in List! 24 are:
- Statements that risks are only relevant in the longer term (and specifically only after the 12 month working capital period) should only be used where this is genuinely the case, and not simply to take the risk outside the working capital statement period.
- Disclaimers or preambles that a risk factor does not qualify the working capital statement should not be used unless the underlying facts disclosed support that position. In the UKLA’s view, the facts underlying the risk are either inherently consistent or inconsistent with a clean working capital statement.
- Risk factors must detail a specific risk which applies to the issuer and not be generic or simply statements of fact which do not specify any particular risk. Risks should be disclosed in as concise and precise a manner as possible. The UKLA also emphasises that risk factors should not include all conceivable risks, irrespective of their materiality to the issuer.
- Some risk factors are fundamentally inconsistent with a clean working capital statement: either the facts underlying the risk factor should be addressed or the working capital statement should be qualified. CESR guidance already requires that the work underpinning a working capital statement should include reviewing the headroom to cover all reasonable worse case scenarios.
- The UKLA recognises that not all risk factors dealing with funding (such as a risk factor that cash constraints may limit future acquisitions) are necessarily inconsistent with a clean working capital statement.
- High-impact-low-probability risks may not be qualifications on the working capital statement provided they have been sufficiently stress tested, although the UKLA only expects to see such risks on an infrequent basis and/or during periods of acute economic or market disruption.
- The risk factors, business strategy and working capital sections should all tell the same story.
- The document as a whole needs to be consistent - the risk factors, business strategy and working capital sections should all tell the same story. The assumptions and factors taken into account in reviewing the working capital position need to be reflected in, or be consistent with, the description of the issuer’s business. For example, a business strategy focussed on acquisitions would not be consistent with a working capital statement based on no acquisitions (as the funding is not then available) unless it is made clear that the acquisitions are conditional on additional funding being obtained.
List! 23 alert – The UKLA’s last thoughts for 2009 To view the full briefing click here
Other recent group briefings include
Changes to the UK listing regime and their impact as non-UK companies: “premium” and “standard” listings
To view the full briefing click here