COVID-19 has brought volatility to the value of many investments, including those of public sector entities. The changed valuations and financial circumstances are bringing increased (and sometimes new) focus on investment management to support operational liquidity and sustainability.
This blog contains some areas of focus for clients in their operational investment assessments and financial reporting.
What does this mean for operational management of investments?
Entities may be making changes to their investments to support on-going operational cash flow requirements. Below are some key considerations and internal controls when making investment decision changes:
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Perform assessments of investment positions
Many entities are understanding investment valuation changes and current operational cash requirements. To do this, entities are:
- updating cash flow forecasts for the business—to understand whether there is now a need to redeem investments for liquidity purposes
- understanding valuation changes through underlying trends or changes to the nature of investments from investment manager reports
- understanding if the objectives and outcomes of investment strategy are still being met
- assessing any restrictions on redeeming investments, whether losses will be incurred due to declining value, and whether there will be a changed investment risk profile.
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Ensure adequate controls and reporting
Entities are also looking at the sufficiency of controls and reports to inform decisions relating to investment management. This includes:
- ensuring sufficient reporting is available to decision makers on current investment performance and position
- understanding what delegations are required for investment redemption and if these can be met in the current situation
- understanding any other approvals that may be required to alter investment arrangements, for example the Statutory Bodies Financial Arrangements Act 1982
- ensuring treasury controls are sufficient to manage the redemption process
- ensuring procurement and expenditure controls adequately oversee the spending of redeemed funds in line with the stated purpose
- identifying what impacts redeeming investments may have on longer-term strategic plans and capital projects.
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What does this mean for my financial reporting?
There may be increased financial reporting on investments in management reports and annual financial statements. Your entity may need to incorporate additional information on risks associated with held investments, including volatility and liquidity.
Entities with investments should consider:
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Risk reporting in financial statements
- Market risk—the range of reasonably possible movements in investment values should be reassessed in light of recently seen market activity. For some investments, an old range (for example five–10 per cent movement) may no longer be appropriate.
- Liquidity risk—based on information within the entity and from external managers, are any limitations on redemptions of investments anticipated, which may need to be disclosed.
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Increased disclosure of estimates and judgements
- Uncertainties around the value of certain investments—entities should assess early what information they need to value their investments. If any estimates or judgements need to be applied to do so, they should identify early if COVID-19 has impacted these estimates and if any uncertainties exist as a result. They may need to disclose these uncertainties, in addition to the judgements and assumptions applied in calculating fair values.
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Post balance data volatility
- If investment values change significantly after year end, or events occur after year end that could significantly impact the value of an investment, entities should consider whether this also requires disclosure.
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