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November

FRC appoints Paul Druckman to its Board

30 Nov 2016

The Financial Reporting Council (FRC) has announced the appointment of Paul Druckman to the FRC Board.

He will join the Codes and Standards Committee and become Chair of the Corporate Reporting Council with effect from 1 January 2017. 

Please click here for the corresponding press release on the FRC website.

Trustees update IFRS Foundation Constitution

30 Nov 2016

The Trustees of the IFRS Foundation have announced amendments to the IFRS Foundation Constitution. These amendments include the reduction of Board members from 16 to 14 and a reclassification of the geographical distribution of Board members and Trustees.

In July 2015, the Trustees began its review of the structure and effectiveness of the IFRS Foundation. The review focused on three strategic areas: (1) relevance of IFRS, (2) consistent application of IFRS, and (3) governance and financing of the IFRS Foundation. In June 2016, the Trustees completed its review and issued an exposure draft with the proposed amendments. After reviewing feedback on its amendments, the Trustees agreed in October 2016 to update the Constitution. The updated Constitution is effective on 1 December 2016.

For more information, see the press release and the updated Constitution on the IASB’s website.

The Investment Association publishes Guidelines on Viability Statements

30 Nov 2016

The Investment Association has published guidelines setting out institutional investors’ expectations with respect to the longer-term viability statement introduced as part of the updates to the UK Corporate Governance Code in 2014.

The requirements for the longer-term viability statement come from Code provision C2.2 which states: 

Taking into account the company’s current position and principal risks, the directors should explain in the annual report how they have assessed the prospects of the company, over what period they have done so and why they consider that period to be appropriate.  The Directors should state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, drawing attention to any qualifications or assumptions as necessary. 

The Financial Reporting Council (FRC) has published its Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (link to FRC website) to assist directors when preparing the longer-term viability statement. 

The Investment Association highlights that the Guidelines have been developed with the benefit of one year’s experience of company’s producing longer-term viability statements and will be reviewed in light of best practice as it evolves.  Although the Guidelines are directed at companies whose shares are admitted to the Premium segment of the Official List of the UK Listing Authority, the IA does indicate that they can be considered best practice for other companies. 

The Guidelines include:

  • Period for the viability statement. The IA highlights that the majority of companies have adopted a three year timeframe with a few adopting a longer term of five years.  The IA indicates that “three or five years seems to have become standard practice” and encourages companies to consider longer term time frames “given the long-term nature of equity capital and directors’ fiduciary duties”.  The IA also highlights that it is important that directors are clear in why they have selected a particular timeframe.  It states that investors value disclosure that make it clear how directors have considered wider factors such as specifics of a company’s business and sector rather than that the assessment is purely based on the medium-term business plan which is what the IA has seen frequently so far.
  • Consider prospects and risks when assessing viability. The Guidelines:
    • recommend that directors do not limit the consideration of viability to medium or long-term risks but should also look at the current state or affairs of the business. Investors would also welcome the viability assessment addressing the sustainability of dividends.
    • indicate that it is the risks that threaten the day to day operations and the company’s existence that should be considered for the longer-term viability statement. These risks should be distinguished from those that impact its performance and which could prevent it from delivering its strategy.
    • Highlight that investors would welcome disclosure that address the likelihood of risks occurring and possible impact.
  • Description of risks. The IA indicates that “too often the description of risks lacks structure or is presented as a shopping list to cover all bases”.  It indicates that risks should be prioritised and should only include “those that are most pertinent to the business and the company’s strategy”.  The IA note that directors should exercise judgement in determining which principal risks are important and it is helpful if disclosure includes ranking of risks (for example low, medium, high) and changes in the level (e.g. likelihood) from a previous period.
  • Stress testing. Investors would welcome greater transparency around the stress testing that has been undertaken by the company in assessing viability. 

The Guidelines are available on the IVIS website.

Recent sustainability and integrated reporting developments

30 Nov 2016

A summary of recent developments at the IIRC and FEE.

The International Integrated Reporting Council (IIRC) has released the latest in its Creating Value series, Creating Value: The cyclical power of integrated thinking and reporting. The publication explores how integrated thinking is an integral component of integrated reporting. For organisations to truly adopt integrated reporting they need to embrace the concept of integrated thinking throughout the organisation. The publication also picks up on the release by the Italian Network for Business Reporting of a handbook on integrated thinking, giving step by step stages for companies to follow in order to 'make integrated thinking concrete and usable'. Please click for for the new creating value publication on the IIRC website and access to the handbook on integrated thinking.

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has released a publication providing practical guidance to companies that will have to comply for the first time with the EU Directive on the disclosure of non-financial and diversity information by certain large undertakings and groups. The publication applies the Directive’s requirements in a ‘mock-up’ management report of a fictional company in the food industry. This will especially help companies without prior experience in reporting on non-financial and diversity information. Please click to access Disclose what truly matters on the FEE website.

FRAB minutes for November 2016 meeting released

30 Nov 2016

The minutes of the Financial Reporting Advisory Board’s (FRAB’s) meeting of 24 November 2016 have been made available on the HM Treasury website.

The role of the Financial Reporting Advisory Board (FRAB) is “to ensure that government financial reporting meets the best possible standards of financial reporting by following Generally Accepted Accounting Practice (GAAP) as far as possible”.  The FRAB includes representatives from the accountancy profession in the private and public sectors, academia and government bodies.  The board meets regularly to consider proposed changes to policy and practice

Key topics discussed during the meeting included: 

  • Financial Reporting Manual (FReM) 2016-17 and 2017-18 – a paper was introduced by HM Treasury providing the Board with the revised FReM 2016-17 and illustrative statements. A draft FReM and illustrative statements for 2017-18 was also presented for consideration.
  • International Financial Reporting Standard 9 Financial Instruments consultation feedback. A paper was produced summarising the consultation feedback.  A number of respondents to the consultation saw the new impairment model as providing the greatest challenge.  The impairment approach in the consultation was received positively and HM Treasury have indicated that it proposes to mandate this across government.  Additionally it was highlighted that HM Treasury are planning to mandate the use of IFRS 9 for hedge accounting, implement retrospective application with no restatement and maintain the existing interpretations in the FReM.  Three areas were identified as requiring further work – analysis of loss allowances on liabilities held within the public sector, the impact of financial guarantee contracts and development of application guidance.
  • IFRS 15 Revenue from Contracts with Customers consultation feedback.  A paper was produced summarising the consultation feedback and proposing next steps for implementation.
  • Discount rates – a paper was presented setting out the discount rates to be applied for 2016-17. The Board was asked for its views on delaying the long-term discount rate update and conducting a full review of the discount rate policy.
  • An update on IFRS 16 Leases was given and proposed steps for implementation in the public sector context.
  • Feedback was sought on the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC) exposure draft of the 2017/18 Code of Practice on Local Authority Accounting in the UK

Click here for detailed minutes and other supporting documents on HM Treasury website.

BEIS issues Green Paper on Corporate Governance

29 Nov 2016

The Department for Business, Energy & Industrial Strategy (BEIS) has issued a Green Paper seeking views on how to improve the UK corporate governance framework and setting out options for updating the framework and reforming executive remuneration. The consultation closes on 17th February 2017.

The Green Paper asks for views on:

  • executive pay;
  • strengthening the employee and customer voice; and
  • corporate governance in large private businesses. 

Executive pay 

Executive pay is the largest section of the Green Paper. Key areas include shareholder voting and other rights, shareholder engagement on pay, the role of the remuneration committee, transparency in executive pay and long-term incentive plans. 

The Green Paper proposes a number of options to the voting regime on director’s remuneration. These include making all or some elements of executive pay subject to a binding vote, introducing stronger consequences for companies losing the annual advisory vote, requiring companies to set an upper threshold for total annual pay to trigger a binding vote and increasing the frequency of the existing binding vote on remuneration policy. There is also an option of strengthening the UK Corporate Governance Code to provide more guidance on how companies should engage with shareholders on pay and what to do in the case of significant shareholder opposition to the remuneration report. 

The Green Paper also considers shareholder engagement on pay. The main options are mandating the disclosure of fund managers’ voting records at AGMs and the extent to which they have made use of proxy voting; establishing senior shareholder committees to engage with executive remuneration arrangements and considering ways to facilitate or encourage individual retail shareholders to exercise their rights to vote. 

Two main options are mentioned regarding the constitution and role of the remuneration committee. The first one is requiring the remuneration committee to consult shareholders and the wider workforce before preparing the executive pay policy and the second is requiring the chairs of remuneration committees to have served for at least 12 months on a remuneration committee before taking up the role of chair. 

On transparency in executive pay, the Green Paper includes an option for listed UK companies to include the ratio of CEO pay to median employee pay in the remuneration report each year, and the context behind that ratio. The government also includes an option to require the disclosure of bonus targets. 

The government is also seeking views on whether long-term incentive plans could be brought more in line with the long term interests of the company. 

Strengthening the employee and customer voice

The Green Paper covers four options for strengthening the stakeholder voice. The options include the introduction of stakeholder advisory panels, designating existing non-executive directors to provide an independent and clear voice for key interested groups as a formal part of the board structure, and appointing individual stakeholder representatives to company boards. There is also an option to strengthen reporting requirements related to stakeholder engagement, for example further guidance on preparation of the Strategic Report to include how directors have performed their duties under section 172 of the Companies Act 2006.

Corporate governance in large private businesses 

The third and final area of the Green Paper considers whether the largest private companies should be held to higher standards of corporate governance and reporting. The options include extending the voluntary approach currently applying to listed companies and using a bespoke code for unlisted companies (the paper acknowledges that some private companies already use the Corporate Governance Guidance and Principles for Unlisted Companies in the UK issued by the Institute of Directors). An example threshold of 1000+ employees is suggested but the consultation covers whether this is an appropriate cut off level. The options also explore whether further non-financial reporting requirements, such as on greenhouse gas emissions and executive remuneration, should also apply to privately held businesses.

The press release and the Green Paper are available on the BEIS website.  Our related Governance in Brief publication is available here.

EPRA publishes updated Best Practices Recommendations Guidelines

29 Nov 2016

The European Public Real Estate Association (EPRA) has published updated Best Practices Recommendations Guidelines (“the BPR Guidelines”). It has also published a question and answer document that is intended to provide additional information on the BPR Guidelines.

The Best Practice Recommendations set out additional performance measures and supplementary information to be presented in the annual reports of public real estate companies, with the aim of making the financial statements of these companies clearer, more transparent and comparable across Europe.  The BPR are important to both investors and financiers. 

The Guidelines, which assist in applying the BPR, include:

  • EPRA BPR General recommendations;
  • EPRA performance measures;
  • Core recommendations;
  • Best practice examples; and
  • An EPRA BPR checklist. 

The Best Practice Recommendations Guidelines and Best Practice Recommendations Q&A are available from the EPRA website.  Our EPRA Annual Report Survey 2015/16 is available here.

Françoise Flores appointed to the IASB

29 Nov 2016

The IFRS Foundation Trustees have announced the appointment of Françoise Flores to serve as a member of the International Accounting Standards Board (IASB). Ms Flores will join the IASB in January 2017 for an initial term ending 31 December 2021.

Ms Flores served as Chief Executive Officer of the European Financial Reporting Advisory Group (EFRAG) and Chairman of EFRAG’s Technical Expert Group (TEG) until April 2016. Most recently, she had returned to work as a partner at accountancy firm Mazars in Paris, France.

Please click for the announcement on the IASB website.

EFRAG publishes November 2016 issue of 'EFRAG Update'

29 Nov 2016

The European Financial Reporting Advisory Group (EFRAG) has published an 'EFRAG Update' summarising public technical discussions held and decisions made during November 2016.

IFRS 9 published in Official Journal of the EU

29 Nov 2016

The European Union has published a Commission Regulation endorsing IFRS 9 'Financial Instruments', confirming the decision to adopt the standard announced last Friday.

Commission Regulation (EC) No 2016/2067 of 22 November 2016 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council published in the Official Journal on 29 November 2016 adopts IFRS 9 'Financial Instruments'. The EU effective date is the same as the IASB's effective date (annual periods beginning on or after 1 January 2018 with earlier appication permitted).

Please click to access the entry in the Official Journal.

 

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