October

FRC invites comments on its draft UK Endorsement Criteria Assessment on the Amendments to IFRS 4 - extension to IFRS 9 deferral

27 Oct, 2020

The Financial Reporting Council (FRC) has published a draft UK Endorsement Criteria Assessment on the International Accounting Standards Board's (IASB’s) 'Amendments to IFRS 4 - Extension of the Temporary Exemption from Applying IFRS 9' (the Amendments).

As part of the preparation for the end of the Transition Period, work is being undertaken to ensure the UK is ready to undertake adoption of the Amendments if EU adoption does not occur in December 2020 (as the UK leaves the EU at the end of the transition period on 31 December 2020).

The FRC welcomes stakeholders’ views to inform its recommendation to the BEIS Secretary of State to adopt the Amendments in the UK.

The FRCs initial assessment is that:

  • the Amendments meet the criterion of relevance, reliability, comparability and understandability required of the financial information needed for making economic decisions and assessing the stewardship of management, as required by SI 2019/685 (see Regulation 7(1)(c)); and
  • application of the Amendments are not contrary to the principle that an entity’s accounts/consolidated accounts must give a true and fair view as required by SI 2019/685 (see Regulation 7(1)(a)).

Additionally the FRC initially concludes that the Amendments will improve the quality of financial reporting, that the benefits of the Amendments are likely to outweigh the costs and that users are likely to benefit from the Amendments.

The press release, Invitation to Comment and the draft UK Endorsement Criteria Assessment are available on the FRC website.

Comments are requested by close of business on Tuesday 10 November 2020. 

FRC Lab publishes a report on video In corporate reporting

12 Oct, 2020

The Financial Reporting Lab of the Financial Reporting Council (FRC) has published a new report on video in corporate reporting.

The report looks at how companies currently use video in corporate reporting and considers how it might be used in the future.

The review identified the following four types of video used in practice:

  • News focused: videos that are tied to the overall reporting cycle and feature prominently on corporate or investor home pages. 
  • Insight focused: videos that aim to provide more datail into a specific aspect of a company's business, relationships or operations.
  • Aspirational: videos that look forward to a state that the company would like to achieve.
  • Narrative focused: videos that tell a story about the company, such as its history or its work on sustainability issues.

For each of these types of video the report identifies examples that worked well in practice.  The report identifies that, for a sample of FTSE 350 companies, 86% were using video to some extent.  For those companeis samples, prevalence of video was higher in the FTSE 100 (100%) than the FTSE 250 (72%) and the most common videos used were 'News and insight' with 'Aspirational' the least used. 

The report also discusses three opportunities for change which may spur innovation in video-based reporting. 

  • A longer-term regulatory outlook 
  • UK digital reporting 
  • Virtual and Augmented reality

The FRC press release, the FRC Lab report are available on the FRC website.

FRC Lab publishes a set of tips to help companies make S172 statements more useful

14 Oct, 2020

The Financial Reporting Lab of the Financial Reporting Council (FRC) has published a set of tips intended to help companies consider what content to include in a Section 172 statement, how to present it and how to facilitate the process of preparing the statement.

The tips have been developed following the Financial Reporting Lab's discussions with investors and other stakeholders about what information would be most useful on how directors have had regard to the matters set out in section 172(1) (a) to (f) of the Companies Act 2006 when performing their duty under Section 172 to promote the success of the company and how it can be presented effectively. The Financial Reporting Lab has also spoken to companies to understand the challenges they are facing in preparing the Section 172 statement. 

The tips are structured under three headings:

Building in useful content - the Section 172 statement should: 

  • not merely be a compliance exercise but instead should reflect on how the company met the requirements, should explain what is relevant to it and what happened during the year and, where applicable, what the board and management plan to do in the future. 
  • explain the board's reasoning behind why, for example, particular stakeholders are identified as key and why particular engagement methods were effective.
  • link to strategy.
  • include difficulties not just positives.
  • reflect the board’s oversight - specifically information on how the board challenges and oversees engagement with stakeholders and formulation of strategy and what stakeholder management processes are in place.
  • include material KPIs on the key stakeholders.
  • address future consequences and planned actions - specifically when setting out the engagement undertaken and decisions made, companies should disclose the implications of the feedback received, the impact of decisions on relevant stakeholders, and what actions have been taken or are planned as a result. Where the statement highlights issues or concerns raised by a stakeholder, it should be clear how they have been or are going to be addressed.
  • be consistent with the rest of the annual report.

Presented in a way that make sense - the Section 172 statement should:

  • reflect the strategic link and be clear about the board's role.  Companies are also advised to think about where to place the statement so that it is positioned in the most helpful and useful position for investors and logically flows to other information presented in the strategic report.
  • be clearly labelled and referred to in the contents pages of the annual report.
  • make use of cross referencing, where appropriate, to expand upon points made in the statement and provide further context.  However, this should not just be a list of links and the statement should still provide a coherant message by itself.
  • include examples and case-studies of significant strategic decisions taken during the year, explaining how stakeholders were taken into account to bring the statement to life.

Supported by process - companies should:

  • start considering their Section 172 statements early in the year and not leave considerations until the end of the year. 
  • consider tailoring board agendas, papers and minutes to include reminders for both the board and management to consider which stakeholders are relevant for decisions. 

The press release and publication are available on the FRC website. 

FRC launches consultation on governance changes to its Enforcement and Operating Procedures

02 Oct, 2020

The Financial Reporting Council (FRC) has launched a consultation on consequential amendments to the Conduct Committee’s Operating Procedures and various Enforcement Procedures arising as a result of changes to its governance structure.

Following Sir John Kingman’s recommendations, the FRC Board has reviewed its sub-board governance structure and decision making in relation to enforcement investigations and intends a number of governance changes to take effect on 1 January 2021.

The key drivers behind the resulting governance structure changes are to enhance the effectiveness, speed and responsiveness of the organisation; shift the organisation to an ‘Executive Led’ approach; reduce layers of management and Committee review and create clearer accountability; enhance transparency; align the governance structure with a new FRC business model and management structure; and refocus Board time to effectively challenge and hold the Executive to account.

The governance changes approved by the Board are to take effect from 1 January 2021. Changes include:

  • Five Committees of the Board to support the Board. These will be:
    • Supervision Committee (new);
    • Conduct Committee;
    • Regulatory Standards and Codes Committee;
    • Audit and Risk Committee; and
    • People Commiteee.
  • Removal of the sub-committee structure to be replaced with a broad Advisory Panel that the Executive and Board Committees can call upon for specialist advice and input on a targeted basis.
  • Senior Advisors to be appointed for a set number of days a month to sit as standing advisors to the three regulatory Board Committees (Regulatory Standards and Codes, Conduct and Supervision) and be available to advise the executive.

As the governance structure changes require minor consequential amendments to a number of the FRC’s regulatory procedures, these are being put to consultation. Comments are requested until 30 November 2020.

A press release and the consultation are available on the FRC website.

FRC publishes 'Key Facts and Trends in the Accountancy Profession'

16 Oct, 2020

The Financial Reporting Council (FRC) has published the eighteenth edition of its annual ‘Key Facts and Trends in the Accountancy Profession’ publication.

The publication provides key data on the accounting profession, its member bodies and practising firms. The publication illustrates the size and shape of the accounting profession and shows how it has evolved over the years. It brings to together information about the major audit firms and accounting bodies including both those who offer audit qualifications and those who register and supervise audit firms.

The publication includes:

  • information related to membership, students, income, costs and staffing of the seven accountancy bodies;
  • information related to the supervision of statutory auditors;
  • information on the registered audit firms with public interest entity clients and;
  • a greater focus on the profession's track record on diversity and inclusion.

A press release and the full publication is available on the FRC website.

FRC publishes a review into AGMs held during the first half of 2020

07 Oct, 2020

The Financial Reporting Council (FRC) has published a review which looked at the different ways in which companies held AGMs during the first half of 2020 and whether the approaches taken best served the interests of shareholders.

UK Companies have been forced to change their approach to holding physical AGMs and embrace virtual and hybrid AGMs as a result of the disruption caused by Covid-19.

As part of the review, 202 FTSE 350 AGMs held between March and August were analysed. Key findings were:

  • 80.7% of FTSE 350 sampled companies held closed meetings due to COVID-19.
  • Of the 163 companies that held closed meetings, 81.6% made arrangements to allow for shareholder Q&A with the board. This was facilitated mainly through questions emailed to the company in advance of the AGM to either be answered at the AGM or have the answers posted to the website post-AGM.
  • Of the 30 companies that held open meetings, 60% were facilitated through webinars or audiocast with live voting capabilities.
  • Of the AGMs reviewed, 30 did not enable any shareholder engagement through Q&A before or during the AGM. The review provides a number of ways that shareholder engagement might be improved and made more effective.

The review found that shareholder rights are best served by companies which provide highly effective and clear communication before, during and after the meeting, and allow full participation from those shareholders that wish to attend the AGM either in person, or virtually. The FRC recommends all efforts should be made to ensure shareholders have the ability to vote following presentations from the board, rather than before.

The review provides an annexe which offers some practical advice for companies to consider for future AGMs whether or not there are restrictions on social gatherings and social distancing.

The FRC will convene a Stakeholder Group, including government, companies and investors, to consider recommendations for legislative change and propose alternative means to achieve flexibility whilst maintaining the integrity of the AGM. The FRC has asked the government to consider, as soon as possible, what measures may need to be brought forward to ensure AGMs are able to take place either virtually or as a hybrid during 2021.

A press release and the full review are available on the FRC website.

FRC publishes discussion paper on the future of corporate reporting

08 Oct, 2020

The Financial Reporting Council (FRC) has published a discussion paper proposing a future for corporate reporting based on a principles-based framework.

The discussion paper outlines a blueprint for a more agile approach to corporate reporting which challenges existing thinking about how companies can more effectively meet the information needs of investors and other stakeholders.

Proposals include:

  • unbundling the existing purpose, content, and intended audiences of the current annual report by moving to a network of interconnected reports;
  • a new common set of principles that applies to all types of corporate reporting;
  • objective-driven reports that accommodate the interests of a wider group of stakeholders, rather than the perceived needs of a single set of users;
  • embracing the opportunities available through technology to improve the accessibility of corporate reporting; and
  • a model that enables reporting that is flexible and responsive to changing demands and circumstances.

Comments on the discussion paper are invited by 5 February 2021.

Please click for more information and access to the discussion paper and related documents on the FRC website.

The FRC's podcast in conversation with Deepa Raval, Director of Narrative Reporting and Jen Sisson, Deputy Director of Stakeholder Engagement and Corporate Affairs on the FRC's Future of Corporate Reporting project is also available on the FRC website.

The FRC also offers a launch event on 11 November 2020 to present an overview of key aspects of the consultation paper. Please click for more information here

FRC publishes findings on the quality of corporate reporting in 2019/2020

21 Oct, 2020

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2019/2020, which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team. The report sets out the FRC’s expectations of areas of corporate reporting that require improvement and what it expects companies to focus on in the coming reporting season. The FRC expects companies to consider its findings during the financial reporting process.

The FRC comments that “overall the quality of reporting by UK companies has remained consistent in recent years”. It notes that although there has been improvements in certain areas such as fewer inconsistencies between the disclosure of significant judgements and estimates and other related disclosures elsewhere in the annual report and accounts and within alternative performance measure (APM) disclosure there is “still room for improvement in other areas”. These areas include better explanation of judgements and estimates, disclosures of impairment testing and impairment losses and better disclosure of revenue recognition especially variable consideration and performance obligations.

The findings follow a review of 216 annual reports and accounts with 67% of those reviews in the FTSE 350. The FRC notes that the topics most frequently raised as a result of the reviews have remained similar to previous years. It stresses that as well as meeting the detailed disclosure requirements of the standards “companies need to meet the overarching objective of accounting standards”. The FRC highlights that a number of the disclosure issues could have been avoided had the disclosure objectives of the relevant accounting standards and legislation been more carefully considered when appraising the quality of reports and the needs of investors.

The FRC indicates that “the statement of cash flows remains the most common source of identified material errors”. The report highlights that these errors were considered “basic in nature” which “could have been spotted by carefully considering the appropriateness of various line items appearing on the face of the cash flow statement”. It identifies the ten most frequently raised topics where improvements to reporting quality are needed are:

  • Judgement and estimates
  • Impairment of assets
  • Revenue
  • Financial instruments
  • Alternative Performance Measures
  • Strategic Report
  • Statement of Cash Flows
  • Provisions and Contingencies
  • Fair value measurement
  • Business Combinations

Each of these topics is analysed in detail in the report with key findings and significant issues encountered from the reviews. Example disclosures that would meet the FRC’s expectations are also provided.

Whilst not in the ‘top ten’ list of areas noted above, the FRC also draws attention to issues it has encountered with respect to earnings per share and illegal dividends. It flags that most of the earnings per share findings arose as a result of a corporate restructuring not being correctly reflected in the calculation. With respect to unlawful distributions the most common issue was failure to file an interim set of accounts prior to the payment of a proposed distribution where the distribution was not supported by the latest set of PLC accounts circulated to members.

Although COVID-19 has had a significant impact on financial reporting, the FRC flags that the key considerations for companies when preparing their reports and accounts such as clarity, consistency, relevance and transparency remain. It indicates that better disclosures are specific to the entity and explain clearly how COVID-19 has affected the company’s reported position and performance, and how it may affect future prospects.

The report highlights the FRC’s key disclosure expectations for 2020/21 which reflect the impact of COVID-19 on users’ needs and priorities. It expects to see:

  • disclosure of forward-looking information that is specific to the entity and which provides insights into the board’s assessment of the business’s prospects and the methods and assumptions underlying that assessment.
  • a clear explanation of any material changes in the business model. The FRC will also assess whether a changed business model is appropriately reflected in the financial statement disclosures of, for example, operating segments, or the allocation and impairment testing of goodwill.
  • going concern disclosures that explain the basis of any significant judgements, including whether there are any associated material uncertainties, and the matters considered when confirming the preparation of the financial statements on a going concern basis.
  • consistency between the business model, going concern disclosures, the viability statement and financial statement assumptions and estimates, notably for impairment testing at group and parent company level.
  • disclosures about significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made, that enable users to understand management’s exercise of judgement and views about the future.
  • appropriate disclosure of information relevant to understanding the company’s financial risk management, particularly the potential impact of debt covenants on liquidity and the use of factoring and reverse factoring in working capital financing.
  • adjusted for Covid-19’ alternative performance measures only in exceptional circumstances. The FRC highlights that “allocation of items such as impairment charges between Covid-19 and non-Covid-19 are likely to be highly subjective and therefore generally unreliable”.

Going forward, the FRC has indicated that its 2021 priorities will focus on the following areas:

  • Disclosures addressing risk;
  • Judgement and uncertainty in the face of the ongoing economic and social impact of COVID-19;
  • The potential consequences of geopolitical tensions and the UK’s exit from the European Union; and
  • Climate-related risks.

A press release, summary report and full report are available on the FRC website.

FRC publishes review of early reporting against the new UK Stewardship Code

02 Oct, 2020

The Financial Reporting Council (FRC) has published its review of early reporting against the UK Stewardship Code 2020.

TheThe new UK Stewardship Code took effect for reporting years beginning on or after 1 January 2020.  The new Code sets higher expectations for investor stewardship policy and practice and focuses on how effective stewardship delivers sustainable value for beneficiaries, the economy and society.  The Code now comprises 12 ‘apply and explain’ Principles for asset owners and asset managers, with reporting expectations relevant to their role. In addition, there are six, separate ‘apply and explain’ Principles for service providers with reporting expectations.

In order to support prospective signatories in meeting the higher expectations set by the Code, the FRC has published its 'Review of Early Reporting'.  The review analysed 21 responsible investment, active ownership and stewardship reports and looked at how well prospective signatories are addressing the higher standards set.  The review reiterates the expectations of effective stewardship, highlights what has been reported well, using examples to demonstrate a range of effective approaches, and highlights areas where reporting needs to improve.

The report consists of two parts;

  • Part 1: In this part the FRC has expands on its expectations of reporting which apply to all the Principles and reporting expectations.  This part also discusses the FRC's observations on the structure and the use of evidence to support stated approaches.
  • Part 2: In this part the FRC comments on the quality of reporting and its expectations for specific Principles. This part highlights good examples of reporting where they have been seen.

The review identified that there were good examples and case studies evidencing stewardship activity.  However few reports consistently demonstrated the application of all of the Principles or addressed all of the reporting expectations.  The FRC indicates that "for all the Principles, reporting needs to improve by reflecting on effectiveness of approach, demonstrating continuous improvement and disclosing outcomes".  It also highlights that "statements should be supported with specific evidence from the reporting period, and the rationale rather than just a general statement of approach".

The press release and Review of Early Reporting are available on the FRC website. 

On 8 October, the FRC published a recording of the Webinar: Stewardship Code Early Reporting Review held on 30 September 2020. Click here to view the webinar.

 

on he new UK Stewardship Code took effect for reporting years beginning on or after 1 January 2020. In order to support prospective signatories in meeting the higher expectations set by the Code, the FRC will publish a 'Review of Early Reporting'. The Review will detail the expectations for reporting, identify effective examples and highlight where reporting needs to improve. new UK Stewardship Code took effect for reporting years beginning on or after 1 January 2020. In order to support prospective signatories in meeting the higher expectations set by the Code, the FRC will publish a 'Review of Early Reporting'. The Review will detail the expectations for reporting, identify effective examples and highlight where reporting needs to improve. 

IAASB Issues Staff Audit Practice Alert on Climate-Related Risks

09 Oct, 2020

The International Auditing and Assurance Standards Board (IAASB) have issued a Staff Audit Practice Alert, 'The Consideration of Climate-Related Risks in an Audit of Financial Statement'.

The Staff Audit Practice Alert is intended to assist auditors in understanding what already exists in the ISAs today and how that material relates to the auditors’ consideration of climate-related risks in an audit of financial statements.

The Staff Audit Practice Alert covers:

  • the purpose of the publication;
  • entities that may be affected;
  • management’s responsibilities;
  • auditor’s responsibilities; and
  • which ISAs may be most relevant in relation to climate-related risks.

IAASB Technical Director Willie Botha comments:

This Staff Audit Practice Alert shows that while the phrase ‘climate change’ does not feature in the ISAs, the auditor’s responsibilities under the ISAs encapsulate the consideration of events or conditions relevant to the susceptibility to misstatement of amounts and disclosures in an entity’s financial statements, which would include climate-change risk.

The Staff Audit Practice Alert is available on the IFAC website.

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