The FRC previously issued guidance in March with subsequent updates in May. The consolidated guidance is delivered as two separates papers – one for companies and one for auditors. Both recognise that there is still considerable uncertainty about the future at a time where a number of companies are preparing annual reports.

Guidance for companies

The paper addressed to companies is intended to highlight some key areas of focus for boards in maintaining strong corporate governance and provide high-level guidance on some of the most pervasive issues that should be considered when preparing annual reports and other corporate reporting.

With respect to corporate governance the key messages to board are to:

• develop and implement mitigating actions and processes to ensure that they continue to operate an effective control environment, addressing key reporting and other controls on which they have placed reliance historically but which may not prove effective in the current circumstances;
• consider how they will secure reliable and relevant information, on a continuing basis, in order to manage the future operations, including the flow of financial information from significant subsidiary, joint venture and associate entities; and
• pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is made, not just proposed; and sufficient resources remain to continue to meet the company’s needs.

The guidance is intended to focus the minds of boards on those areas of reporting that are of most interest to investors and to encourage them to provide clarity on the use of key forward-looking judgements. The guidance covers:

• the need for narrative reporting to provide forward-looking information that is specific to the entity and which provides insights into the board’s assessment of business viability and the methods and assumptions underlying that assessment;
• going concern and any associated material uncertainties, the basis of any significant judgements and the matters to consider when confirming the preparation of the financial statements on a going concern basis;
• the increased importance of providing information on significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made; and
• judgement required in determining the appropriate reporting response to events after the reporting date and the extent to which qualitative or quantitative disclosures may be appropriate.

More detailed guidance is provided on the following specific areas:

• Corporate governance
• Management information
• Risk management and internal controls systems
• Dividends and capital maintenance
• Corporate reporting
• Strategic Report and Viability Statement
• Financial statements – going concern and material uncertainties, significant judgements and estimation uncertainty, events after the reporting date, exceptional or similar items, alternative performance measurements, leases, and interim reports.
• Other sources of guidance and publications issued by the FRC.

The FRC encourages companies to make use of the extensions to the deadlines for the publication of the annual report and accounts. It notes that the FCA recently confirmed that listed companies with a year end up to and including 31 April 2021 will still have six (rather than four) months to publish their annual report and accounts.

Guidance for auditors

The Bulletin provides guidance to auditors carrying out audit engagements that may be affected by COVID-19. The Bulletin indicates that some companies and auditors are continuing to face practical difficulties in preparing accounts and carrying out audits. It highlights that given possible restrictions on travel, meetings and access to company sites in some jurisdictions, audit firms may need to apply alternative audit procedures to gather sufficient, appropriate audit evidence.

The FRC remains concerned that the pandemic should not undermine the delivery of high quality audits. It highlights that audits should continue to comply fully with required standards and flags that additional time should be taken to complete audits, where necessary, even if this risks a delay in company reporting.

The Bulletin indicates that auditors need to consider the impact of COVID-19 on:

• the auditor’s risk assessment, and whether it needs to be revised;
• how the auditor gathers sufficient, appropriate audit evidence, recognising that the planned audit approach may need to change, and alternative procedures developed, particularly in group audit engagements. The auditor must be able to gather the necessary evidence to be able to report or consider modifying their audit opinion;
• how the group auditor proposes to review the work of component auditors to meet the requirements in standards, including considering whether alternative procedures can be used: for example, where travel is restricted;
• the auditor’s assessment of going concern and the prospects of an audited company, given that uncertainty about the global economy and the immediate outlook for many companies has increased;
• the adequacy of disclosures made by management about the impact on the company of COVID-19, so that users of the financial statements are properly informed, and the company’s prospects and how they might be affected are described, recognising the high degree of uncertainty; and
• the need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation, recognising that this assessment will take place right up to the point of signing the auditor’s report, and may need the provision of further evidence and information by management. Where the current circumstances have had a significant impact on the delivery of the audit, the auditor will need to consider how to explain this in their report, for example, by reporting this as a key audit matter.

The Bulletin also indicates that auditors need to engage with entities they audit to ensure that:

• the auditor sets clear expectations as to the level of disclosure they expect to see in annual reports to communicate the impact and risk of COVID-19 on the company; and
• companies, and in particular their audit committees, understand it is vital that auditors have sufficient time and support to carry out their work to an appropriate standard, including reassessing work done to reflect changed circumstances – in some cases, this may need companies to reconsider their reporting deadlines. Where auditors are unable to obtain sufficient, appropriate audit evidence to support their audit, they will need to consider necessary modifications to their audit opinion.

The Bulletin provides a non-exhaustive list of factors which auditors should be considering when carrying out audit engagements in the current environment, along with guidance on how they might be addressed.

A press release, the guidance for companies and guidance for auditors is available on the FRC website.

The Corporate Reporting Review team will undertake thematic reviews in the following areas:

• Going concern and viability. The thematic review will focus on management’s assessments and disclosures in relation to going concern and viability.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets.  The review will pick up issues identified regarding compliance with the Standard identified in the FRC's Annual Review of Corporate Reporting.
• Streamlined Energy and Carbon Reporting (SECR) compliance.
• Alternative Performance Measures.  This will be a follow up to the FRC’s 2017 thematic review to assess the extent to which its expectations on use of Alternative Performance Measures have been embedded into reporting practices.
• Interim Reporting. The FRC will review compliance with the requirements of the Disclosure Guidance and Transparency Rules and IAS 34 to identify areas of better practices.

As part of the FRC’s programme of audit quality inspections, the Audit Quality Review (AQR) team will pay particular attention to the auditor's work on:

• COVID-19 impact including in relation to going concern, impairment of assets, inventory and group audits.
• Estimates.
• Fraud.
• Climate risk.

In selecting corporate reports and audits for review, tthe FRC will give priority to the travel, hospitality, leisure, retail, property and financial services sectors.

A press release is available on the FRC website.

In September 2020, even before the Trustees launched their sustainability consultation, IFAC had already called for an IASB sister board for setting global sustainability standards.

In response to the Trustees' consultation, IFAC now reiterates its call for an international sustainability standard-setting Board under the IFRS Foundation. The comment letter states (emphasis in original):

The Consultation identifies important and challenging questions that should be considered by the IFRS Trustees — including the scope and sequencing of standards, the approach to materiality, and how to build off existing initiatives. However, in answer to the fundamental issues at stake—is there a need for a global set of internationally recognized sustainability reporting requirements, and should the IFRS Foundation play a leading role through the establishment of a new sustainability standards board (SSB) — IFAC believes, based on extensive stakeholder outreach, that the answer is a resounding “Yes.”

Please click to access the full comment letter on the IFAC website.

The amendments clarify existing guidance for four public sector instruments:

• Monetary gold;
• Currency in circulation;
• IMF quota subscriptions; and
• IMF special drawing rights.

Please click to access Non-Authoritative Amendments to IPSAS 41 'Financial Instruments', a short introductory webinar and an At a Glance introduction on the IPSASB website.

The FRC has identified that the most common finding in its quality reviews is that audit firms did not challenge the management of audited entities effectively on the significant judgements they had made in areas such as long-term contracts, goodwill impairment or the valuation of financial instruments.  For more than 80% of those audits which required more than limited improvement, the effectiveness of challenge was a key audit quality consideration. 

The review stresses that robust, focused and independent challenge is vital to a high-quality audit, particularly during current uncertain times, including the continued impact of COVID-19 and Brexit uncertainties and should be at the forefront of the minds of audit teams during December 2020 year-end audits.

The FRC analysis highlights those factors which have given rise to both favourable and unfavourable audit review findings, each firms root cause analysis and the matters reported in each firms public report on quality in July this year.  The FRC identifies processes and attributes which it considers are key features of effective challenge of management and states that developing the right mind set and professional behaviour is critical underpinned by a strong culture of audit scepticism and challenge.

A number of teams have already been able to demonstrate to the FRC enhanced challenge of management with respect to the audit of going concern as indicated in the FRC's recent review.  The FRC hopes that the lessons learned and experience gained from that review will allow firms to replicate effective challenge of management consistently on future audits.

In order to promote change in the area of effective management challenge, the FRC is planning initiatives in 2021.  In June 2021, the FRC will host a conference on the culture of challenge, entitled “Audit firm culture: Challenge. Trust. Transformation” involving academics, other regulators and experts on culture from a wide range of sectors to share experience, ideas and good practice. Building on the output from this conference, the FRC will undertake a thematic review on building a challenge culture in audit firms.

A press release and the FRC analysis is available on the FRC website.

The newsletter provides an update of the Lab's current projects and a brief overview of its other activities. Some highlights include:

• an update on the Lab's projects, including its project on 'Reporting on stakeholders and section 172 statements' and its project on 'Reporting on risks, uncertainties and scenarios'.
• an update on recent FRC publications including the Annual Review of Corporate Reporting, the Annual end of year letter to CEOs, CFOs and Audit Committee Chairs, thematic reviews into IFRS 15 Revenue from Contracts with Customers, IFRS 16 Leases and a thematic review into climate reporting. 
• an update of published guidance for companies and auditors regarding COVID-19.

The full newsletter is available on the FRC website here.

This year, preparers face the additional demands of producing high-quality reports against the backdrop of the effects of the COVID-19 pandemic and its economic consequences. In a continually changing and uncertain economic environment, both the FRC and ESMA highlight the importance of entity-specific and transparent disclosures regarding the impact that COVID-19 has had on the performance, position and cash flows of the entity. The FRC’s Annual Review of Corporate Reporting and ESMA’s Common Enforcement Priorities provide guidance on appropriate reporting and meeting investor expectations during the pandemic and highlight other areas of regulatory scrutiny that reporters of all sizes should focus on in the coming reporting season

Although Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosure is not yet fully mandatory, the FRC has highlighted that climate-change reporting needs to improve significantly to meet the expectations of investors and other users. Boards need to demonstrate how they have considered climate change in setting strategy. Narrative reporting should consider the broader needs of users rather than just complying with the minimum legal requirements. Disclosures in the ‘front-half’ should be consistent with those in the ‘back half’ financial statements. A recent FRC thematic review provides guidance that will help facilitate improved company disclosure in this area.

2020 sees the mandatory application of two new legal reporting requirements. The first, effective for financial periods beginning on or after 1 April 2019, broadens greenhouse gas reporting and energy efficiency disclosure requirements in the directors’ report for quoted companies and extends this reporting requirement to large unquoted companies and LLPs. The second, impacting financial years beginning on or after 10 June 2019, introduces changes to remuneration reporting and extends the scope to unquoted traded companies.

Whilst reporting under the revenue and leasing standards, IFRS 15 and 16,is no longer new, the FRC expects significantly improved reporting under these standards. Additionally, the FRC has challenged companies to improve their s172 reporting, publishing a set of tips to assist companies in making the statement more useful.

Further FRC challenge can continue to be expected over presentation and reconciliation of Alternative Performance Measures (APMs) and business reviews, which should be a balanced and comprehensive analysis of both performance and position. Additionally the FRC will be looking for company-specific disclosures about the impact of Brexit including the company’s ability to continue as a going concern and its longer-term viability and prospects. Increasing focus is also being given to capital allocation and dividend policy disclosures.

Turning to the financial statements, amendments to both UK GAAP and IFRS Standards have been relatively minor. However, for those entities that apply hedge accounting, amendments as a result of IBOR reform to both UK GAAP and IFRS Standards are likely to be significant. Additionally, lessees and lessors reporting under UK GAAP who have received temporary rent concessions for operating leases as a direct consequence of COVID-19 will need to apply the amendments to Section 20 of FRS 102. Whilst amendments for lessees have also been made to IFRS 16, entities can choose, as an accounting policy choice, whether to apply them or not.

Our Closing Out 2020 publication covers all these topics and more, providing an invaluable guide to the issues affecting today’s corporate reporting landscape.

IAS 37 mandates that the future cost of clean-up be estimated and accounted for using an appropriate discount rate to calculate the present value of these costs. However, the standard does not mandate for businesses to disclose the rate they have used, nor makes clear whether the basis for calculating the discount rate should be an accounting choice.

The ICAS research used a large international sample across the mining, utilities, and oil and gas sectors, and found substantial variations exist in companies’ choice to disclose the discount rate when accounting for decommissioning and environmental liabilities. Furthermore, the research notes that when a company with a decommissioning liability becomes insolvent the clean-up liability remains attached to the asset, which may therefore become less attractive to a potential buyer, and so, if eventually the asset remains unsold, the taxpayer ends up picking up the decommissioning tab. ICAS points out that this scenario is likely to be more frequent in a post-COVID world.

The report arrives at two recommendations:

• Standard setters should require disclosing the discount rates applied to facilitate comparability and thus allow for users of financial statements and other key stakeholders to see inside the ‘black box’ of accounting for decommissioning liabilities; and
• Preparers should include, and auditors demand, enhanced disclosures, to include not only the discount rate but also undiscounted future estimated cash flows and timing of decommissioning activities, augmented by a comprehensive narrative on the major uncertainties surrounding these items.

Please click to access Black Box Accounting: Discounting and disclosure practices of decommissioning liabilities on the ICAS website.

This remuneration guidance sets out its members’ views on the role of shareholders and directors in relation to remuneration and the manner in which remuneration should be determined and structured.

The Principles have received a small number of updates to reflect developments in market practice and investor expectations including:

• Use of Non-Financial Performance Measures – The Principles have been updated to be clearer on shareholder expectations on the range of non-financial performance metrics (strategic, personal and Environmental, Social and Governance) in variable remuneration.
• Post-Employment Shareholding Policies – Shareholders are keen to understand the enforcement mechanisms which the Remuneration Committee has in place to ensure that post-employment shareholding policies are enforced once a director has left the Company.
• Deferral of bonuses – the Principles have been updated to reflect member expectations that a proportion of the entire bonus should be deferred when the bonus opportunity is greater than 100% of salary.

The above changes have been set out in a letter issued to Remuneration Committee chairmen. The letter additionally explains that the approach to pensions should be a key area of focus in the forthcoming AGM season. The Principles are supplemented with separate guidance which sets out member expectations on specific issues arising as a result of the COVID-19 pandemic.

The revised Principles of Remuneration, letter to the chairs of Remuneration Committees and supplementary guidance are available from the IVIS website.

The three apparent paradoxes Mr Maijoor identified were:

• the need to ensure that reporting standards are, at the same time, international and jurisdiction-specific;
• the importance of ensuring that the disclosure standards are sufficiently robust to help prevent the risk of greenwashing, while at the same time allowing for sufficient flexibility for entities to tell their own story; and
• the difficulty of establishing a robust and extensive disclosure regime covering as many companies as possible so to ensure that information by (actual or potential) investee companies is available, while maintaining a proportionate set of requirements especially for smaller companies.

On the first paradox, he stated that he did not believe that global and EU-specific standardardisation are in contradiction, rather, he said, they would be complementary to one another. Mr Maijoor explained that to be effective, a set of international standards would need to be modular to cater for the needs of jurisdictions that are at different stages of progress in the area of sustainable finance.

On the second paradox, Mr Maijoor explained that principles-based standards are typically well-suited to support the efforts of those issuers that aim at innovating in their reporting practices, but they are also helpful in preventing the risk that non-financial reporting is merely based on a check-list approach.

And on the third paradox, he suggested that one potential way forward would be to acknowledge that the size of a company alone is an imperfect proxy of its ESG impact, but that at the same time it is a relatively good indicator of the resource constraint that a company might face if a heavy reporting burdens is imposed on it.

Mr Maijoor concluded his speech by noting:

The future of sustainability reporting depends, in my view, upon good international cooperation, robust, proportionate and principles-based reporting requirements and, most importantly, on a standard-setting process that is centred around the public interest. Like for any standard setting process, extensive and thorough consultation of all relevant stakeholders will also be essential.

Please click to access the full text of Mr Maijoor's speech on the ESMA website.