Legal development

Ashurst Governance & Compliance Update – Issue 42

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    Audit and Corporate Governance reform

    1. Government shelves corporate reporting requirements for 'size-based PIEs'

    The Department of Business and Trade has announced the withdrawal of draft regulations which required enhanced corporate reporting by a new category of 'size-based' public interest entities. It has done so after 'consultation with business' on the wider reporting regime. Instead it will 'pursue options to reduce the burden of red tape to ensure the UK is one of the best places in the world to do business'. These proposals will be set out 'shortly'.

    Specifically, the announcement relates to the shelving of the draft Companies (Strategic Report and Directors' Report) (Amendment) Regulations 2023. These would have:

    • created the new category of 'company with a high level of employees and turnover', being public or private UK-incorporated companies with 750 or more employees and an annual turnover of £750 million or more; and
    • required such entities to publish:
      • an annual 'resilience' statement;
      • an annual distributable profits figure and distribution policy statement;
      • an annual material fraud statement; and
      • a triennial audit and assurance policy underpinned by an annual implementation update.

    AGC Update, Issue 39 contains more detail on the proposed legislation which was due to be implemented for relevant size-based PIEs with securities admitted to trading on UK regulated markets for financial years beginning on or after 1 January 2025. The legislation would have applied to other in-scope PIEs a year later - i.e. private companies and those with securities admitted to trading on AIM. 

    The announcement echoes previous statements by reiterating that the government remains committed to wider audit and corporate governance reform, including the establishment of the new Audit, Reporting and Governance Authority to replace the existing Financial Reporting Council. Legislation to deliver these reforms will be brought forward 'when Parliamentary time allows'. However, as reported in AGC Update, Issue 41, this legislation is unlikely to feature in the King's Speech on 7 November 2023, casting doubt on whether it will be enacted before the next General Election. According to the FT, the Labour Party has also committed to these proposals.

    The announcement comes as a surprise. It is highly unusual for legislation so long in the making and so widely consulted on not to be taken forward at this stage. Indeed, according to Hansard, the regulations were due to be put before Parliament for approval the day after they were withdrawn. It also casts doubt on the other aspects of the reform package, not least the proposed changes to the UK Corporate Governance Code (for more detail, see our update here) as some of those proposals, particularly those relating to the enhanced role of Audit Committees and related disclosures including the audit and assurance policy, linked into the withdrawn regulations. We will issue further updates when the picture becomes clearer. 

    Financial and Narrative Reporting

    2. FRC publishes Annual Review of Corporate Reporting for 2022/2023

    The Financial Reporting Council has published its Annual Review of Corporate Reporting. 

    The Annual Review constitutes the findings from the FRC's monitoring activities, together with its expectations for the coming reporting season. 

    Overview of findings

    Overall, the FRC felt that the general quality of corporate reporting across the population of FTSE 350 companies had been maintained. It felt this was a positive outcome in the context of a 'challenging trading and reporting environment'.

    The FRC's Corporate Reporting Review (CRR) team reviewed 263 company reports (2021/22: 252) comprising 59 per cent of the FTSE 350 (2021/22: 57 per cent) and wrote to 112 companies with questions about their accounts (2021/22: 103). Following FRC enquiries, 25 companies were required to refer to correspondence with the FRC in their accounts and/or restate aspects of them (2021/22: 27). Priority sectors during the currency of this review work were: travel, hospitality and leisure; retail; construction and materials; and gas, water and multi-utilities, although reviews were undertaken of the accounts of companies and LLPs from other sectors with a higher proportion coming from AIM-quoted and private companies than in the past. Summaries of the findings of this review work can be found here.

    Areas of improvement and in need of improvement

    The FRC noted improvements in the reporting of various issues including alternative performance measures, although it believes that there remains continued room for improvement here.  It also saw a gradual fall in issues related to revenue, leasing and financial instruments standards. 

    The most frequently raised issues related to impairments, and judgments and estimates. According to the FRC, this may reflect the ongoing economic uncertainties companies need to factor into their financial reporting and the need for detailed explanations to help users understand the positions taken. 

    The FRC also continued to identify a significant number of issues with cash flow statements, resulting in seven companies restating their results.

    Strategic reporting and other Companies Act 2006 matters

    The most common aspects of the Companies Act 2006 (CA 2006) on which the FRC asked questions of companies were the requirement for the strategic report to be ‘fair, balanced and comprehensive’, and compliance with distributable profits requirements when paying dividends and repurchasing shares.

    Specific instances of challenge included where companies:

    • failed to discuss material issues and developments in strategic reports which were apparent on the face of the accounts;
    • failed to include a section 172 statement;
    • declared dividends and undertook share repurchases not supported by last audited accounts;
    • failed to follow through on the rectification of unlawful dividends; and
    • failed to explain why an investment in a subsidiary did not lead to the preparation of consolidated accounts.

    Climate-related reporting

    As for climate-related, specifically TCFD, reporting, the FRC has embedded the review of these disclosures in its routine review activity and carried out further thematic work, focused on the disclosure of metrics and targets. It also continues to monitor the extent to which climate change is incorporated into companies' financial statements. 

    Its review work suggests that companies are at different stages of maturity in their reporting. This means that the FRC raised a 'substantial number' of issues in correspondence for companies to consider in future reports. Once practice becomes more established, the FRC suggests it will enter into substantive correspondence where reporting does not meet expectations.

    Directors' remuneration reporting

    As part of the ongoing audit and corporate governance reform programme, the FRC extended its monitoring work for the first time to include reviews of directors’ remuneration reporting for a selection of ten companies. This focused on the requirements of Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) as regards Directors' Remuneration Reports (DRR).

    The FRC wrote to nine of the companies reviewed on matters mostly relating to the clarity of disclosed targets and performance against them. It also highlighted instances of non-compliance as well as a lack of consistency between DRR and the information presented elsewhere in the report and accounts, such as alternative performance measures and TCFD disclosures. This aspect of the FRC's review work will be repeated next year with a larger cohort being selected for review. 

    Corporate Governance reporting

    By way of reminder, until primary legislation is brought forward to constitute the FRC's successor body, the Audit, Reporting and Governance Authority (ARGA), the FRC does not have formal jurisdiction over governance reports. 

    Nevertheless, as it has done for some time, the CRR team has continued to work with the FRC's Corporate Governance team to coordinate reviews. This resulted in correspondence with a number of companies where opportunities to improve reporting were identified. These focused on potential areas of non-compliance with the Code's Provisions which had not been declared, inadequate explanations for non-compliance and instances where it was not clear how a company had applied the UK Corporate Governance Code's principles. 

    The FRC believes that improvements could also be made to disclosures of the effects of company policies and procedures, which should highlight outcomes and impacts and explain how these relate to a company’s purpose, strategy and values.

    Reporting by larger private companies

    This is an area of increasing interest to the FRC such that it will publish a thematic review on this issue in 2024 in which it will consider a selection of the annual reports of larger private companies to identify areas of poorer compliance with reporting requirements, with a view to informing its future monitoring activities.

    Expectations for future reporting

    In summary, when companies report in 2023/24, the FRC expects them to:

    • Carefully consider how current economic conditions may impact on financial and narrative reporting, in particular high inflation, rising interest rates and other uncertainties.
    • Explain in their narrative reporting the risks and changes in the business environment and their impact on the company's position, performance and prospects.
    • Consider the effect of uncertainty (such as climate change, labour market constraints, changes in consumer demand etc.) and high inflation on the recognition and measurement of assets and liabilities, and related disclosures in their financial statements. This should include review of whether assumptions and 'reasonably possible' ranges for sensitivity disclosures remain appropriate.
    • Ensure disclosures about uncertainty are sufficient to meet the relevant requirements and for users to understand the positions taken in the financial statements.
    • Give a clear description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, cross-referenced to relevant detail in the reports and accounts.
    • Provide transparent disclosure of the nature and extent of material risks arising from financial instruments, including changes in investing, financing and hedging arrangements.
    • Provide a clear statement of consistency with TCFD which explains, unambiguously, whether management considers they have given sufficient information to comply with the framework in the current year. The FRC may challenge companies which have not disclosed information the FCA 'particularly expects' to be provided. Companies must, in any case, comply with the new mandatory requirements for disclosure of certain TCFD-aligned information, where applicable.
    • Perform a sufficient critical review of the annual report and accounts. This includes:
      • taking a step back to consider whether the report as a whole is clear, concise and understandable, omits immaterial information and whether additional information, beyond the requirements of specific standards, is required to understand particular transactions, events or circumstances; and
      • a robust pre-issuance review to consider issues commonly challenged by the FRC, including internal consistency, whether accounting policies address all significant transactions, and presentational matters, such as cash flow and current/non-current classification.

    The FRC has arranged a webinar at 10:00am on 1 November 2023 to discuss the annual review in more detail.

    Overviews of the FRC's Annual Review of Corporate Reporting 2021/2022 and Review of Corporate Governance Reporting in 2022 can be found in AGC Update, Issue 28.

    Payment Practices Reporting

    3. Payment practices reporting to be extended and enhanced

    Following the government's consultation in February 2023 (see AGC update Issue 32), the Department of Business and Trade has announced a package of proposals to 'back small businesses and tackle late payments'. 

    Headline proposals include:

    • The currency of the Reporting on Payment Practices and Performance Regulations 2017 will be extended. New metrics for reporting, including a value metric, will be included such that the value of invoices, including invoices paid late, and a disputed invoices metric will be required to be disclosed. Those in the constructions sector will be required to report on retention payments.
    • The government will work with partners (such as business representative organisations) and other existing initiatives (Growth hubs, Help to Grow) to help deliver an improved payment culture which will include guides on negotiating payment terms.
    • The powers of the Small Business Commissioner will be broadened, enabling it to undertake investigations and publish reports where necessary on the basis of anonymous information and intelligence.
    • There will be closer integration of the Small Business Commissioner with other late payment functions.
    • The Prompt Payment Code will be strengthened so that business signatories must reaffirm their commitment every two years to stay on it.
    • An 'effective and proportionate' compliance regime will be introduced to help ensure that businesses required by law to report their payment data, do so.

    We will publish further updates once draft legislation is brought forward. 


    4. Climate transition plans: TPT final disclosure framework and implementation guidance

    The UK Transition Plan Taskforce (TPT) has published its final disclosure framework for climate transition plans and accompanying implementation guidance.

    The final framework is based on the TPT's November 2022 consultation draft and recommends disclosures in 19 areas, grouped under the broad headings of foundation, implementation strategy, engagement strategy, metrics and targets, and governance.

    The TPT framework is designed to be consistent with and to build on the International Sustainability Standard Board's (ISSB) climate-related disclosure standard (IFRS S2), published in June 2023. IFRS S2 includes provisions relevant to transition planning and the TPT framework provides disclosure recommendations to assist with those. The TPT framework also aligns with guidance on TPs for financial institutions published by the Glasgow Financial Alliance for Net Zero (GFANZ) in November 2022.

    Our briefing note on the TPT final disclosure framework and guidance notes is here.

    In addition, the Green Technical Advisory Group (GTAG) has published a report on options for creating an 'institutional home' for the UK's new green taxonomy with a view to deciding on who should have ultimate responsibility for that taxonomy. 

    5. TCFD publishes 2023 status report on TCFD-aligned disclosures and FSB publishes annual progress report on climate-related disclosures 

    The Taskforce on Climate-related Financial Disclosures (TCFD) has published its 2023 Status Report and the Financial Stability Board (FSB) has published its 2023 Annual Progress Report on climate-related disclosures.  

    The FSB report covers the TCFD's findings as well as the progress made by the International Sustainability Standards Board (ISSB) following the issue of its first global sustainability disclosure standards (IFRS S1 and IFRS S2) in June 2023.

    TCFD 2023 status report

    The TCFD's status report describes firms' progress in making climate-related financial disclosures. It also highlights some of the challenges firms face in making such disclosures, including challenges incorporating climate-related risks into their financial statements. 

    The TCFD's 2023 status report is its final report and follows a review of publicly available reports for more than 1,350 large companies in specific sectors around the world over a three-year period.

    Key findings of the TCFD's 2023 status report include:

    • the percentage of public companies disclosing TCFD-aligned information continues to grow, but more progress is needed;
    • the proportion of companies reporting on climate-related risks or opportunities, board oversight, and climate-related targets increased significantly;
    • disclosure of climate-related financial information in financial filings is limited with the 11 recommended disclosures four times more likely to be disclosed in sustainability and annual reports than in financial filings; and
    • the majority of jurisdictions with final or proposed climate-related disclosure requirements specify that such disclosures be reported in financial filings or annual reports.

    FSB annual progress report

    The FSB's annual progress report outlines the progress made by jurisdictions in promoting climate-related disclosure practices, including steps being taken already by jurisdictions to prepare for adopting, applying or otherwise making use of the ISSB climate-related disclosure standards.

    Following the release of the ISSB's standards, here, the FSB's report confirms that the TCFD's work is complete and that the FSB has requested the ISSB to report in 2024 on progress in companies' disclosures, including early take-up of IFRS S2 on specific climate-related disclosures and progress in achieving interoperability.


    6. PRA and FCA consultation papers on diversity and inclusion in financial services

    The PRA and FCA have each published a consultation paper (CP23/20 and CP18/23) following their joint July 2021 discussion paper on diversity and inclusion. Our briefing on the consultation papers is here.

    The regulators, which have worked closely to develop a consistent and coordinated set of proposals, consider that the proposals will deliver better outcomes for customers and markets by ensuring healthy work cultures, reducing groupthink and unlocking talent.

    Importantly, the proposals also incorporate changes to the FCA conduct rules relating to fitness and propriety to clarify the position firms should adopt with respect to non-financial misconduct. 

    Both consultations close on 18 December 2023. 


    Authors: Will Chalk, Partner; Rob Hanley, Partner; Vanessa Marrison, Senior Associate, Becky Clissmann, Counsel

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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