Corporate reporting – FRC Lab report on viability and going concern disclosures

The Financial Reporting Lab of the Financial Reporting Council (FRC) has published a thematic review of companies’ viability and going concern disclosures, highlighting areas for improvement and offering examples of best practice.

The review follows the FRC’s previous reports on going concern, risk and viability issues published in June 2020 (see our blog post here) and October 2020 (see our blog post here).

The report recognises that Covid-19 and its economic effects continue to impact companies and explains that investors appreciate more tailored, detailed explanations of how management intends to deal with challenges to solvency and liquidity over the short, medium and long term.

Key recommendations in the review include:

  • Inputs and assumptions – Companies should provide more granular qualitative and quantitative detail of the inputs used and assumptions made in each scenario and how they have been determined.
  • Principal risks and uncertainties – Disclosures should be explicitly linked to particular principal risks and uncertainties, and indicate how those risks have been modelled in viability scenarios. Investors also want to understand how resilient the company is to risks that could threaten its going concern status or long-term viability and what mitigating actions could be taken.
  • Period of assessment – For both the viability and going concern disclosures, the period of assessment should be specifically identified and justified by reference to as many company-specific factors as possible, including the company’s business model, strategy and development, any investment or capital allocation plans and its debt profile and expected repayments.
  • Significant judgements – Any significant judgements that have been applied in determining whether the company is a going concern, or whether there was a material uncertainty in respect of going concern, should be disclosed clearly, with an explanation as to why such judgement has been deemed appropriate.
Sarah Hawes
Sarah Hawes
+44 20 7466 2916

Alex Kay
Alex Kay
+44 20 7466 2447

Ben Ward
Ben Ward
+44 20 7466 2093

Corporate reporting – FRC reports on risks and opportunities, and streamlined energy and carbon reporting

The Financial Reporting Lab of the Financial Reporting Council (FRC) has published a report on risks, uncertainties, opportunities and scenarios and the FRC has published a thematic review on streamlined energy and carbon reporting. 

Risks, uncertainties, opportunities and scenarios

The Lab report on risks, uncertainties, opportunities and scenarios sets out investors’ expectations in relation to reporting in these areas and gives best practice examples.

The report says that investors are looking for information relating to risks, uncertainties and opportunities that contributes to their understanding of a company’s business model, longer term strategy, resilience and viability. It emphasises the inter-relationship between risks, uncertainties and opportunities.

Key recommendations in the report include:

  • Governance and processes – Investors want to understand a company’s risk management processes, who is responsible for the various aspects of monitoring and managing risks, and how the outputs are presented to the board or risk committee. Investors are also keen to understand how these processes adapt or change over time and how effectively they have functioned.
  • Approach to disclosures – Disclosures should be appropriately linked to other aspects of the annual report including the business model, strategy and viability statement.
  • Scenarios and stress testing – Investors finds scenarios and stress tests particularly helpful given they provide insights into areas that are uncertain and cannot necessarily be predicted or calculated with certainty. The report emphasises that scenarios should be company-specific and that it is useful for companies to explain how they influence its strategic decisions and the company’s business model.

Streamlined energy and carbon reporting

The FRC’s thematic review on streamlined energy and carbon reporting follows its thematic review on climate reporting which it published in November 2020 (see our corporate update 2020/21).

The Energy and Carbon Reporting Regulations (2018/1155) require quoted companies to disclose their energy consumption, and large companies and limited liability partnerships to report on their greenhouse gas emissions and energy consumption (see our corporate update 2018/23).

The thematic review contains a helpful summary of the requirements, highlights examples of emerging good practice and sets out the FRC’s expectations for reporting.

Key observations in the thematic review include:

  • Compliance with requirements – Overall compliance was good, with only a few errors or omissions in reporting identified. Many companies also went beyond the mandatory requirements, for example by disclosing scope 3 emissions or seeking independent assurance on the data disclosed.
  • Methodologies – Companies are required to describe the methodologies used for calculating their greenhouse gas emissions and energy consumption. The FRC notes that reports did not always provide sufficient information about the methodologies used, including which entities were included in group-wide disclosures. It also notes that cross-referencing to information on a company’s website does not meet the requirements.
  • Ratios – Companies are required to disclose a ratio which expresses the company’s annual greenhouse gas emissions in relation to a quantified factor associated with the company’s activities. The FRC notes that it was sometimes unclear whether the ratio selected was the most appropriate for the company’s operations as encouraged by the Government’s Environmental Reporting guidelines which accompany the streamlined energy and carbon reporting regime (see our corporate update 2019/3).
  • Energy efficiency – The “principal measures” taken by the company to increase its energy efficiency are not always clearly described by companies.
Sarah Hawes
Sarah Hawes
+44 20 7466 2916

Caroline Rae
Caroline Rae
+44 20 7466 6311

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

FCA consultation on diversity-related disclosures by listed companies

The Financial Conduct Authority (FCA) has published a consultation paper (CP21/24) on proposals to require premium and standard listed companies to make disclosures in relation to gender and ethnic diversity at board and executive management level.

The consultation follows the publication earlier this year of the five year summary report of the Hampton-Alexander Review on improving gender balance in FTSE companies (see our blog post here) and the 2021 update from the Parker Review on ethnic diversity on FTSE 100 boards (see our blog post here).

The FCA is seeking views on changes to the Listing Rules which would require premium and standard listed companies to include in their annual report and accounts a statement confirming whether they have met specified board diversity targets as at a date during the financial year of their choosing. The proposed targets are that:

  • the board comprises at least 40% women;
  • at least one of the positions of Chair, CEO, CFO or Senior Independent Director is occupied by a woman; and
  • at least one member of the board is from a non-white ethnic minority background (as categorised by the UK Office for National Statistics).

Companies not meeting the specified targets would be required to explain the reasons why they have not been met.

In addition, premium and standard listed companies would be required to include data on the gender and ethnic diversity of members of their board and executive management.

There would be prescribed tabular forms for all of the proposed new disclosures.

In addition, the FCA is seeking views on expanding the current diversity policy-related disclosures required by Transparency Rules which were originally introduced as part of UK implementation of the EU Non-Financial Reporting Directive in 2017 (see our corporate e-bulletin here).

The proposed changes include adding ethnicity, sexual orientation, disability and socio-economic backgrounds to the aspects of diversity currently in DTR 7.2.8A R.

The consultation closes on 20 October 2021 and the FCA aims to publish final rules by the end of 2021. Any new disclosure requirements would apply to financial years starting on or after 1 January 2022.

Caroline Hagg
Caroline Hagg
+44 20 7466 6311

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Corporate reporting – FRC Lab report on disclosures around stakeholders and decisions

The Financial Reporting Council’s Financial Reporting Lab has published a Report on stakeholders, decisions and Section 172 statements. The report sets out investors’ expectations in relation to disclosures on stakeholders and the impact of decisions on them and gives best practice examples.

The requirement for companies to report on how directors have had regard to the matters in section 172 of the Companies Act 2006 (see our briefing for further detail) has driven companies to increase reporting on their stakeholders. However, the Report says that there are still calls for better information on how companies are having regard to their stakeholders and taking their perspectives into account.

Recommendations in the Report include:

  • Stakeholders – When providing information on stakeholders, companies should:
    • identify key stakeholders and their respective interests by reference to the company’s business model and strategy, noting where particular stakeholders’ importance may vary over time;
    • describe stakeholder engagement processes, including feedback received, outcomes identified and the impact on decision-making;
    • assess opportunities and risks which could impact stakeholder relationships and describe what measures are being taken to manage these relationships; and
    • determine appropriate and reliable metrics to monitor stakeholder engagement and report against these metrics consistently.
  • Decisions – When setting out the significant decisions taken during the year, companies should:
    • link each decision back to the company’s purpose and strategy;
    • explain how the decision was reached, including how stakeholders were considered and the potential impact of the decision on each group of them;
    • be open about any difficulties or challenges in making the decision, including any prioritisation of particular stakeholder groups or offsetting of short-term negative consequences for long-term benefits; and
    • cover the expected and/or actual outcomes of the decision and the long-term implications for the company.

The report also considers the section 172 statement more broadly, cautioning that the statement should cover all aspects of the section 172 duty, not just stakeholders.

Alongside the report, the Lab has also published a summary of key questions, which companies can use to enhance the quality of information provided to investors on stakeholders and decisions, and further guidance on Section 172 statements.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Alex Kay
Alex Kay
+44 20 7466 2447

Ben Ward
Ben Ward
+44 20 7466 2093

Corporate governance – Glass Lewis overview of Say on Climate votes

Glass Lewis has published a paper setting out its views on Say on Climate votes.

The paper notes that “Say On Climate” votes, where listed company shareholders are given the opportunity to vote on climate-related proposals, are becoming an increasingly important part of the 2021 annual general meeting season. Both boards and shareholders are putting forward proposals for votes on climate-related matters.

Glass Lewis acknowledges that there are many positive aspects to Say On Climate resolutions but that they also present a number of challenges for investors and companies, particularly if the resolution relates to a company’s strategy or plans. It notes that, whilst many investors are supportive of such resolutions, views in the investor community are mixed.

Glass Lewis distinguishes between proposals that involve additional disclosure by companies, which it strongly supports, and those that offer a shareholder vote on a climate plan or strategy. It says it will generally recommend against management and shareholder proposals requesting that companies adopt a policy that provides shareholders with an annual vote on a climate-related plan or strategy.

On other proposals, Glass Lewis states that given their broad variety, and the lack of standardisation on how shareholders should evaluate these resolutions before voting, it will review each resolution on a case-by-case basis. The paper gives examples of various climate-related resolutions proposed to date and also provides examples of best practice disclosures in support of such resolutions.

Glass Lewis intends to codify its approach in advance of the 2022 AGM season, following investor, corporate and stakeholder engagement.

 

Silke Goldberg
Silke Goldberg
+44 20 7466 2612

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Corporate reporting – BEIS consultation on climate-related disclosures by publicly quoted companies, large private companies and LLPs

The Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation on mandatory climate-related disclosures by publicly quoted companies, large private companies and limited liability partnerships (LLPs).

Context of the proposed mandatory disclosure requirements

The UK Government aims under its 2019 Green Finance Strategy for all listed companies and large asset owners to make disclosures in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022. Entities are currently encouraged to disclose against the TCFD recommendations on a voluntary basis. The number of disclosures remains low – which BEIS attributes to their voluntary nature – so the current consultation is assessing whether to make these disclosures mandatory.

BEIS considers that by making the disclosures mandatory, it will significantly increase the number of entities taking action in respect to climate-related risks and opportunities. BEIS’s other aim is to ensure that investors have access to climate-related information which can help them understand and manage their own climate-related financial risks.

Companies with a premium listing are already subject to relatively new TCFD-related disclosure obligations under the Listing Rules. With effect for financial periods starting on or after 1 January 2021, the FCA introduced a new Listing Rule which requires companies with a premium listing to include a compliance statement in their annual financial report, stating whether they have made disclosures consistent with the TCFD recommendations and recommended disclosures, or provide an explanation as to why they have not done so – for further details, see our client briefing here. BEIS intends the proposed new rules to be complementary to the FCA’s rules.

Companies and LLPs in scope

The consultation paper proposes that the disclosure requirements would apply to:

  • UK companies that are currently required to produce a non-financial information statement (that is, companies with more than 500 employees which are listed, or are banking or insurance companies);
  • AIM companies with more than 500 employees; and
  • other companies and LLPs which have more than 500 employees and a turnover of more than £500 million.

These companies will be required to report climate-related financial information in the non-financial information statement which forms part of their strategic report. LLPs will be required to publish the disclosures either in their strategic report, or in the carbon report in their annual report.

The disclosure requirements

For accounting periods starting on or after 6 April 2022, companies that are in scope will be required to include climate-related financial disclosures in annual reports under the four key pillars of the TCFD recommendations:

  1. Governance: disclose descriptions of the governance arrangements in place to identify and manage risks and opportunities from climate change, including who has operational responsibility for this, their experience, and, if applicable, whether the entity’s audit committee considers climate change.
  2. Strategy: disclose the entity’s business models and strategies, as well as a description as to how these may change in response to the effects of climate change.
  3. Risk Management: disclose descriptions of the principal risks and opportunities that the entity may face as a result of climate change, as well as how the entity manages those areas of risk. This may include a description of the risk management policies implemented to address climate change-related risks, and a description of the outcome of any such policies.
  4. Metrics and Targets: disclose descriptions of the key performance indicators (KPIs) relevant to the entity’s exposure to climate change risks and opportunities. Disclosure of targets for these KPIs would also be required.

The proposed new disclosure obligations are arguably less stringent than the rules for premium listed companies under the Listing Rules, as the proposed rules do not require or prescribe the disclosure of climate-related financial information in line with the 11 more detailed TCFD recommended disclosures. BEIS states that this is because it considers these to be at a level of granularity inconsistent with current legislative requirements of the strategic report. BEIS says that the focus on the TCFD pillars is particularly aimed at driving disclosure under the ‘Strategy’ heading, given that the percentage of companies currently disclosing under this pillar is significantly lower than under any of the other pillars.

Next steps

The consultation closes on 5 May 2021. The legislation to introduce the new disclosure requirements will be introduced when parliamentary times allows – BEIS aims to have drafted regulations implementing these new requirements by the end of 2021, with a view to them coming into force on 6 April 2022. The regulations would then be applicable for accounting periods starting on or after that date.

 

Jannis Bille
Jannis Bille
+44 20 7466 6314

Silke Goldberg
Silke Goldberg
+44 20 7466 2612

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

FRC Lab report on section 172 statements

The FRC’s Financial Reporting Lab has published a guidance note on section 172 statements.

The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) introduced a range of stakeholder reporting measures, including a requirement for certain companies to include in their strategic report a statement that describes how the directors of the company 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 (see our briefing for further detail).

The FRC Lab guidance note seeks 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.

Key points discussed in the guidance note include:

  • Content – The statement should explain why particular stakeholders are considered to be key; why particular engagement methods were effective; and the key decisions and planned actions in light of engagement and feedback. There should be appropriate linking to the company’s strategy and business model. The report also says that the statement should include discussion of the board’s oversight of stakeholder engagement.
  • Presentation – The statement should be clearly labelled, and cross-refer to further detail in other parts of the annual report. Case studies of significant decisions taken during the year are also helpful.
  • Process – Board agendas and board papers can be used to include helpful prompts on stakeholder-related issues.

 

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Alex Kay
Alex Kay
+44 20 7466 2447

Consultation on deforestation due diligence law

The UK government has published a consultation on a new law aimed at protecting rainforests and clamping down on illegal deforestation. The proposed law would introduce mandatory supply chain due diligence obligations and reporting in relation to ‘forest risk’ commodities.

The government’s announcement follows the recommendations set out in a March 2020 report prepared by the Global Resource Initiative taskforce, a group comprising business representatives and environmental groups which has been tasked with finding ways to reduce the climate and environment impacts of key UK supply chains.

Under the new law, it will be illegal for larger businesses to use forest risk commodities that have not been produced in accordance with local laws. Due diligence must be undertaken to ensure this is the case, and companies will be required to report on the steps taken. Those who do not comply would be subject to fines. Forest risk commodities are commodities that can cause wide-scale deforestation such as beef, cocoa, palm oil, rubber and soya.

The consultation closes on 5 October 2020.

Further discussion of the proposals is available here.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Gavin Williams
Gavin Williams
+44 20 7466 2153

COVID-19 – latest developments for corporate practitioners

In light of the widespread impact of COVID-19, various pieces of guidance have been published which companies should be aware of.

Company meetings and other corporate actions

  • Dividends – The London Stock Exchange (LSE) has published guidance in Market Notice N07/20 on payment dates under the 2020 Dividend Procedure Timetable. The Dividend Procedure Timetable says that issuers should pay cash dividends within 30 business days of the record date. However, from 25 March 2020, the LSE will permit a deferral period of up to 30 business days for payment of a dividend, but to no more than 60 business days after the record date. An issuer must notify the LSE of any deferral of a dividend payment without delay. After the deferral period has expired, the dividend must either be paid or cancelled. Issues to consider around the payment of dividends are also discussed in the FRC guidance referred to in the corporate reporting section below.
  • Company meetings – The Government has announced that it will introduce legislation to ensure that companies required by law to hold annual general meetings (AGMs) will be able to do so in light of the restrictions on movement and gatherings. It says that companies will be given greater flexibility to hold AGMs online or to postpone the meetings but the detailed provisions are not yet available. ICSA: The Chartered Governance Institute has published an updated version of its guidance on holding AGMs and guidance on virtual board meetings.
  • Proposed changes to insolvency law – The Government has announced that it will introduce a number of proposed changes to UK insolvency law in response to COVID-19. Whilst the detail of the changes is not yet available, the announcement indicates that they will enable companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency. They will also enable companies to continue buying supplies and will temporarily suspend wrongful trading provisions retrospectively from 1 March 2020. Our restructuring, turnaround and insolvency team has published a briefing on what form the changes may take.
  • Share issues – The Pre-Emption Group has published a statement recommending that investors consider supporting, on a case by case basis, issuances by companies of up to 20% of their issued share capital (rather than the usual 5% for general corporate purposes, plus an additional 5% for acquisitions, that it usually recommends). The statement indicates that this is only a temporary relaxation and sets out steps for companies seeking to take advantage of this flexibility. For further information, see this briefing published by our ECM team.
  • Stock transfer forms – HM Revenue & Customs (HMRC) has published details of a new process for stock transfer forms and payment of stamp duty, in light of COVID-19. Stock transfer forms should no longer be posted to HMRC but instead an electronic copy (e.g. a scanned PDF) of the stock transfer form, or in the case of purchase of own shares of Form SH03, should be emailed to HMRC. HMRC also says that it will accept e-signatures while COVID-19 measures are in place and that stamp duty must be paid before HMRC can process the form.

Corporate reporting

  • Listed company annual report and accounts – The Financial Conduct Authority (FCA) has published a statement which, in effect, gives listed companies an additional two months to finalise their annual report and accounts as the FCA says that it will not suspend the listing of companies if they publish financial statements within six months of their year-end. The Q&A to accompany the FCA statement confirms that the FCA statement does not currently extend to half yearly financial reports. The FCA has published an updated version of its Primary Market Bulletin No. 27 to reflect this (see our blog post for more information on PMB No. 27).
  • AIM company accounts – The LSE has said that AIM companies can apply for a three-month extension to the deadline for publication of their annual accounts.
  • Filing accounts at Companies House – Companies House has said that it will grant a three month extension for companies to file their accounts. Companies must apply for the extension but those citing issues around COVID-19 will be automatically and immediately granted an extension.
  • FRC guidance for companies preparing financial statements – The Financial Reporting Council (FRC) has published guidance for companies preparing financial statements. It highlights some key areas for boards in maintaining strong corporate governance as well as providing high-level guidance on preparation of annual reports and other corporate reporting matters.
  • Gender pay gap reporting – The Government has suspended enforcement of the gender pay gap deadlines for this reporting year (2019/20) and there will be no expectation on employers to report their data.
  • Preliminary results announcements – The FCA has asked listed companies to delay announcement of their preliminary results for a period of two weeks. Further details on the moratorium, which is voluntary, can be found in a Q&A published alongside the FCA statement.

For further information, see this post on our Corporate Notes blog.

Other relevant developments

  • Managing liquidity – As both economic production and consumption contract rapidly, many businesses are facing cash flow difficulties. We have published a briefing in which we consider options open to companies to help manage liquidity.
  • Job retention scheme – HMRC has published more details on the Coronavirus Job Retention Scheme. Our employment team has published a briefing on the new guidance.

For further information on these and other COVID-19 related issues, see our COVID-19 Hub and sign up for our Global Webinar Series.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gavin Williams
Gavin Williams
+44 20 7466 2153