FRS 102, FRS 104 and FRS 105- consultations on proposed amendments
The Financial Reporting Council (FRC) has published two consultations on proposed amendments to FRS 102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland), FRS 104 (Interim Financial Reporting) and FRS 105 (The Financial Reporting Standard applicable to the Micro-entities Regime).
On 23 July 2020, the FRC published two consultations, one in respect of proposed amendments to FRS 104 (Interim Financial Reporting) (FRED 75) and the other in respect of proposed amendments to both FRS 102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland) and FRS 105 (The Financial Reporting Standard applicable to the Micro-entities Regime) (FRED 76).
The FRC has become aware of an unintentional difference between the requirements for assessing and reporting on the going concern basis of accounting when preparing interim financial reports in accordance with EU-adopted IFRS and FRS 104. To ensure consistency between the information available to the users of interim financial reports prepared in accordance with IAS 34 and FRS 104, FRED 75 proposes to clarify the requirement to assess the going concern basis of accounting, and require the disclosure of any related material uncertainties when preparing interim financial statements in accordance with FRS 104.
The proposals in FRED 75 are expected to apply to interim periods beginning on or after 1 January 2021, although early application will be permitted.
FRED 76 proposes explicit requirements for accounting for temporary rent concessions for operating leases occurring as a direct consequence of the COVID-19 pandemic, and within a limited timeframe. They shall be recognised over the period that the concession is intended to compensate, reflecting the economic substance of the concessions and their temporary nature.
The proposals in FRED 76 are expected to apply to accounting periods beginning on or after 1 January 2020, although early application will be permitted.
The deadline for responding to FRED 75 and FRED 76 was 1 September 2020.
Financial reporting: FRC lab project on corporate disclosures on stakeholders
On 9 July 2020 the FRC’s Financial Reporting Lab published a call for investors, companies and other interested parties to participate in a new project on corporate disclosures on stakeholders, including statements in response to section 172 of the Companies Act 2006. The project aims to evaluate how useful investors find disclosures about stakeholders across a range of reporting formats. The Lab expects to publish a range of outputs in the last quarter of 2020 and the first half of 2021.
UK CORPORATE GOVERNANCE: COVID-19
FCA consultation on delay to ESEF requirements for annual financial reports
On 22 July 2020, the FCA published consultation paper CP 20/12 which sets out proposed amendments to transitional provisions relating to DTR 4.1.14R and the retained EU law version of Commission Delegated Regulation (EU) 2019/815 to postpone by one year the mandatory European Single Electronic Format requirements for annual financial reporting under the Transparency Directive.
Issuers must publish their annual financial reports in the ESEF format from the start of 2021 for financial years beginning on or after 1 January 2020. The FCA is proposing to delay these requirements to allow issuers to focus their managerial and operational resources on more immediate and significant priorities in light of the exceptional circumstances caused by the COVID-19 crisis. Issuers will be able to publish and file their annual financial reports voluntarily in ESEF if they wish to do so.
Under the proposed amendments:
- The requirement for all issuers to publish their annual financial reports in XHTML web browser format, replacing the current PDF format, will be postponed to financial years starting on or after 1 January 2021, for publication from 1 January 2022.
- The requirement for issuers who prepare consolidated annual financial statements in accordance with IFRS to tag basic financial information will be postponed to financial years starting on or after 1 January 2021, for publication from 1 January 2022.
- The requirement for issuers who prepare IFRS consolidated annual financial statements to tag notes to the financial statements will be postponed to financial years starting on or after 1 January 2023, for publication from 1 January 2024.
The FCA’s power to amend the retained EU law version of Commission Delegated Regulation (EU) 2019/815 is contained in the Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019 which come into force at the end of the Brexit transition period. The proposed amendments to the retained EU law version of the Commission Delegated Regulation with effect from 1 January 2021 are therefore contingent on the Brexit transition period ending at the end of 2020.
FRC thematic review of company reporting
On 21 July 2020, the FRC published a report of its first thematic review of corporate reporting since the onset of the COVID-19 pandemic. The report summarises the key findings of the FRC’s review of the financial reporting effects of COVID-19 for a sample of interim and annual reports and accounts with a March period end.
The report states that most of the companies that were reviewed provided sufficient information to enable a user to understand the impact that COVID-19 has had on their performance, position and future prospects. Nevertheless, there was room for improvement by many companies. In particular, the FRC reminds companies that they should:
- Explain the significant judgements and estimates made in preparing their accounts and provide meaningful sensitivity analysis or details of a range of possible outcomes to support any disclosed estimation uncertainty
- Describe any significant judgements made in determining whether there is a material uncertainty about their ability to continue as a going concern.
- Ensure that assumptions used in determining whether the company is a going concern are compatible with assumptions used in other areas of the financial statements.
- Apply the requirements of IAS 1 to any exceptional or similar items, with income statement sub-totals comprising only items recognised and measured in accordance with IFRS.
- Apply existing accounting policies for exceptional and other similar items to COVID-19 related income and expenditure consistently. Income and expenses should not be split arbitrarily between COVID-19 and non-COVID-19 financial statement captions.
- Prepare interim reports that provide sufficient information to explain the impact that COVID-19 has had on their performance, position and future prospects.
Extension of temporary measures
Regulations have been made to extend a number of temporary measures included in the Corporate Governance and Insolvency Act 2020 that were due to expire on 30 September 2020.
The newly extended measures include:
- Companies and other qualifying bodies with obligations to hold AGMs will continue to have the flexibility to hold them (and other general meetings) by electronic means until 30 December 2020;
- Statutory demands and winding-up petitions will continue to be restricted until 31 December 2020 so as to protect indebted, but otherwise viable, companies from aggressive creditor enforcement action where coronavirus has affected their ability to pay;
- Termination clauses are still prohibited, stopping suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process. However, small suppliers will continue to be exempted from the obligation to supply until 30 March 2021 so that they can protect their business if necessary;
- Modifications to the new moratorium procedure that ease access to the procedure, which give companies breathing space from their creditors whilst they seek a rescue. And the temporary moratorium rules will also be extended until 30 March 2021;
- Extending the commercial eviction ban for businesses that are struggling to pay their rent due to the impact of COVID-19 until 31 December 2020.
These changes are being made via regulations SI1031 and SI1033.
Extension of pre-emptions guidelines
The Pre-Emption Group (PEG) has extended its recommendation that investors, on a case-by-case basis, consider supporting issuances by companies of up to 20% of their issued share capital. Previously, the PEG had said this flexibility would apply until 30 September 2020. It has now extended this recommendation for equity placings to 30 November 2020.
At this stage, the PEG expects that from 1 December 2020 companies will revert to seeking approvals for a maximum of 10% as set out in the Statement of Principles (5% for general corporate purposes with an additional 5% for specified acquisitions or investments).
Government response to BEIS committee recommendations to prevent future corporate collapse
On 14 July 2020, BEIS published the government’s response to the BEIS Committee’s recommendations concerning, among other things, corporate governance, audit reform and executive pay and bonuses following its inquiry examining the collapse of Thomas Cook.
In its response the government states that it will take the recommendations into account in developing its corporate governance and audit reforms. In particular, the response indicates that:
- In relation to executive pension contributions, the government expects to see further progress from companies in 2020 as a result of new remuneration policies, in particular in aligning contribution rates for existing directors with those of the wider workforce.
- In relation to ensuring executive bonus scheme arrangements use pre-defined and unambiguous measures, the government will consider the Committee’s recommendation in its response to Sir Donald Brydon’s report.
- The government expects companies to act on provisions in their remuneration policies allowing recovery (or withholding) of sums or shares awards. It also expects shareholders to use their binding vote on remuneration policies to ensure robust malus and clawback arrangements.
- The government supports initiatives that aim to improve board diversity and the talent pipeline for senior leadership positions such as the Hampton-Alexander Review and the Parker Review, noting the government will respond in due course on its 2018 consultation on ethnicity pay gap reporting.
- In relation to accounting practices relating to goodwill and its impairment, the International Accounting Standards Board published a discussion paper in March 2020. Regarding the recommendation that graduated findings be made mandatory, the Brydon recommendation is that this should not be mandatory, and the government is considering all Brydon recommendations and intends to consult on them.
- The government is committed to audit reform, including considering audit regulation, the audit market and the quality and effectiveness of audit together. It intends to respond with comprehensive proposals for reform of company audit and it will then bring forward legislation as soon as Parliamentary time allows.
The response also states that the government will bring forward legislation to create the Audit, Reporting and Governance Authority (ARGA) as soon as Parliamentary time allows.