Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.
FRC highlights issues for boards preparing financial reports following the Brexit vote
In light of the UK vote to leave the European Union and the consequential economic and political uncertainties, the Financial Reporting Council (FRC) has highlighted issues for directors to consider when preparing their forthcoming half-yearly and annual financial reports.
Although not all businesses will be affected by these issues to the same extent, boards must determine what disclosures, if any, are required to ensure their financial statements and management and strategic reports meet the needs of investors and comply with regulatory requirements.
Directors should consider the following issues:
- Business model – Companies should clearly disclose their business model as part of the strategic report, including a description of the main markets in which they operate and their value chain. The disclosure should be sufficient to enable readers to make an assessment of the company’s exposure arising from the outcome of the referendum.
- Principal risks and uncertainties – Directors must consider the nature and extent of risks and uncertainties arising from the result of the referendum, as well as the impact on the future performance and position of the business. The risks identified must be disclosed and explained in the company’s interim management or strategic report. Explanations should facilitate the reader’s understanding of how the risks and uncertainties are specifically relevant to the company.
- Market volatility – As the referendum may have an impact on balance sheet values and potential future earnings due to foreign exchange fluctuations, directors should consider whether assets may be impaired and/or disclosures made consistent with the requirements of IAS 36 Impairment of Assets, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures.
- Going concern basis of accounting – Directors must consider whether the going concern basis of accounting is appropriate and whether disclosures of material uncertainties are needed particularly where there is a material risk of breach of covenants.
- True and fair – Directors are encouraged to consider whether additional disclosures are necessary to ensure that their annual financial statements and half-yearly reports give a true and fair view of their company.
- Half-yearly financial reports – The interim management report of listed companies must include disclosure of important events that have occurred during the first six months of the financial year, and an indication of their impact on the interim financial statements.
Investment Association amends Principles of Remuneration regarding MAR closed periods
The Investment Association has published an updated version of its Principles of Remuneration document regarding the timing of share awards in light of the Market Abuse Regulation (MAR) coming into effect on 3 July 2016, which specified a new definition of closed periods.
Given the change in definition of closed periods and the ongoing uncertainty regarding the long term implementation of this provision (which has now been clarified by ESMA), the Investment Association has decided to amend Section C.2.vii), so that it now reads: “The rules of a scheme should provide that share or option awards should normally be granted within a 42 day period immediately following the end of the closed period under Market Abuse Regulation (EU) 596/2016”.
The Investment Association explained in its press release that it will be reviewing the Principles of Remuneration following the publication of the independent Executive Remuneration Working Group’s final report. The Investment Association will also incorporate its usual annual review of the Principles into this process so that the fully revised Principles are published in early autumn.
FRC publishes report on corporate culture and the role of boards
The FRC has published its report – Corporate Culture and the Role of Boards – which looks at the increasing importance which corporate culture plays in delivering long-term business and economic success.
The report concludes that boards, directors and senior management should take the following steps to enhance their company’s culture:
- Recognise the value of culture – The board should determine the purpose of the company and ensure its values, strategy and business model are aligned to it;
- Demonstrate leadership – Leaders, in particular the chief executive, must embody the desired culture, embedding this at all levels;
- Be open and accountable – Important at every level, good governance means a focus on how this takes place throughout the company and those who act on its behalf;
- Embed and integrate – The values of the company need to inform the behaviours which are expected of all employees and suppliers. Human resources, internal audit, ethics, compliance, and risk functions should be empowered and resourced to embed values and assess culture effectively;
- Assess, measure and engage – Indicators and measures used should be aligned to desired outcomes and material to the business. Boards should devote sufficient resource to evaluating culture and consider how they report on it;
- Align values and incentives – The performance management and reward system should support and encourage behaviours consistent with the company’s purpose, values, strategy and business model; and
- Exercise stewardship – Effective stewardship should include engagement about culture and encourage better reporting.
European Commission strengthens anti-money laundering rules
The European Commission has adopted a proposal to further reinforce EU rules on anti-money laundering to counter terrorist financing and increase transparency about who really owns companies and trusts.
This proposal reinforces the measures introduced by the Fourth Anti-Money Laundering Directive (adopted in 2015 and currently being implemented by Member States) with the following changes:
- Full public access to the beneficial ownership registers – EU Member States will make public certain information of the beneficial ownership registers on companies and business-related trusts. Information on all other trusts will be included in the national registers and available to parties who can show a legitimate interest. The beneficial owners who have 10% ownership in certain companies that present a risk of being used for money laundering and tax evasion will be included in the registries. The threshold remains at 25% for all other companies;
- Interconnection of the registers – the proposal provides for the direct interconnection of the registers to facilitate cooperation between Member States; and
- Extending the information available to authorities – To prevent any account being potentially used for illicit activities from escaping detection, both existing and new accounts should be subject to due diligence controls.
The proposed update of the legal rules will now be up for adoption by the European Parliament and the Council of Ministers under the ordinary legislative procedure.
It should be noted that, since 6 April 2016, UK companies and companies that have a subsidiary incorporated in any part of the UK must keep and maintain a register of people with significant control (a PSC register). Quoted companies are exempt; companies obliged to report under DTR 5 (Official List companies and those on AIM and the ISDX Growth Market) will not need to create a PSC register. We have compiled an array of resources here.