Included in this issue: FRC guidance on 2017/18 annual reports; IoD ranks large companies’ corporate governance performance; Updated Modern Slavery Act Statement Guidance and more...


Financial Reporting

FRC Reporting Lab publishes second study on disclosure of dividends

Further to its initial report in November 2015, the Financial Reporting Council (FRC) Reporting Lab has published an implementation study on how companies have responded to demands for better disclosure of dividends. 58% of the FTSE 100 made some level of disclosure (up from 40% in 2015 reports), although this figure fell to 30% among the FTSE 250.

In addition to examples of best practice, the study recommends four ways in which disclosures could be improved:

  • Identifying explicit links between the dividend, principal risks and viability.
  • Enhancing the disclosure on any constraints to paying dividends.
  • Explaining more fully what the policy means in practice.
  • Clarifying where profit is generated in the group, how profits might flow to the top company and any relevant constraints (current or potential) to that flow.
FRC guidance on 2017/18 annual reports

The FRC has written to audit committee chairs and finance directors outlining the FRC's perspective on aspects of annual reports that companies should aim to improve and to highlight changes to UK reporting requirements.

The advice includes a focus on:

  • Implementation of three new accounting standards: IFRS 9 'Financial Instruments', IFRS 15 'Revenue from contracts with customers' and IFRS 16 'Leases'.
  • Strategic reports: The FRC believes that quality of reports can be further improved by ensuring that strategic reports explain the relationships and linkages between different pieces of information such as KPIs and remuneration policies.
  • Non-financial reporting within strategic reports: In August 2017, the FRC launched a consultation on proposed amendments to its Guidance on the Strategic Report to reflect the new regulations implementing Directive 2014/95/EU on non-financial and diversity information. The regulations are effective for financial years beginning on or after 1 January 2017 and the FRC aims to finalise the revised guidance for companies in the first half of 2018. In the interim, the FRC has published a factsheet to assist companies to determine the impact of the new regulations. The proposed amendments also look to improve the effectiveness of section 172 of the Companies Act 2006.
  • Performance reporting: Certain reviews of annual reports reveal that not all key aspects of performance have been considered. The reasons for changes to KPIs and the impact of this should be explained. Boards are also encouraged to take note of the FRC's publications on alternative performance measures which provide guidance on how to meet the requirements of the European Securities and Markets Authority's (ESMA) "Guidelines on Alternative Performance Measures".
  • Risk reporting and viability statements: Further improvements in this area are still a key priority for investors and the Financial Reporting Lab plans to publish a report on risk and viability reporting later this year, to provide practical guidance for companies.
  • UK referendum result: Companies should consider how their assessment of the potential impact on their business has developed over the year and make appropriate disclosures to reflect their latest analysis.
  • Dividends: The FRC encourages further adoption of reporting on the capacity to pay dividends, including the extent to which profits can be distributed by subsidiary companies and the extent of any restrictions.
  • Critical judgements and estimates: Boilerplate and generic disclosures should be avoided. Information value can be improved by providing more granular information about a smaller set of judgements and estimates that had a significant impact on results and explaining why certain assets were subject to significant risk of material change.
BEIS consults on streamlined energy reporting framework

The Department of Business, Energy and Industrial Strategy has published a consultation on its proposals for a streamlined and more effective energy and carbon reporting framework. As the CRC Energy Efficiency Scheme is to be abolished at the end of the 2018-19 compliance year, the new framework would be implemented in April 2019. The consultation proposes that, alongside the existing requirement for quoted companies to report their greenhouse gas emissions, the information to be required under the new framework should be reported through the annual report. The government also proposes to extend the scope of the reporting framework to capture certain unquoted, as well as quoted, companies (and their corporate groups). Responses are requested by 4 January 2018.

Corporate Governance

IoD ranks large companies’ corporate governance performance

The 2017 Good Governance Report has been published by the Institute of Directors. Compiled by the Cass Business School, the rankings are calculated by looking at how companies score across 47 governance indicators. These indicators are grouped into five broad categories of corporate governance: Board Effectiveness; Audit and Risk/External Accountability; Remuneration and Reward; Shareholder Relations; and Stakeholder Relations. Specific indicators are chosen in order to reflect a broad conception of corporate governance which not only takes into account the interests of shareholders but also considers how governance is working for other key stakeholders.

The research did not find any strong correlation between ranking and the size of the company (as measured by market capitalisation). However, there was some degree of correlation between ranking and industry sector with energy and utility companies scoring significantly above the average mean. In contrast, companies from the information technology sector scored on average below the overall mean.

Market Abuse Regulation in Practice

ESMA updates MAR Q&As on market abuse

ESMA has published a further update to its Q&As on the Market Abuse Regulation (MAR) to include a new Q&A 5.2 which deals with the issue of when inside information, which has been delayed in accordance with Article 17(4) of MAR, subsequently loses the element of price sensitivity.

The Q&A clarifies that, in such circumstances, the information ceases to be inside information and thus is considered outside the scope of Article 17(1). Therefore, the issuer is neither obliged to publicly disclose that information nor to inform the competent authority that disclosure of such information was delayed. However, the issuer will still be obliged to comply with all relevant obligations relating to the drawing up and updating of insider lists and the maintenance of the information relating to the delay of disclosure.

Best Practice Principles for shareholder voting research under review 

The Principles were introduced in March 2014 to promote a greater understanding of the role of shareholder voting research providers / proxy voting agencies and provide more transparency about their activities.

As well as considering the effective operation of the Principles, the consultation also examines whether action is required to ensure they are compatible with the mandatory requirements for proxy advisors operating in the EU that are contained in the revised EU Shareholder Rights Directive, due to come into operation in 2019. The consultation also intends to look at the operation of other voluntary codes and principles to identify lessons that might enhance the effective operation and oversight of the principles.

Contributions can be made by completing an online survey or by submitting comments by 15 December 2017.

Modern Slavery Act

Updated Modern Slavery Act Statement Guidance

The Government has updated its practical guide to publishing a supply chain transparency statement as required by the Modern Slavery Act 2015. A new foreword, written by the current Home Secretary Amber Rudd, explains that the updated guidance intends to build on experience since 2015, and to include more explanation of what best practice looks like.

Companies are likely to welcome the clarification that the director who signs the statement should sit on the board of the company that approved the statement. However, questions are likely to remain on issues such as which group companies should publish a statement, and how those statements should be properly approved and signed. For a more detailed overview of the updated Guidance click here.

Payment Reporting Practices

Guidance on duty to report on payment practices and performance updated 

BEIS has published updated guidance to reporting on payment practices and performance. An overview of the regime can be found in our Governance & Compliance update published at the time of the implementation of the regime. Changes to the original guidance include:

  • Expansion of the guidance on whether a contract has a significant connection with the UK.
  • Additional guidance for businesses that commonly agree early settlement discounts and expanded guidance on the maximum payment period.
  • The addition of specific examples in the context of reporting statistics when supply chain finance is used.

Diversity

Parker Review publishes final report on ethnic diversity on boards

The Parker Review Committee has published its final report into the ethnic diversity of UK boards, following the consultation on its November 2016 report. While the Committee carefully considered all feedback received during the consultation, the core recommendations made in the final report remain unchanged. The Committee also endorses the recommendations of the McGregor-Smith Review which was published while the Parker Review was in its consultation period.

Legal Entity Identifiers

Use of LEI numbers - A reminder for the main market

By way of reminder, the requirement for issuers subject to DTR 6.2.2A – i.e. those with securities admitted to trading on a regulated market such as the main market of the London Stock Exchange (LSE) – to provide a Legal Entity Identifier (LEI) and classify the information in accordance with Annex 1 to DTR 6 is now in force. More information on LEIs and how to obtain them can be found here.

Use of LEI numbers – Extended to AIM

The LSE has published AIM Notice 47 on the requirement for AIM companies to have an LEI code so as to ensure compliance with the obligations under the Markets in Financial Instruments Directive (MiFID II) and MAR, which require market operators, such as the LSE, to collate LEI codes for each issuer with securities admitted to trading.

If an existing AIM company has not registered for an LEI, it must do so by 30 November 2017 and ensure that its LEI is renewed on a timely basis.

The notice also states that the AIM application form for admission of new securities to trading to AIM has been amended to require an LEI. The amended form is now available on LSE's website and will be applicable to all AIM companies and prospective applicants seeking admission to trading on AIM.

ESMA highlights the importance of the LEI compliance

ESMA has also published a briefing on the LEI as part of its efforts to raise industry awareness and facilitate compliance with the LEI requirements under MiFID II. Based on its previous experience with EMIR reporting, ESMA urges reporting entities not to delay, as advance preparation will help in avoiding backlogs and ensuring that all market participants are ready for the new regime.

Key contacts

Will Chalk

Will Chalk

Head of Corporate Governance
United Kingdom

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Richard Preston

Richard Preston

Managing Associate, Governance and Compliance
London

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