The FRC issues the 2018 UK Corporate Governance Code

The FRC has issued the 2018 UK Corporate Governance Code. The Code is applicable to all companies with a premium listing, whether incorporated in the UK or elsewhere. The new Code applies to accounting periods beginning on or after 1 January 2019.

The FRC notes that the new Code places emphasis on businesses building trust by forging strong relationships with key stakeholders. It calls for companies to establish a corporate culture that is aligned with the company purpose and business strategy, promotes integrity and values diversity.

Areas of change include board engagement with the workforce, how the interests of stakeholders have been considered, culture, board succession and diversity and the importance of external board evaluation for all companies, and taking into account workforce remuneration and related policies when setting director remuneration.

The Guidance on Board Effectiveness has also been updated.

The Code and Guidance on Board Effectiveness can be accessed from theFRC website.

The FRC consults on corporate governance principles for large private companies

The Financial Reporting Council, on behalf of James Wates CBE, has published a consultation on corporate governance principles for large private companies.

Large private companies will be encouraged to follow six principles to inform and develop their corporate governance practices and adopt them on an 'apply and explain' basis. The principles and guidance are intended to help large companies comply with new legislation that will require companies of a significant size to state in their directors' reports whether and how they follow a code of corporate governance. The relevant legislation is the Companies (Miscellaneous Reporting) Regulations 2018 which will apply for financial years commencing on or after 1 January 2019.

It is intended that the principles will be finalised for publication in December 2018. Companies will be able to voluntarily adopt the Wates Corporate Governance Principles for Large Private Companies as an appropriate framework when making a disclosure about their corporate governance arrangements under the government's new reporting requirement. A company that adopts the principles is expected to apply them fully.

The consultation can be accessed from the FRC website.

New reporting regulations issued by The Department for Business, Energy and Industrial Strategy (BEIS)

BEIS has issued regulations, The Companies (Miscellaneous Reporting) Regulations 2018, Statutory Instrument 2018/860. Various changes have been made and have an impact on the strategic report, directors' report and for quoted companies, the directors' remuneration report. The changes come into force for accounting periods beginning on or after 1 January 2019.

The changes include those relating to large companies under the Companies Act 2006. They will need to include in their strategic report a statement describing how in the relevant financial year the directors have had regard to the matters set out in section 172 of the Companies Act 2006, duty to promote the success of the company.

The directors' report of a company with 250 or more UK employees is required to include a statement on employee engagement. Large companies will need to include a statement in the directors’ report summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the company during the financial year.

Very large companies will need to provide a statement of their corporate governance arrangements, saying which corporate governance code, if any, they applied in the financial year in question. If they did apply such a code, they would need to explain how and, if they departed from the code, how and why. If they did not apply a corporate governance code, they would need to explain the reasons for that decision and explain what arrangements for corporate governance were applied. These rules do not apply to companies that already have to provide a corporate governance statement in accordance with the Disclosure and Transparency Rules.

Quoted companies with more than 250 UK employees will have to provide pay ratio information in the directors’ remuneration report.

The legislation can be accessed from the government website.

BEIS have also published a Q and A document to help companies and interested stakeholders understand how they will be affected by the new corporate governance reporting requirements in The Companies (Miscellaneous Reporting) Regulations 2018.

The FRC issues revised Guidance on the Strategic Report

The FRC has published revised Guidance on the Strategic Report. The revised guidance encourages consideration of wider stakeholders and broader matters that affect long term performance.

The latest guidance recognises the increasing importance of non-financial reporting yet still observes the key principles of existing guidance.

Greater focus is placed on the directors’ duty to promote the success of the company under section 172 of the Companies Act 2006, complemented by new legislation (The Companies (Miscellaneous Reporting) Regulations 2018) introducing specific reporting requirements on how directors have had regard to broader matters when performing their duty.

The new legislation is applicable for accounting periods beginning on or after 1 January 2019.

The revised guidance can be accessed from the FRC website.

FRC Financial Reporting Lab report - Performance metrics – an investor perspective

The Financial Reporting Lab has issued a report in which it notes that investors are calling on companies to reassess how they report their performance metrics. The report sets out investors' views on the reporting of performance metrics and includes a framework and set of questions for companies and their boards to consider when deciding on how they report their performance.

Performance metrics are all forms of metric a company might disclose in order to provide information about its performance, position and prospects. They include financial metrics (GAAP and Non-GAAP) and wider metrics such as those relating to environmental measures and customer satisfaction scores.

The report sets out five principles for reporting performance metrics including transparency and consistency.

The next phase of the project will seek to identify examples of how these principles can be put into practice.

The report can be accessed from the FRC website.

Draft Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 published

The draft regulations require additional reporting on emissions, energy consumption and energy efficiency action by quoted companies, large unquoted companies and large LLPs.

Quoted companies will be required to disclose in the directors’ report energy use from activities for which the company is responsible and from purchases of electricity, heat, steam or cooling for its own use, and the principal measures (if any) taken to increase its energy efficiency.

Large unquoted companies will be required to disclose in the directors’ report greenhouse gas emissions, energy use from activities for which the company is responsible and action taken to increase energy efficiency.

Large LLPs will be required to prepare an equivalent report to the directors' report (an energy and carbon report) for each financial year. The content requirements mirror the disclosure requirements that apply to large unquoted companies. If the LLP is a parent LLP and the members of the LLP prepare group accounts, the energy and carbon report must be a consolidated (group) report.

An exemption exists if making the statements would be seriously prejudicial to the interests of the company or LLP or if the company or LLP has used a small amount of energy (40,000 kilowatt hours or less) in the financial year.

The regulations are expected to be effective in respect of financial years beginning on or after 1 April 2019.

The draft regulations can be accessed from the government website.

The FRC issues the results of its most recent audit inspections

The FRC has published the results from the most recent inspections of eight audit firms.

The individual reports on the eight firms inspected can be accessed from the FRC website.

FRC Audit Culture Thematic Review

The FRC has carried out a thematic review of audit culture. The FRC notes that it is important that firms create a culture where achieving high quality audit is valued and rewarded, and which emphasises the importance of ‘doing the right thing’ in the public interest. The FRC considered how firms identify and pay attention to challenges in their culture and take action to address them to promote and sustain improvements in audit quality.

The report can be accessed from the FRC website.

The audit of defined benefit pension obligations – FRC findings from 2017/18 Audit Quality Reviews

The FRC has published a report on its findings relating to the audit of defined benefit pension obligations as part of its 2017/18 audit quality reviews. The audit of defined benefit pension obligations was identified as an area for review as while for many companies with defined benefit pension obligations, the net pension obligation appearing on the balance sheet may not be significant, the related pension assets and liabilities are significant balances. The FRC notes that the valuation of these assets and liabilities rest on a range of assumptions and management judgements and are at risk of material misstatement or manipulation through management bias. Auditing the company’s defined benefit obligations and related pension assets therefore encompasses a number of the more complex aspects of audit.

The FRC notes that there is room for improvement in the audit of pension balances for both auditors and their experts as well as disclosures in company accounts.

The report can be accessed from the FRC website.

The FRC consults on the proposed revision of its UK standard (ISA (UK) 540) - Auditing Accounting Estimates and Related Disclosures

The FRC’s changes reflect revisions made by the International Auditing and Assurance Standards Board (IAASB).

When finalised, the revised UK standard is proposed to be effective, in line with the international standard, for audits of financial statements for periods beginning on or after 15 December 2019. Early adoption of the revised standard will be permitted and is encouraged.

The consultation document can be accessed from the FRC website.