On 24 October 2018, the FRC published its annual review of corporate governance and reporting.

The review covers, among other things:

  • Areas for improvement:
    • Corporate reporting — disclosure of judgments and estimates and alternative performance measures (APMs) were the most common areas of concern for the FRC.
    • Financial statements — the reporting of significant judgments and estimates, that companies made in the preparation of their accounts require greater attention. As these disclosures enable investors to evaluate the company's financial position, the FRC was disappointed to observe poor disclosure around the assumptions and the estimates on which assumptions were based. Additionally, the FRC identified basic errors and non-compliance in reporting, which, in its view, could have been averted by implementing appropriate pre-publication review processes.
    • Strategic reports — companies should pay particular attention to ensuring that the strategic report includes a fair, comprehensive and balanced review of the company's business and APMs are clearly presented, reconciled to International Financial Reporting Standard (IFRS) numbers and explained as required by the European Securities and Markets Authority's (ESMA's) Guidelines on APMs, which, in its view, represent best practice
  • Corporate governance and stewardship:
    • Corporate Governance Code — although high compliance with the U.K. Corporate Governance Code was reported, the FRC warned that this may signal an excessive focus on formulaic compliance. In addition, companies remain reluctant to fully explain non-compliance with the provisions of the Corporate Governance Code.
    • Stewardship Code — the FRC will be consulting on a revised U.K. Stewardship Code, the main objective of which is to raise the quality and quantity of the stewardship activities of investors, and the market expectations of signatories to the Stewardship Code.
  • Risk reporting and viability statements — many companies' viability statements are not sufficiently illuminating. It noted, in particular, that although some companies have advanced their disclosure this year, many still did not explain the processes they had undertaken to prepare their statement, including the stress and scenario testing carried out.
  • Non-financial reporting — the Government has introduced secondary legislation to require certain companies to make a statement under section 172 of the Companies Act 2006 (duty to promote the success of the company) describing how the directors have had regard to the matters set out in section 172. This reflects society's growing expectation of greater accountability from company directors, their advisors and regulators. As a result, the FRC updated its Guidance on the Strategic Report (including guidance on the new section 172 statements) and revised the Corporate Governance Code, including a provision that asks boards to describe in the annual report how the matters set out in section 172 have been considered in board discussions and decision making.
  • Brexit — companies are encouraged to provide disclosure that distinguishes between the specific and direct challenges to their business model from broader economic uncertainties. Where there are particular threats, these should be clearly identified and management should describe any actions being (or already) taken in mitigation. Adjustments may be made in the balance sheet of the company where necessary. While not all companies will require extensive disclosure, where sensitivity or scenario testing indicates significant issues, relevant information and explanations should be reflected in the appropriate parts of the annual report and accounts.

The FRC corporate governance and reporting review can be accessed here.

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