Cabinet Office: Brexit opportunities: Regulatory reforms
On September 16, 2021 the Cabinet Office published a short policy paper summarising opportunities to review certain laws and ensure that they are tailored to support the best interests of business and citizens. Two of the areas to be reviewed concern the dematerialisation of shares and the execution of documents.
Dematerialisation of shares
Although the majority of shares are held in electronic form, the policy paper notes that a minority are held in paper form which means it is more expensive and takes longer for holders of paper shares to trade them. There is also a risk of certificates going astray. The Government intends to work with industry, regulators and shareholders in the medium term to determine the best mechanism for converting these paper shares into electronic form, while preserving the rights of existing shareholders.
Execution of documents
The Government is sponsoring an independent, judicially-chaired Industry Working Group of experts to look at increasing best practice and confidence in the use of electronic signatures and other electronic ways of executing documents. By improving clarity in this area, the Government hopes that the Group’s work will help ensure businesses can use electronic documentation with confidence, in turn enabling them to make the most of digital innovations and greener working practices. The policy paper notes that the Group was recommended in a 2019 Law Commission report which concluded that e-signatures were legally valid for the vast majority of business and legal transactions.
(Cabinet Office, Brexit opportunities: Regulatory reforms, 16.09.2021)
FRC: Thematic Review – Viability and Going Concern
On September 22, 2021 the Financial Reporting Council (FRC) published a document summarising the key findings of its review of the viability and going concern disclosures for a selection of annual reports and accounts for Main Market and AIM listed companies with year ends between December 2020 and March 2021. It aims to provide useful guidance for preparers of annual accounts by identifying areas where viability and going concern disclosures could be improved, and by providing examples of better disclosures.
The FRC notes that the report builds on the information contained within the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting document published by the FRC in September 2014 which it states is still relevant despite being based on the 2014 Corporate Governance Code. Key findings set out in the report include the following:
- Focus on providing better, more informative, company specific disclosure - The FRC encourages companies to make improvements in this way and to provide information which is still clear and concise and avoids unnecessary clutter. It notes that duplication in the annual report could be cut through better use of cross-referencing between viability and going concern statements.
- Viability and going concern disclosures often lack sufficient qualitative and quantitative detail – This is in respect of the inputs and assumptions used in the scenarios prepared to aid the assessment of viability and going concern. While the FRC thinks that in general companies can, and should, do a better job of providing more granular information, it acknowledges that the amount of information provided should be proportionate to the uncertainties to which a company is exposed, and to its financial position. A company facing greater uncertainty and with less financial headroom should be providing more detail than one without such challenges.
- Significant judgements – The FRC expects company specific significant judgement disclosures to be presented in cases where significant judgement has been exercised either in determining whether a company is a going concern or whether a material uncertainty in respect of going concern exists.
- Principal risks and uncertainties - While the FRC notes that all companies preparing a viability statement noted that they had considered the principal risks and uncertainties identified in the strategic report when forming their assessment of viability, disclosure of how those risks and uncertainties had been modelled in the viability scenarios was not always clear. The best disclosures clearly mapped the principal risks identified to the viability scenarios tested.
- Resilience to risks - Most companies did not disclose information on how they were resilient to risks which could threaten either their going concern status or longer term viability. The FRC encourages companies to clearly disclose how they are resilient to principal risks and how the impact of such risks could be mitigated if they were to crystalise.
- Viability period - The most common viability period selected by companies was three years and although most companies disclosed why this was an appropriate viability period, the explanations provided often failed to fully identify and consider all of the relevant factors in determining this period. For instance, companies should consider debt repayment profiles, the nature of the business and its stage of development, planning and investment periods, strategy and business model and capital investment when selecting the viability assessment period.
- Assessment period – The FRC refers to the Restoring trust in audit and corporate governance White Paper published in March 2021 which proposes disclosure of a new resilience statement, with the medium term assessment period covering five years rather than the three year period most commonly used now. While final policy proposals are awaited, the FRC encourages companies to provide longer term information and extend their period of assessment where possible. The FRC does not expect the period of assessment to be shorter than the period covered by any detailed budgets or forecasts (before extrapolations) which have been approved by management and used in other forward-looking areas of the financial statements such as impairment testing.
- Consistent information – The FRC notes that in many cases, the viability and going concern disclosures lacked sufficient detail to enable a reader to assess whether the assumptions used were consistent with those applied in other areas of the financial statements. Information provided within the viability and going concern disclosures should be internally consistent and consistent with other parts of the report and accounts. The FRC also expects information to be presented in sufficient detail for the reader to appreciate the interrelationship between the various related disclosures.
The FRC wants companies to consider carefully the findings of this thematic review when they are drafting their forthcoming annual accounts.
(FRC: Thematic Review – Viability and Going Concern, 22.09.2021)