BEIS: The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 (SI 2020/1349)
On November 24, 2020 the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 were made and they come into effect on November 26, 2020. They further extend the suspension of the wrongful trading provisions in the Insolvency Act 1986 and extend the temporary flexibilities for company meetings introduced in the Corporate Insolvency and Governance Act 2020 (CIGA).
These Regulations effect these extensions in the following manner:
- The effect of the insolvency legislation is modified in order to suspend section 214 (wrongful trading) and 246ZB (wrongful trading: administration) of the Insolvency Act 1986 (“the wrongful trading provisions”), from November 26, 2020 to April 30, 2021 (the “wrongful trading measure”). As a result, in determining what contribution to a company’s assets that it is proper for a person to make, a court is required to assume that the person is not responsible for any worsening of the company’s financial position that occurs during the period November 26, 2020 to April 30, 2021. This is intended to allow directors of companies which are viable but for the effect of the coronavirus to make decisions as to whether to continue trading without the threat of personal liability were those companies to subsequently enter insolvency proceedings.
- Measures originally introduced by CIGA which provide temporary flexibilities to companies and other bodies as to the manner in which they are required to hold Annual General Meetings and other meetings are extended beyond December 30, 2020 to March 30, 2020 and will apply to meetings held on or before that date.
(BEIS: The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 (SI 2020/1349))
(BEIS, Explanatory Memorandum accompanying SI 2020/1349)
FRC: Review of corporate governance reporting 2020
On November 26, 2020 the Financial Reporting Council (FRC) published its assessment of the reporting of up to 100 FTSE 100, FTSE 250 and FTSE Small Cap companies against the 2018 UK Corporate Governance Code (2018 Code). It states that while it has found examples of good reporting, overall it is disappointed with the response to the 2018 Code. The review presents the FRC’s findings and sets out its expectations for the future application of the 2018 Code and reporting.
The FRC’s analysis shows that companies not compliant with the 2018 Code continue to offer vague explanations rather than explanations that demonstrate a thoughtful approach to corporate governance and the FRC states that, as a result of the review, it expects improved reporting in the following ways:
- Companies to have a well-defined purpose and to clearly show the progress towards achieving it.
- Discussion of the issues raised, topics considered, and feedback received during engagement with shareholders and employees.
- Clearly show the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success.
- Increased focus on assessing and monitoring culture, including consideration of methods and metrics used.
- Increased attention and better reporting of succession planning, diversity and board evaluation.
- Clearly show the impact of engagement with shareholders on remuneration policy and outcomes.
- Clearly show the impact of the engagement within the workforce in relation to executive remuneration policy.
In its conclusion, the FRC notes that the year ahead brings even more challenges. Boards will need to ask some of the hardest questions, ensuring that the varied risks associated with Brexit, COVID-19 and climate change are effectively managed and mitigated in company operations and strategy. Over the next year the FRC states that it will be carefully monitoring how companies are reporting on the impact of risks which have manifested themselves and how boards are responding in terms of improving their governance. With growing focus on the social issues, the FRC will review how directors are discharging their section172 duty Companies Act 2006 duty, in particular the quality of stakeholder engagements, the extent to which they have informed board decisions and how effectively companies are responding to concerns raised.
(FRC: Review of corporate governance reporting 2020, 26.11.2020)
BEIS: Accounting and corporate reporting after the end of the transition period
On November 23, 2020 the Department for Business, Energy and Industrial Strategy (BEIS), with the Financial Reporting Council (FRC), published a letter explaining the arrangements that will be in place for accounting and reporting standards in the UK from January 1, 2021. The letter includes a Q&A section at the back of it.
General requirements for UK companies and groups
The Companies Act 2006 requires UK incorporated companies to prepare their annual accounts either in accordance with International Accounting Standards endorsed by the EU (EU-adopted IFRS), or in accordance with UK Generally Accepted Accounting Practice (UK GAAP) standards. All UK incorporated companies currently required to use EU-adopted IFRS will need to use UK-adopted international accounting standards for financial years beginning on or after January 1, 2021. On January 1, 2021, UK-adopted international accounting standards and EU-adopted IFRS will be identical. Companies with financial years ending on December 31, 2020, can continue to use EU-adopted IFRS as it stands at the end of the transition period for the 2020 financial year, and UK-adopted international accounting standards for the next financial year. Where new or amended IFRS are adopted by the UK after the transition period, but before those companies file their accounts for the financial years that straddle the end of the transition period, they can choose to apply any new IFRS adopted by the UK in addition to EU-adopted IFRS as they exist at the end of the transition period, as can companies with financial years ending before the end of the transition period, but who do not file until after the end of the transition period. Companies choosing to make use of this option, will need to disclose what standards they have used as part of the notes to their financial statements.
UK companies with EEA listing
UK incorporated companies or groups with securities admitted to trading on an EEA regulated market, or UK incorporated groups that issue debt from a subsidiary incorporated in the EEA, will need to comply with local regulatory provisions from January 1, 2021. If UK-adopted international accounting standards are granted equivalence to EU-adopted IFRS, accounts prepared using these standards will be permissible for trading on an EEA regulated market but no such decision has yet been made. UK issuers of shares or debt securities that are only admitted to trading on EEA regulated markets will no longer be subject to the Transparency Rules issued by the Financial Conduct Authority from January 1, 2021.
UK GAAP users
While most companies that apply UK GAAP to prepare their accounts will not face any changes to their reporting requirements, there will be changes for companies that have an EEA parent or subsidiary or are listed in the EEA (see below). In addition, companies whose securities are admitted to trading on an EEA regulated market but who do not have to prepare consolidated accounts will probably have to prepare an additional set of accounts to meet the Transparency Directive requirements.
Changes to certain filing exemptions for UK companies
The letter sets out the changes that will apply to the following:
- UK intermediate parent companies with an EEA parent – if the EEA parent produces group accounts that are not equivalent to those required by UK law, the UK intermediate parent company will need to produce consolidated accounts at the UK sub-group level.
- UK incorporated subsidiaries with an EEA parent - such subsidiaries can no longer rely on the parent’s non-financial information statement. Where the UK subsidiary is itself in scope of producing a non-financial information statement, this will need to be separately produced in the strategic report for financial years beginning on or after January 1, 2021. Such subsidiaries will also only be able to extend their accounting reference period once every five years and the subsidiaries audit exemption will no longer be available for subsidiaries of EEA parents.
- Dormant subsidiaries of EEA parents - the preparation and filing exemptions will no longer be available for them, so dormant UK registered subsidiaries with an immediate EEA parent will need to prepare and file individual annual accounts with Companies House for financial years beginning on or after January 1, 2021.
EEA companies with UK listing
EEA companies with transferable securities admitted to trading on a UK regulated market and who use EU-adopted IFRS will not have to do anything as the UK has already determined the equivalence of EU-adopted IFRS for the purposes of the FCA’s Transparency Rules. EEA companies with transferable securities admitted to trading on a UK regulated market who use Member State GAAP, for financial years beginning on or after January 1, 2021 will need to prepare accounts in accordance with the law of the UK. EEA companies with transferable securities admitted to trading on a UK regulated market will also need to ensure that their EEA auditor is registered as a third country auditor on the register of third country auditors maintained by the FRC.
Intermediate EEA parent with UK parent
Such companies may need to produce consolidated group accounts for their EEA sub-group, as well as individual accounts.
(BEIS, Accounting and corporate reporting after the end of the transition period, 23.11.2020)
BEIS: Information for auditors and audit firms regarding arrangements from 1 January 2021
On November 23, 2020 the Department for Business, Energy and Industrial Strategy (BEIS), with the Financial Reporting Council (FRC), published a letter explaining the arrangements that will be in place for auditors and firms from January 1, 2021. The letter includes a Q&A section at the back of it.
The letter notes that, at the time of writing, the EU has not reached ‘equivalence’ or ‘adequacy’ decisions in relation to the UK under Articles 45-47 of the Audit Directive. If the EU makes a positive equivalence decision, a UK auditor that registers as a third-country auditor in an EEA state may be exempt from quality assurance by the competent authority in that EEA state with respect to any audit work it has conducted for an entity that is both incorporated in the UK (or elsewhere outside the EEA) and lists its securities on a regulated market in that EEA state.
The letter considers the following:
- The recognition of UK qualifications in EEA states.
- The recognition of EEA qualifications in the UK.
- The management and voting rights governing UK audit firms.
- The management and voting rights governing EEA audit firms.
- Third country audit firms.
- The continued application of the EU Audit Regulation in the UK as retained EU law, which applies to the audits of public interest entities (PIEs), although companies and other entities that are not banks, building societies or insurers and do not have issued securities on a UK regulated market will no longer be a PIE for the purposes of applying the Regulation in the UK.
- Group audits.
- Audit committees.
- Audit exemptions.
(BEIS, Information for auditors and audit firms regarding arrangements from 1 January 2021, 23.11.2020)
Glass Lewis: UK Proxy Paper Guidelines 2021
On November 24, 2020 Glass Lewis published its UK Policy Guidelines for 2021.
Key changes to the 2020 Guidelines include the following:
- Board and workforce diversity – Updates reflect the expectation of Glass Leis that FTSE 350 companies provide meaningful disclosure regarding their performance against the board ethnic diversity targets set in the Parker Review. Glass Lewis has also clarified that, subject to exceptions, it will generally recommend a vote against the nomination committee chair on any FTSE 350 board that has failed to meet the 33 per cent board gender diversity target set out by the Hampton-Alexander Review, and against the chair of the nomination committee at any other company on the LSE’s main market that has failed to ensure that the board is not composed solely of directors of one gender. In egregious cases where boards have failed to respond to legitimate concerns regarding a company’s workforce diversity and inclusivity policies, practices and disclosure, Glass Lewis may recommend voting against the chair of the committee tasked with oversight of the company’s governance practices or, where such a committee has not been established, the chair of the board.
- Human capital management – Glass Lewis has updated its guidelines to state that in egregious cases where a board has failed to respond to legitimate concerns with a company’s human capital management practices, it may recommend voting against the chair of the committee tasked with oversight of the company’s governance practices or the chair of the board, as applicable.
- Environmental and social risk oversight – Glass Lewis has updated its guidelines with respect to board-level oversight of environmental and social issues. Beginning in 2021, Glass Lewis will note as a concern when boards of FTSE 100 companies do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Beginning with shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the governance chair of a board who fails to provide explicit disclosure concerning the board’s role in overseeing these issues.
- Environmental and social initiatives – Glass Lewis has updated its guidelines on environmental, governance and social initiatives to clarify its approach to these issues. In particular, Glass Lewis has clarified that it generally supports shareholder proposals that seek to improve governance structures or promote relevant disclosure that serves the long-term interests of shareholders. Additionally, Glass Lewis has clarified that it assesses shareholder proposals on environmental and social issues in the context of financial materiality.
- Virtual shareholder meetings – Glass Lewis has updated these guidelines to outline its expectations in respect to the organisation and disclosure of virtual shareholder meetings, as well as in respect to proposals that seek to amend a company’s articles of association to allow for virtual shareholder meetings and/or the virtual attendance of directors and executives at shareholder meetings. While Glass Lewis unequivocally supports companies facilitating the virtual participation of shareholders in general meetings, it believes that clear procedures should be set and disclosed to ensure that shareholders can effectively participate in virtual-only shareholder meetings and meaningfully communicate with company management and directors.
(Glass Lewis: UK Proxy Paper Guidelines 2021,24.11.2020)
FRC: Call for participants in Lab project on risks, uncertainties and scenarios
On November 23, 2020 the Financial Reporting Lab issued a call for participants in a new project on corporate disclosures on risks, uncertainties and scenarios. The call notes that given the significant reassessment many companies are making to their longer-term business model and strategy, risk, uncertainty and scenario reporting is likely to become even more important. The aim is to publish a range of outputs from the project across 2021.
(FRC, Call for participants in Lab project on risks, uncertainties and scenarios, 23.11.2020)
FRC: Audit firms’ going concern review
On November 24, 2020, the Financial Reporting Council (FRC) published the results of a review of eleven audits of the going concern assessments performed by the seven largest UK audit firms.
Audit firms have implemented additional measures to enhance their evaluation of companies’ going concern assessments, since the start of the Covid-19 pandemic and the review found that these additional policies and procedures have been substantially applied in practice.
The FRC notes that the auditors demonstrated an appropriate level of challenge to company boards and management about their key assumptions, stress testing and disclosures in the financial statements. However, in some cases, auditors needed to improve their consideration of the going concern assessment period, which was not always clear, and their approach to testing the integrity of the forecasting models.
The FRC’s review follows updated guidance issued to companies and auditors in March 2020, an FRC Lab report on going concern, risk and uncertainty and a thematic review in July 2020 on the financial reporting of Covid-19.
(FRC, Audit firms’ going concern review, 24.11.2020)