Corporate Law Update

• The FRC publishes advice to companies and auditors on Coronavirus risk disclosures
• BEIS and the FRC publish letters to the accounting sector and the audit sector
• BEIS publishes draft International Accounting Standards, Statutory Auditors and Third Country Auditors Regulations
• The FRC publishes implementation guidance on its revised Ethical Standard
• The European Commission launches a consultation on possible reforms to MiFID II and MiFIR
• A few other items

The FRC has published advice to companies and auditors on Coronavirus risk disclosures

The FRC has published guidance for companies on the disclosure of risks and other reporting consequences arising from the emergence and spread of the Coronavirus (COVID-19). The FRC is encouraging companies to consider carefully what Coronavirus-related disclosures they might need to include in their year-end accounts and to monitor developments to ensure they include up-to-date and meaningful disclosures.

The FRC has also advised that it is discussing with audit firms whether the Coronavirus affects their ability to review component audits in China, the impact on their audits of UK listed groups with Chinese subsidiaries and the consequences for delivering timely audit opinions.

BEIS and the FRC publish letters on accounting and corporate reporting during the Brexit transition period

BEIS and the FRC have published joint letters to accountants and auditors setting out information regarding auditing, accounting and corporate reporting standards during the Brexit transition period, which ends on 31 December 2020. The letters coincide with BEIS publishing the draft International Accounting Standards, Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020, covered as an item below.

The information in the letter to accountants is particularly relevant for companies considering how to prepare accounts and which accounting standards to adopt for financial years beginning after 31 December 2020.

The letter to auditors stresses that during the Brexit transition period there is no change to audit reporting requirements for UK and EEA auditors and firms and their clients. The letter states that after the end of the transition period, the EU Audit Regulation will continue to apply in the UK as domestic retained EU law, subject to certain amendments. In the view of BEIS and the FRC, the status of UK auditors after the end of the transition period is likely to be subject to negotiations.

The letters note that the UK is seeking equivalence on accounting and audit, and adequacy in relation to audit from the European Commission. The Political Declaration agreed between the EU and the UK envisages that assessments should be concluded by June 2020, and the EU and the UK will assess each other’s equivalence and adequacy in parallel. The UK is currently entering into discussions with the EU on a Free Trade Agreement with the EU, during which areas that sit outside the equivalence regime will be considered. BEIS and the FRC will publish updates on what these talks may mean for the UK’s audit and accounting sector in due course.

BEIS has published draft International Accounting Standards, Statutory Auditors and Third Country Auditors Regulations

BEIS has published the draft International Accounting Standards, Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020 and related draft explanatory memorandum.

The draft regulations amend the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 to set out transitional arrangements for companies with financial years that “straddle” the Brexit implementation period completion day (IP completion day), being 31 December 2020. This will apply where either a company’s financial year begins before IP completion day and ends after that date, or where its financial year ends before IP completion day, but it files its accounts after IP completion day.

On IP completion day, the international accounting standards adopted by the EU will be brought into UK law. For financial years beginning after that date, companies will not be able to use IAS subsequently adopted by the EU, and instead will be required to use those adopted by the UK under the new framework (see our previous update regarding BEIS guidance on accounting law requirements after Brexit). This draft regulation will permit companies with financial years that “straddle” 31 December 2020 to use IAS that are adopted by the UK after IP completion day (which was not permitted under the 2019 regulations). To take advantage of this optional use of UK-adopted IAS, a company must put a note in their accounts stating that they have used this option.

The draft regulations are expected to come into force immediately before IP completion day.

The FRC has published implementation guidance on its revised Ethical Standard

The FRC has published implementation guidance on its revised Ethical Standard which will be effective from 15 March 2020 (the effective date). For background to the revised Ethical Standard, see the FRC’s press release from 17 December 2019 and our previous update.

The guidance clarifies the status of non-audit or audit-related services which have not been engaged or started prior to the effective date, but which relate to a financial period beginning before the effective date.

The guidance also provides further information about Other Entities of Public Interest (OEPI), as defined in the Ethical Standard. The auditor of a private equity or venture capital fund portfolio company that is an OEPI may only provide to the company permitted non-audit or audit-related services. The permitted services are listed in the Ethical Standard. The same requirement will apply for services provided by the auditor to any controlled undertakings of the OEPI, and to its UK holding company. Any other services provided by the auditor to the OEPI’s UK holding company can only be provided after the audit firm has undertaken an assessment of threats to independence and applied any required safeguards to address identified threats.

The European Commission has launched a consultation on possible reforms to MiFID II and MiFIR

The European Commission has launched a consultation on potential reforms to the Directive and Regulation on Markets in Financial Instruments (MiFID II and MiFIR). The consultation is taking place alongside ESMA’s consultations on the functioning of certain aspects of MiFID II and MIFIR.

The Commission is seeking the views of stakeholders as to how well the regime is functioning. The consultation also focusses on specific technical aspects of the framework, including issues and proposals raised in previous consultations and arising from exchanges with experts.

As MiFID II and MiFIR have been in force for over two years (since January 2018), the Commission is to present to the European Parliament and the Council a review report on the operation of the framework, and any legislative proposals for reform. Both this consultation and the ESMA consultations will inform the review report.

The consultation is open until 20 April 2020.

Other items

• Corporate governance. ICSA has published revised guidance notes proposing model terms of reference for audit, remuneration and nomination The guidance has primarily been revised to reflect the 2018 UK Corporate Governance Code and the FRC’s Guidance on Board Effectiveness (published in 2018), and certain changes to the law since the last versions were published.
• Prospectuses. On 18 February, ESMA published updated Questions and Answers on the Prospectus Regulation. This includes two new Q&As clarifying the number of additional pages that can be included in a summary when there is more than one guarantor, and the number of additional pages that can be included in a summary relating to several securities (as per Article 7(7) Prospectus Regulations). ESMA has also stated that it is setting up a web-based tool to facilitate the submission of questions, and the publication of questions received and answers.