Corporate Law Update

In this week’s update: The FRC publishes updates on risk and viability reporting and its annual review of corporate reporting, the Investment Association publishes data on shareholder dissent, the LSE ends its Covid-19 dividend timetable relaxation, amendments to FRS 104 and ESMA updates its prospectus threshold list.

The FRC publishes updates to its reports on risk and viability reporting during Covid-19
The FRC publishes its annual review of corporate reporting for the 2019/2020 reporting season
The Investment Association publishes data on shareholder dissent during the 2020 AGM season
The London Stock Exchange ends Covid-19 dividend timetable relaxation
The FRC publishes amendments to FRS 104 in relation to interim financial reports
ESMA updates its list of national thresholds above which an issuer must publish a prospectus

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

FRC publishes updates on reporting during Covid-19

The Financial Reporting Council (FRC) has published two short update reports relating to corporate reporting during the Covid-19 pandemic.

The first report – “Resources, action, the future” – provides an update to the FRC’s previous report on the same topic in June 2020. It focusses on companies’ existing cash resources and liquidity and actions and their ability to preserve assets and manage expenditure. The report contains recommendations for companies, including:

providing clarity on the company’s evolving cash position, as well as its plans for using that cash and making repayments under any government financing schemes;
giving clear disclosure of actions taken by management at different stages in the recovery process is very useful, including as further lockdown measures are put in place; and
providing more information on management’s view of the company’s future and prospects, as well as the different pressures faced by the company in different geographies.

The second report – “Going concern, risk and viability” – provides an update to the FRC’s previous report on the topic, also in June 2020. It focusses on effective reporting on viability during the pandemic and contains recommendations, including:

discussing the process for identifying in certain scenarios how changes in circumstances are monitored, evaluated and mitigated against over time; and
disclosing the effect of the components of Covid-19 (e.g. government regulation, lockdowns, impact on employees, and funding) on other risks, rather than as a separate risk, given that different components may last for different lengths of time.

FRC publishes its annual review of corporate reporting

The Financial Reporting Council (FRC) has published its annual review of corporate reporting, following an analysis of 216 sets of accounts from the 2019/2020 reporting cycle.

The report sets out the FRC’s “top ten” areas for improvement in reporting quality, noting that the FRC has seen “gradual improvements” in the quality of reporting in certain areas. Key observations arising out of the report include the following:

Judgements and estimates. This remains the key area for improvement following previous years. The FRC identified fewer companies with inconsistencies between judgements disclosed in the accounts and related disclosures in other sections of the annual report. However, it notes that there are still companies that do not identify all material judgements and estimates or provide insufficient information to enable users to understand uncertainty in estimates.
Impairment of assets. This rose to become the second highest area of concern. The FRC reports that disclosures could have been “more transparent and company-specific”, and it will continue to pay close attention to impairment in light of Covid-19.
Revenue. This also became an area of significantly greater concern for the FRC. The report notes that most of the FRC’s questions to issuers arose because companies gave “generic information” about revenues without being sufficiently precise about how they applied IFRS 15.
Alternative performance measures (APMs). This was less of a concern than in previous years, with the FRC noting “fewer pervasive shortcomings”. However, the report notes that there were still issues relating to “undue prominence and transparency of APMs”.

Investment Association publishes data on shareholder dissent

The Investment Association (IA) has published an announcement noting that, according to data for the 2020 AGM season, 98% of FTSE 100 companies have now either aligned pension contributions for new directors with that of the workforce or committed to doing so.

The announcement also notes that:

14 FTSE 100 companies reduced pension contributions for existing directors;
a further 43 companies committed to reduce contributions in future years; and
six companies are increasing their workforce rate in an effort to align pension contributions.

The IA also notes that executive pay remained a topic of focus for investors among the FTSE All-Share, with 45 companies (64 resolutions) added to the IA’s public register of significant votes against.

Separately, the IA notes that investors remained concerned with director re-elections, with 46 companies (80 resolutions) added to the register. Shareholders voted against directors for a variety of potential reasons including overboarding, lack of diversity, and decisions made as remuneration or audit committee chair.

However, the IA notes that almost 90% of companies added to the register stated publicly how they intend to respond to shareholder dissent, demonstrating an acknowledgement of shareholder concerns.

Also this week…

London Stock Exchange ends Covid-19 dividend timetable relaxation. The London Stock Exchange (LSE) has published Market Notice N16/20, in which it has confirmed that the temporary measures for payment dates under its Dividend Procedure Timetable (announced in Market Notice N07/20) will come to an end on 2 November 2020. Issuers announcing cash dividends after that date should revert to the standard 30-business day period from record date within which the dividend should be paid. The LSE has also published its Dividend Procedure Timetable for 2021.
FRC publishes amended FRS 104. The Financial Reporting Council (FRC) has published amendments to FRS 104 (Going concern), which reflect the proposals set out in its July consultation in relation to the going concern basis of accounting in interim financial reports. For more information on those proposals, see our previous Corporate Law Update. Amended FRS 104 will apply to interim periods beginning on or after 1 January 2021.
ESMA updates list of prospectus thresholds. The European Securities and Markets Authority (ESMA) has published an updated version of its list of national thresholds in different EEA member states below which a prospectus is not required to offer securities to the public. The updated list contains amended entries for Iceland and Romania. The list continues to include the UK for the time being, as (at the time of publication) the UK remains subject to EU law.