Essential Corporate News: Week ending 21 July, 2023

Draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023

On 19 July 2023 the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 (Regulations) and associated explanatory memorandum were published.

These reflect the Government’s final proposals on new corporate reporting set out in its response (published in 2022) to the 2021 White Paper on restoring trust in audit and corporate governance. The explanatory memorandum notes that, following publication of the Government’s response to the White Paper, the development of the detailed content of the reporting requirements set out in the Regulations has involved two phases of informal consultation with a balanced set of impacted and expert stakeholders.

The Regulations make amendments to the Companies Act 2006 imposing additional reporting requirements in a number of areas for companies with a high level of employees and turnover (defined, in summary, as those with 750 or more employees and an annual turnover of at least £750m).¹  Key requirements introduced by the Regulations for such companies will include (in brief summary):

• Distributable profits: The inclusion of information on distributable profits in a note to the annual accounts (which will be subject to statutory audit). The explanatory memorandum notes that, as companies are not currently required to disclose their distributable profits, investors and other readers of the accounts have no way of knowing whether companies have sufficient distributable reserves to pay a dividend, or what headroom exists between dividends paid (or proposed) and the amount available.
• Distribution policy statement: The inclusion of a distribution policy statement in the directors’ report. This will be required (amongst other things) to set out the policy on amount and timing of distributions to shareholders over the short and medium-term, including through purchase of own shares, to consider the risks and constraints relevant to implementing and sustaining the policy, and to describe how the policy has been implemented.
• Resilience statement: The inclusion of a resilience statement in the strategic report. This will be required (amongst other things) to summarise the company’s strategic approach to managing risk and building or maintaining resilience over the short, medium and long-term and its internal governance processes covering risk management. There is also a requirement for the company to carry out an annual “reverse stress test” (in which it tests a scenario in which the business plan could fail) and to summarise this and any mitigating action taken as a result.
• Audit and assurance policy statement: The inclusion of an audit and assurance policy statement in the directors’ report. In summary, this will require the company to set out every three years its plans for assuring the reliability of information in the annual report beyond the accounts (including whether any third-party assurance is planned). The explanatory memorandum notes that this responds to concerns that statutory audit is primarily concerned with assuring the reliability of the company’s financial statements and accounts but that other information in the annual report (such as risk, strategy and governance) is of increasing importance to investors and other stakeholders.
• Material fraud statement: The inclusion of a material fraud statement (summarising the directors’ assessment of the risk of material fraud and a description of the main measures in place, or proposed, to prevent and detect the occurrence of material fraud) in the directors’ report. The explanatory memorandum notes that this is intended to encourage boards to think carefully about this aspect of their responsibilities as well as to provide reassurance to investors that the risk of material fraud is being properly considered and managed.

Once approved by Parliament, the Regulations will come into force on 1 January 2025 and have effect in respect:

• Of any financial year of a company which commences on or after 1 January 2026.
• In the case of a company whose equity share capital is admitted to trading on a UK regulated market for the whole of the financial year of the company, which commences on or after 1 January 2025, of that financial year and each subsequent financial year.

The explanatory memorandum notes that the Regulations are not accompanied by formal guidance but that the Financial Reporting Council (FRC) will provide full guidance on the new reporting requirements which will be consulted upon in draft and is expected to be published in final form in 2024 before the reporting requirements come into effect. 

The FRC has welcomed the publication of the Regulations and will be holding a webinar on 27 July 2023 at which it will be discussing the new requirements and how they strengthen the corporate reporting landscape.

(Draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, 19.07.2023)

(Explanatory memorandum, 19.07.2023)

(DBT, Guidance: Corporate reporting: The Draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, 19.07.2023)

(FRC, Financial Reporting Council welcomes new corporate reporting requirements, 20.07.2023)

FRC: Call for evidence: IFRS Sustainability Disclosure Standards in the UK

On 19 July 2023 the Financial Reporting Council (FRC), in its role as Secretariat to the UK Sustainability Disclosure Technical Advisory Committee (TAC), issued a call for evidence to inform the proposed UK endorsement of IFRS S1 and IFRS S2.

IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) and associated guidance are the inaugural standards that were issued by the International Sustainability Standards Board (ISSB) in June 2023.

The call for evidence seeks views on whether the disclosures required by the standards, in the context of the UK:

• Will result in disclosures that are understandable, relevant, reliable and comparable for investors.
• Are technically feasible to prepare.
• Can be prepared on a timely basis and at the same time as general purpose financial reports.
• Are expected to generate benefits that are proportionate to the costs that are likely to be incurred.

The call for evidence also notes that further information about the UK’s approach to endorsement and implementation will be available in the coming weeks.

FRC Lab: Report on ESG data use and distribution

On 20 July 2023, the Financial Reporting Council (FRC) Lab published a new report titled “ESG Data Distribution and Consumption” which examines how investors obtain and use environmental, social and governance (ESG) data on companies.

It explores three key areas:

• Motivation: What motivates investors to collect ESG data?
• Method: How do investors collect the data?
• Meaning: How do investors integrate ESG data into their investment processes?

It also considers what companies should do to facilitate the use of ESG data and sets out a number of questions boards should ask themselves in this context.

(FRC, ESG Data: Distribution and Consumption, 20.07.2023)

(FRC, Press release: ESG Data Distribution and Consumption, 20.07.2023)

FCA: Listing Transactions: Russia and Belarus sanctions confirmation

On 17 July 2023, the FCA published a webpage relating to the confirmations concerning Russia and Belarus sanctions required to be given by issuers when making a vetting, guidance or listing application request (including eligibility reviews, review and approval of documents under the Listing Rules or Prospectus Regulation Rules, requests for individual guidance, and applications for the admission and amendment of securities to the Official List and for any issuance programme cases).

The confirmation must be provided:

• In a prescribed form and include a statement that the issuer will inform the FCA as soon as practicable if its circumstances change and the confirmation is no longer valid. 
• By the issuer or by the sponsor (or other adviser) authorised to make the submission on behalf of the issuer.
• For every transaction. If an issuer has provided a confirmation for a previous transaction, an updated confirmation at the submission date is required.