New reporting requirements for PIEs meeting the size thresholds

A) Resilience statement

1) Boards to report on short and medium-term material challenges to resilience

• boards will be required by legislation to report on matters that they consider a material challenge to resilience over the short and medium-term, together with an explanation of how they have arrived at this judgement of materiality. They are no longer being asked to report on longer-term challenges to resilience.

2) Detailed contents of Resilience Statement set out by Government

Boards should:

• identify annually a combination of adverse circumstances which would cause its business plan to become unviable
• assess the likelihood of such a combination of circumstances occurring
• summarise within the Resilience Statement the results of this assessment and any mitigating action put in place by management as a result. The summary will not be required to include any information which, in the opinion of the directors, would be seriously prejudicial to the commercial interests of the company.
• identify any material uncertainties to going concern that existed prior to the taking of mitigating action or the use of significant judgement which the directors consider are necessary for shareholders and other users of the statement to understand the current position and prospects of the business

3) Boards to choose the length of assessment period for medium-term resilience

• the five-year mandatory assessment period proposed in the White Paper for the combined short- and medium-term sections of the Resilience Statement is being replaced with an obligation on boards to choose and explain the length of the assessment period for the medium-term section of the statement

4) Flexibility on reporting risks within the short and medium-term sections

• companies will be given the flexibility to report the risks they are required to report within the short- and/or medium-term sections of the Resilience Statement, noting that different kinds of risk or uncertainty may crystallise or resolve over different time periods.

5) Only a single reverse stress test now to be required

• boards preparing a Resilience Statement will be required to perform at least one reverse stress test rather than the minimum of two as proposed in the White Paper.

6) Resilience Statement to replace viability statement

• the existing viability statement provision in the UK Corporate Governance Code (Provision 31) extending to premium listed companies will be incorporated and adapted within the statutory requirements for the Resilience Statement

7) Safe harbour provisions of Companies Act to apply to the Resilience Statement

• the Resilience Statement will form part of the Strategic Report and so information provided will be covered by the existing ‘safe harbour’ provision of the Companies Act 2006

B) Audit and assurance policy

1) AAP to be published every three years with an annual implementation report

• the Audit and Assurance Policy (AAP) will be required to be published every three years whereas previously the possibility of alternative annual approval had also been raised. In addition, an annual implementation report will be required.

2) AAP should state how account has been taken of shareholders’ views

• an advisory shareholder vote, as proposed in the White Paper, will no longer be required on the AAP but it will be mandatory that companies state within the AAP how they have taken account of shareholder views

3) Issues to be covered within the AAP set out by the Government

The AAP should:

• set out whether, and if so how, a company intends to seek independent (external) assurance over any part of the Resilience Statement or over-reporting on its internal control framework
• describe their internal auditing and assurance
• describe the company’s policy in relation to the tendering of external audit services
• state whether any independent assurance proposed within it will be ‘limited’ or ‘reasonable’ assurance, as defined in the FRC’s Glossary of Terms, or whether an alternative form of engagement or review, as agreed between the company and the external provider, will be undertaken
• state whether any independent assurance beyond the statutory audit will be carried out according to a recognised professional standard, such as the International Standard on Assurance Engagements (ISAE) (UK) 3000 (covering assurance other than audits of historical financial information)

4) Discretion on whether assurance is needed on APMs and KPIs

It has now been decided, following a question in the White Paper, that it will be for directors and investors to decide whether specific assurance on APMs and KPIs is necessary through the Audit and Assurance Policy process

5) AAP and implementation statement to be linked to the audit committee report

• the triennial AAP and the annual implementation report on the AAP should be published within the same section of the annual report as the audit committee report

C) Prevention and detection of material fraud

1) New responsibilities for directors in relation to preventing and detecting fraud

• directors will be required to report on the steps they have taken to prevent and detect material fraud 

 2) Auditors’ existing responsibilities sufficient to cover directors’ new reporting on fraud 

• the Government considers that auditors’ existing requirements to identify and report material inconsistencies in directors’ reporting will be sufficient in reporting on directors’ fraud statements.
• the Government has indicated it intends to wait to see if the relevant revised auditing standards have the anticipated effect in clarifying what is expected of auditors in explaining the work they have done to detect fraud and to assess the effectiveness of relevant fraud controls

 3) Consideration to be given to providing access to fraud case studies

• the Government has indicated it will discuss how an accessible case study register could be taken forward with the FRC and the professional bodies as Recognised Supervisory Bodies

D) Dividends and capital maintenance

1) ARGA to be given responsibility for defining realised profits

• ARGA will be given formal responsibility for issuing guidance on what should be treated as “realised” profits and losses under the Companies Act 2006.

2) PIEs meeting the size thresholds to disclose distributable reserves

• PIEs meeting the size thresholds or, in the case of a UK group, the parent company only, will be required to disclose their distributable reserves, or a “not less than” figure if determining an exact figure would be impracticable or involve disproportionate effort.

3) Disclosing the dividend capacity of the group as a whole will be encouraged

• disclosing an estimate of the dividend-paying capacity of the group as a whole will now be encouraged rather than, as previously proposed in the White Paper, a required element of reporting

4) Board’s long-term approach to returns to shareholders to be explained

• boards will be required to provide a narrative explaining their long-term approach to the amount and timing of returns to shareholders (including dividends, share buybacks and other capital distributions) and how this distribution policy has been applied in the reporting year

5) Legality of proposed dividends to be confirmed

• directors will be required to make explicit statements confirming the legality of proposed dividends and any dividends paid in a year.

6) Proposal to confirm dividends would not jeopardise solvency dropped

• the proposal in the White Paper for a directors’ assurance that a dividend would not be expected to jeopardise the future solvency of the company over a period of two years has now been dropped