The Companies (Miscellaneous Reporting) Regulations 2018 introduced several new and enhanced disclosure requirements for UK companies, effective from periods commencing 1 January 2019. In addition, major recent socio-political events – chiefly Brexit and the COVID-19 pandemic – will require businesses to report additional information in their accounts. But what are the new requirements and how will they affect your business?
S172 for large companies
The s172 statement is an entirely new requirement and arguably the biggest reporting change affecting many businesses. That said, some entities may have already included some or all of the required disclosures in another form within the annual report – in this case it is possible to cross refer to these areas within the s172 statement.
All large and ineligible entities* must include a separate s172 statement within the Strategic Report, also to be included online, which describes how the directors have had regard to their duties under section 172 of the Companies Act 2006. The following areas must be covered:
the likely consequences of any long term decisions;
the interests of the entity’s employees;
the need to further the entity’s business relationships;
the impact of the entity’s operations on the community and environment;
the desirability of the entity maintaining its reputation; and
the need to act fairly.
*Of note, the available exemption does not include plcs even if small – all plcs must therefore comply with s172 requirements.
Reporting about directors
Directors’ Report requirements:
Engagement with employees – All large and medium sized entities with more than 250 employees must include a statement in the Directors’ Report in regard to its engagement with employees;
Engagement with others – Large entities are required to include a statement in the Directors’ Report summarising how the directors have had regard to the need to foster the entity’s business relationships with suppliers, customers and others;
Governance – Entities with either 2,000 or more employees or turnover of £200 million and a balance sheet total of £2 billion, must include a statement of corporate governance in the Directors’ Report*.
*Does not apply to those entities already required to provide such a statement as a result of being listed.
Quoted companies with more than 250 employees are required to disclose the pay ratio information relating to the remuneration of the Chief Executive Officer (CEO) in the directors’ remuneration report;
All quoted companies are now required to disclose information on the share price impact for director remuneration.
Other legislative and reporting considerations
Brexit Following the UK’s exit from the EU on 31 January 2020, there is a transition period to 31 December 2020 during which there will be no changes to the UK’s accounting, auditing or corporate reporting framework. After this time (i.e. from financial years ending 31 December 2020), entities currently reporting under EU IFRS will be required to adopt UK IFRS. The two frameworks will be aligned as at 31 December 2020 and therefore no retrospective restatements will arise on transition.
In addition, UK incorporated entities listed on an EEA regulated market will need to comply with EU local regulatory provisions from 31 December 2020, in addition to the need to produce UK Companies Act 2006 compliant financial statements for domestic filing purposes.
Also, some existing exemptions for UK subsidiaries will be removed from 31 December 2020:
UK UK intermediate companies with an immediate EEA parent will no longer receive automatic exemption from preparing group financial statements;
UK dormant companies with EEA parents will no longer receive exemption from filing statements at Companies House; and
An audit exemption will no longer be available by way of parental guarantee if that parent is an EEA-registered company.
Appropriate disclosure must be made within the Strategic Report in relation to the risks and uncertainties surrounding Brexit specific to the company or group, as far as it is understood at the time of reporting. Key risk areas to consider will be the potential impact on solvency, liquidity and going concern. More meaningful disclosures in this area will be possible following the development of negotiations surrounding future trading between the UK and EU.
The following should be taken into account when considering the impact of Brexit:
The potential loss and shortfall of key talent as freedom of movement is restricted for workers post-transition;
The potential interruption to data flow as a result of Brexit – will the UK still benefit from the ‘digital single market’? It will be important to monitor any changes in legislation in this area as it could affect alignment;
The need for responsive and innovative tech platforms within UK businesses as the UK-EU trading relationship emerges and develops – does this present an opportunity?
COVID-19 The COVID-19 pandemic is expected to have a lasting effect on the global economy and no industry will be immune to this. The impact for individual entities will vary enormously depending on the size of the entity and the industry it operates in. However, all entities will be required to carefully consider how the pandemic and its impact are reflected in their annual financial statements.
Relevant disclosures should be made within the financial statements, as a minimum, in the following areas:
Going concern note
Post balance sheet events (for December year ends – later year ends will need to consider timing carefully)
Principal risks & uncertainties The key at this early stage is to ensure readers of the financial statements are made aware of the significant uncertainties surrounding the pandemic over the short and medium-term, and what this could mean in the context of the company’s operations. Entities may wish to consider the following areas for the purposes of disclosure and preparation of forward-looking financial information, where relevant:
Travel restrictions – impact on operations
Key operational cost cutting decisions made – e.g. staffing
Committed spend vs discretionary
Impact of low investor confidence and uncertain economic environment – e.g. on availability of fundraising
Planned or actual use of any available government measures
Any positive impact – some industries may have seen a growth in activity as a result of the pandemic and this should also be disclosed along with any risks
There will also be an impact on the independent auditor’s report and, again, this will depend on the individual entity/group in terms of its financial position and going concern assessment (incorporating the expected COVID-19 impact). In the audit world, the guidance prescribes one of two routes:
The use of the ‘material uncertainty’ paragraph in respect of going concern (drawing out COVID-19) – for entities that either prior to the pandemic, or after revisiting forecasts amidst it, are deemed to have a significant risk surrounding their going concern status; or
The use of the ‘emphasis of matter’ paragraph in relation to the uncertainties surrounding COVID-19 – for entities that prior to the pandemic, would have been expected to have a clean audit report and, having performed an assessment of the impact, are not considered to be severely affected.