UK Corporate Governance Code

Corporate governance has faced immense scrutiny recently following the high-profile collapses of BHS in 2016 and Carillion in January 2018, with MPs, the media and the public blaming the actions of the directors and auditors and all asking the same question… where was the board?

MPs, shareholders and the public have also been asking how effective the Financial Reporting Council’s (FRC) Corporate Governance Code has been in deterring poor corporate governance at the UK’s largest companies, following a raft of corporate failures. In July 2018 the FRC released a new UK Corporate Governance Code, (the Code) for listed companies in the UK. It also issued an update on its Guidance on Board Effectiveness. The Code is applicable to all companies with a premium listing, whether incorporated in the UK or elsewhere.

The new Code applies to accounting periods beginning on or after 1 January 2019, so with that in mind, this Common Practices report looks at how companies have been reporting on the current Code. We look at some good examples of reporting and look at the “explanations” made regarding compliance with the Code. We also discuss what’s new in the 2018 Code to enable readers to prepare for the upcoming changes.

The annual reports of 25 UK listed companies with year-ends between 31 December 2017 and 30 September 2018 were selected at random for review, across a range of industries. The full list of sample companies detailing company name, period end, auditor and industry classification can be found at the end of this report.

Disclosure of judgements and estimates

At the end of 2017, the FRC published a thematic review which focused on the disclosure of critical judgements and sources of estimation uncertainty, a requirement of IAS 1 Presentation of Financial Statements. This review was carried out in part because, in its 2016-17 corporate reporting review, the FRC found that companies were not making sufficiently clear disclosures in this area.

Unfortunately, despite this, judgements and estimates still represent an area of difficulty for companies, remaining the area most commonly raised by the Corporate Reporting Review Panel in reviewing company accounts during 2017–18. Common issues include poor explanations, a failure to separate judgements and estimates clearly and discussion of judgements and estimates that were not considered by the company to be significant or material. In some cases the FRC noted that disclosures elsewhere in the accounts suggested that significant judgements were made but these were not included in or referred to in the IAS 1 disclosures.

As a result of this, the FRC can be expected to continue its scrutiny of these disclosures and to challenge companies that do not provide clear, specific disclosures that meet the requirements of IAS 1.

This report analyses the disclosures about judgements and estimates which have been included in the consolidated annual reports of 20 UK listed companies selected at random from the FTSE 350.

Segment Reporting

The requirement to disclose information on operating segments has been around for a number of years, firstly under IAS 14 Segment Reporting, and currently under IFRS 8 Operating Segments which has been applicable for entities with publicly traded debt or equity instruments (or those which are about to publicly trade) since 2009.
 
This report looks at the operating segment disclosures in the consolidated financial statements of 20 UK listed companies selected at random.
 

IFRS 15 impact disclosures - focus on telecommunications

In our last report on IFRS 15, we looked at the disclosure of the expected impact of the standard in a randomly selected group of 20 UK listed company accounts for periods ending 31 December 2017. None of the sample of companies had early adopted IFRS 15 and only 25% of the sample anticipated the adoption to have a material impact on their next set of financial statements. 

When selecting the sample of ten for this report, we included some 31 March 2018 year-end accounts and we have only included companies in the software and mobile telecommunications industry for which the adoption of IFRS 15 is expected to have a greater impact.  The new standard sets out five core principles that preparers should following when judging how to recognise revenue from longer-term contracts. In these two industries, companies often offer customers multi-year service contracts with equipment offered for no or a low fee. Under previous rules, there were a greater number of options available to companies, whereas IFRS 15 is considerably more prescriptive, and requires companies to split the revenue from these contracts based on the performance of the contract.

This report also includes some discussion of Capita Plc, which has early adopted the standard.

 

Alternative Performance Measures (APMs)

In this Common Practices report we look at what APMs are; how companies are using them; and what they mean for the users of accounts when comparing them to others. This report examines the APMs that are stated within recent company and group accounts for a sample of 20 companies. Our selected sample covers year ends from 30 June 2017 to 31 March 2018. All companies report under International Financial Reporting Standards (IFRS) as adopted in the EU. Throughout this report, we look at some of the recommendations put forward by the European Securities and Markets Agency (ESMA) in their guidelines setting out best practice on APMs in 2015, which became effective from 3 July 2016, as well as the observations made by the FRC, assessing whether and how companies have implemented them. 

New standard disclosure - IFRS 16 "Leases"

This report revisits the findings of the CR Emerging Issues Report "Disclosure of the impacts of IFRS 16 "Leases", and assesses 20 companies with 31 December 2017 year ends, to understand if some of the trends of the previous report are repeated. After the last report, we expected to see more companies early adopting, as well as more providing qualitative commentary on their expected materiality position post-implementation. We will assess whether this is the case. 16 of the 20 companies reviewed were in the original sample.