U.K. Regulator Urges Investors to Hold Companies Accountable

By David R. Jones

March 18 — Investors in U.K. companies should encourage entities to disclose how they are complying with financial reporting requirements, U.K. Financial Reporting Council chief executive Stephen Haddrill said March 17.

As companies gear up for the 2016 shareholder meeting season, investors should be poised to hold entities accountable on such topics as risk reporting, dividend disclosures and governance in light of recent changes to reporting standards, he said in a public letter to investors.

Shareholders should spur companies to reveal “what information they believe is relevant and to challenge where reporting falls short of expectations,” FRC said in a March 17 statement.

The council establishes U.K. and Irish accounting, auditing and actuarial standards.

Disclose Risk Factors, Viability

Companies that apply the U.K. Corporate Governance Code—which sets out standards of good practice for boards of directors—for the first time this year must provide enhanced disclosures on risk as well as include a statement on an entity's viability, Haddrill noted.

“All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report on how they have applied the Code in their annual report and accounts,” FRC said.

Explaining Code Compliance

The council recognizes that some parts of the code don't apply at all times to all reporting companies.

If boards choose not to apply certain provisions of the code, though, Haddrill said they should clearly explain their reasoning, and he encouraged investors to question a company that fails to adequately justify its course of action.

In addition, he said, boards should explain the judgments they make in areas where significant diversity of treatment exists, such as pension accounting.

Principal Risks

A company's strategic report, which is designed to inform shareholders of its business model, strategy and prospects, should include information on so-called principal risks and uncertainties, according to Haddrill's letter.

Shareholders should consider questioning those companies that in their financial reporting appear to avoid discussing principal risks, he said.

“We have recently heard some investors express surprise that cyber risk and climate-change related risks are not reported more often as principal risks.”

“For example, we have recently heard some investors express surprise that cyber risk and climate-change related risks are not reported more often as principal risks,” the letter said.

Dividend Policies

FRC also is encouraging companies to clearly disclose their dividend policies .

“You may wish to challenge companies that provide insufficient information in this area,” Haddrill told investors.

International Standards

The International Accounting Standards Board in recent years has approved three important standards, the council noted, addressing financial instruments in International Financial Reporting Standard 9, revenue recognition in IFRS 15 and leases in IFRS 16.

“The effective date for IFRS 15 has been deferred to 1 January 2018 and IFRSs 9 and 16 have not yet been endorsed for use” in the European Union, Haddrill pointed out.

Still, investors should watch for indications from companies of the standards' likely impacts, which companies should disclose once they can be reasonably estimated, the letter said.

Looking Ahead

Haddrill said FRC plans to contact investors again after it gauges the new standards' potential impacts.

The council hasn't set firm plans on what the standards assessments might entail or when they'll be conducted, an FRC spokeswoman told Bloomberg BNA in a March 18 e-mail response to questions.

“It will depend on the IFRS 9 and IFRS 16 European endorsements,” she said.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com