BEIS White Paper – Government’s response to the consultation: Restoring trust in audit and corporate governance – Update on the original proposals and what this means for corporate reporting? (part 2)

Thu 07 Jul 2022

The Government has published its response Restoring trust in audit and corporate governance to the original consultation published back in March 2021 Restoring trust in audit and corporate governance on strengthening the UK’s audit, corporate reporting and corporate governance systems. Unquestionably the White Paper has a primary focus on audit reform, however there are some substantial aspects in relation to corporate reporting that were proposed. Specifically, to progress directors’ accountability in relation to dividends and capital maintenance and to introduce new reporting requirements surrounding companies publishing an annual Resilience Statement and an Audit Assurance Policy.

Following feedback from the original consultation, the Government are now not intending to make any changes to enhance reporting on supplier payment practices, however set out below are the Government’s latest intended changes that will impact corporate reporting. Refer to our blog: BEIS consultation: Restoring trust in audit and corporate governance – Focusing on the proposals for corporate reporting for further details of the original proposals.

What does this mean for corporate reporting?

At the centre of the changes for reform is the intention to establish a strong, independent regulator, the Audit, Reporting and Governance Authority (ARGA), to implement high-quality regulation and high standards and encourage improvement by regulated entities and individuals. In April 2022, the Financial Reporting Council (FRC) published its 3-year plan that sets out the FRC’s progress towards establishing the new ARGA.  

There are 7 intended changes within the Government’s response that will directly impact corporate reporting in the future. An update on each of these areas is set out as follows:

1. Guidance on distributable reserves: The Government intends to assign formal responsibility for issuing guidance and defining realised profits and losses to the new regulator, ARGA, and enhance the legal status and enforceability of the definition, meaning that the requirements surrounding determining distributable reserves will become enforceable. The guidance will be subject to full prior consultation.
2. Disclosure of distributable reserves: The Government intends to introduce a new requirement to disclose distributable reserves in the financial statements of the parent company of a group. If determining an exact figure would be impracticable or involve disproportionate effort, a “not less than” figure may be disclosed instead. This distributable reserves figure will be subject to audit.
3. Dividend policy and dividend-paying capacity: The Government intends to encourage, rather than require, the introduction of a new requirement to disclose estimates of a group’s dividend-paying capacity. However, the Government does intend to require a narrative explanation of a group’s 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 a reporting year. This narrative reporting will be expected to explain any legal and financial constraints and risks to the policy, any significant barriers on the ability of a subsidiary undertaking to pay its distributable reserves up to the parent company, and any competing demands for capital, such as investment.
4. Dividend legality statement: The Government intends to introduce a new directors’ ‘legality statement’ making the directors more accountable for confirming the lawfulness of any proposed dividends and any dividends paid in the year. The Government does not intend to introduce any directors’ assurance over the resulting effects on the future solvency of the business over a period of two years.
5. Resilience Statement: The Government intends to introduce a new reporting requirement to publish an annual Resilience Statement that covers the short-term, medium-term and long-term of the business. This statement will be required to report on matters that are considered to be a material challenge to a company’s resilience over the short and medium term, together with an explanation of how the judgement of materiality has been arrived at. The reporting will be required to have regard to certain matters, including operational and financial preparedness for a significant and prolonged disruption to normal business trading, digital security risks, sustainability of dividend policy, significant areas of business dependency and the impact of a company’s business model of climate change. The Government does not intend to mandate a 5-year period of assessment; however, the reporting will be required to choose and explain the length of the assessment period for the medium-term section.
6. Reverse stress testing: The Government intends to introduce a new requirement to perform at least 1 reverse stress test (rather than a minimum of 2) and for the results of this assessment to be summarised within the Resilience Statement along with any mitigating actions put in place as a result.
7. Audit and Assurance Policy:  The government intends to introduce a new requirement for a company to publish an Audit and Assurance Policy setting out whether or how it intends to seek independent assurance over any part of the Resilience Statement or its internal control framework. The policy, which will be required to be published every three years with an annual summary report on how it has worked in practice, will require a company to describe its internal auditing and assurance process, its policy in respect of tendering of external audit services and a statement as to whether any independent assurance beyond the statutory audit will be carried out according to a recognised professional standard, such as ISAE (UK) 3000.

Who are the intended changes applicable to?

The original consultation looked at making the proposals applicable to publicly listed companies and AIM companies, as well as making the proposals relating to dividends and capital maintenance applicable to certain private companies.

The Government’s response, however, intends to change this proposed scope so that the changes will be applicable to public interest entities and certain other entities meeting the size thresholds of having more than 750 employees (on a global basis) and annual turnover of at least £750 million. The UK’s current definition of a ‘public interest entity’ (PIE) therefore being expanded to ensure that large businesses which are of public importance are subject to appropriate regulation. The new PIE definition will therefore be expanded to include all entities that meet the 750:750 size threshold (large entities); this therefore will include private companies, LLPs, AIM companies, third sector entities such as universities, charities and housing associations, so long as they meet the 750:750 size threshold. Lloyd’s syndicates will not be included in the intended scope.

All public interest entities as currently defined, such as entities whose transferable securities are admitted to trading on a regulated market, credit institutions, and insurance undertakings will continue to fall within scope.  

Further information:

For further information, refer to our technical publication: BEIS response: intended changes – Restoring trust in corporate governance.