non executive director briefings · september 2012 final – published june 2013. pwc ... • final...
TRANSCRIPT
Non Executive Director BriefingsUpdate on corporate reporting andassurance matters28/29 January 2014
www.pwc.com/jg
PwC
Contents
• Summary of 2013 reporting changes
• UK Corporate Governance Code
- Directors’ statement – fair, balanced and understandable
- Changes to audit committee reporting
• New style audit reports – ISA (UK&I) 700
• BIS narrative reporting regulations (the strategic report) & FRCimplementation Guidance
• Accounting update
• Audit tendering and mandatory firm rotation
2
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Summary of 2013 reporting changesDemonstrating stewardship
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BIS narrativereporting regulations
BIS remunerationreporting regulations
FRC UK CorporateGovernance Code
FRC Sharman –going concern
FRC audit reports –ISA (UK&I) 700
Strategic report replacesBusiness review
Strategic, forward-looking focus for quotedcompanies
Remuneration report intwo parts:- Forward-looking
policy part- Backward-looking
implementation part
Directors statement thatthe annual report, takenas a whole, is ‘fair,balanced andunderstandable’
Distinguishes betweenfinancial reporting andstewardship purposes ofgoing concern
Audit report to providemore insight intojudgements made as‘inputs’ to theaudit process
Strategic report part ofinitiative to drive upquality of annual reports
Proposed Guidance fromFRC issued forconsultation
Corresponds to votesunder Enterprise andRegulatory ReformAct 2013 - binding onpolicy; advisory onimplementation
Audit committee reportshow it has addressed thekey judgements andestimates in the financialstatements
Going concern is part ofongoing riskmanagement; liquidityand solvency risk bothrelevant; and looksbeyond the currenthorizon
Company-specificinformation on auditrisks, materiality andgroup audit scopereported publicly
Also replaces summaryfinancial statements
New disclosures on bothpolicy &implementation,including single totalfigure for pay
Audit tenders at leastevery ten years oncomply-or-explain basis
Combined consultationwith updated guidanceon internal control andrisk management issuedon 6 November 2013
In the meantimecompanies areencouraged to ‘considerand abide by ‘theSharman principles’
Final – published August 2013 Final – publishedSeptember 2012
Final – published June2013
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FRC UK Corporate Governance CodePulling the stewardship agenda together
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A ‘fair, balanced and understandable’annual report
“The directors should explain in the annualreport their responsibility for preparing theannual report and accounts, and state thatthey consider the annual report andaccounts, taken as a whole, is fair, balancedand understandable and provides theinformation necessary for shareholders toassess the company’s performance, businessmodel and strategy...”
[UK Corporate Governance Code provisionC.1.1]
The audit committee reportshould include...
“the significant issues that the committeeconsidered in relation to the financialstatements, and how these issueswere addressed”
[UK Corporate Governance Code provisionC.3.8]
Advisory role for audit committee onfair, balanced and understandable
“Where requested by the board, the auditcommittee should provide advice on whetherthe annual report and accounts, taken as awhole, is fair, balanced and understandableand provides the information necessary forshareholders to assess the company’sperformance, business model and strategy...”
[UK Corporate Governance Code provisionC.3.4]
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Fair, balanced and understandable
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FRC UK Corporate Governance CodeFair, balanced and understandable – FAQs
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• Making formal statement based onCode provision, usually in theDirectors’ responsibilities statement
• Sometimes outlining the process usedto support the statement
• Audit committees acknowledging theirrole, where they have advised the board
• Matters on which to report byexception on ‘fair, balanced andunderstandable’ statement (andsignificant issues reporting) underISAs (UK&I) 700
• Along with the formal statement by thedirectors, this will raise the bar onborderline issues
• Fair, balanced and understandable all pre-existed
• Case-by-case judgement, in the context of the annualreport taken as a whole
• Also opportunity to re-visit particular aspects of theannual report
• ‘Understandable’ is in relation toa reasonably informed reader
• Build in enough time to review thereport as a whole and for changes tobe processed
• Ensure appropriate information will beprovided on which to base judgements
• Have right people involved and providedirection early – preparers need encouragementto innovate or be transparent
• Check progress regularly
• Extent of change depends oncurrent process
What arecompaniesdoing inpractice?
What are theauditors’responsibilities?
What processis needed tosupport thestatement?
What is newabout this?
CompetitionCommission final
report – establishesadvisory vote on the
audit committee report
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What we’re seeingFindings from survey of September 2013 year-ends
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Audit committees usually advising the board
70%: audit committeeadvising board on FBU
statement
90%: FBU statements in theDirectors’ responsibilities
statement
90% 30%
30%: audit committeedescribes FBU process in
annual report
70%
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FRC UK Corporate Governance Code – examplesDirectors’ statement – fair, balanced and understandable
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BAE 2012Directors’ responsibilities statement
BAE 2012 - Audit committee report
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Supporting the fair, balanced and understandable statementThe audit committee’s role
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Overview checks
• Annual reportreflects thestoryboard or keymessages
• Messages arecredible andrealistic
Linkage checks
• The links throughfrom strategy toperformance to payare clear
• The story is joinedup across theannual report
Insight checks
• Difficult messageshave beenidentified andhandledappropriately
• Challenges havebeen anticipatedand addressed
Fair, balanced andunderstandable
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Changes to audit committee reporting
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Changes to audit committee reportingReporting Lab project report
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Focused on provision C.3.8- Significant issues- Auditor appointment & safeguarding independence around
non-audit services- Effectiveness of the external audit process
Specific observations
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What we’re seeingFindings from survey of September 2013 year-ends
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Focus is on significant issues
70%: reported between 2and 5 significant issues
25%: consistently met theFRC Reporting Lab criteria
25%70% goodwill impairment
70% 45% tax
40% provisions
25% going concern
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Changes to audit committee reportingSignificant issues reporting – what investors will value most (per the Lab report)
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Changes to audit committee reportingAudit committee reporting of significant issues
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Land Securities 2013
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Changes to audit committee reportingAudit committee reporting of significant issues
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Lonmin 2013
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New style audit reports – ISA (UK&I) 700
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FRC audit reports – ISA (UK&I) 700Providing more insight into audit to facilitate engagement
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• Aim is to facilitate engagement betweeninvestors and companies about the auditprocess
• The FRC believes this complements the auditcommittee’s disclosure of significant issues
- The FRC proposal preserves the principlethat the auditor does not directly reportinformation on the company; internationalinitiatives do not do so as clearly
• The FRC proposals do not go farenough – and do not provide theinformation that engaged investors areasking for
• Investors want auditors’ views onoutcomes not just on audit process
Investor views to be sought on new-stylereports over the coming months
• The auditor’s report on the financial statements includescompany-specific information on the auditor’s assessment of risksand materiality and how the scope of the auditaddressed those assessed risks
• This introduces non-template wording to auditreports for the first time
• The changes are to audit reporting ratherthan audit procedures
• A number of the same areas will appearin the audit committee list of‘significant issues’ and in the auditreport
• Need to plan for consistency
• Will be differences – e.g. audit risks that donot give rise to accounting judgements orestimates
What’s thepurpose?
Our viewLink to auditcommitteereport
What will bereported?
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What we’re seeingFindings from survey of September 2013 year-ends
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Consistency with audit committee significant issues
70%: of audit reportsincluded between 2 and 5
areas of focus
50%: of Big 4 includepresumed significant risks
– fraud in revenuerecognition and
management override ofcontrols
50%65% goodwill impairment
75%
25% tax
45% provisions
10% going concern
35% revenue
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FRC audit reports – ISA (UK&I) 700Thomas Cook Group plc - audit committee reporting of significant issues
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Thomas Cook Group plc 2013, page 61
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FRC audit reports – ISA (UK&I) 700Thomas Cook Group plc - auditor reporting of assessed risks and responses (1)
20Thomas Cook Group plc 2013, page 91
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FRC audit reports – ISA (UK&I) 700Thomas Cook Group plc - auditor reporting of assessed risks and responses (2)
21Thomas Cook Group plc 2013, page 91
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FRC audit reports – ISA (UK&I) 700Thomas Cook Group plc - auditor reporting of materiality and scope
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Thomas Cook plc 2013, page 90
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FRC audit reports – ISA (UK&I) 700Easyjet plc - audit committee reporting of significant issues
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Easyjet plc 2013, page 71
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FRC audit reports – ISA (UK&I) 700Easyjet plc - auditor reporting of assessed risks and responses
24Easyjet plc 2013, page 92
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Narrative reporting and the strategic report
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BIS narrative reporting regulationsKey information together, with a forward-looking emphasis
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• Strategy & business model
• Gender diversity
- Number of directors, seniormanagers and employees ofeach sex
• Human rights issues
• Greenhouse gas emissions(directors’ report)
• Read the strategic report as“other information” issued withthe financial statements
• No specific audit responsibilitybut will be closely related to thefair, balanced andunderstandable statement
• Strategic report at same level as directors’ report inthe annual report – replaces business review
• Strategic report replaces summary financialstatements
• A number of specific disclosures
• No ‘annual directors’statement’ ofstanding data
• No guidance onuse of online reporting
Regulations not issued until August 2013;may not encourage innovation this year
What are thespecific newdisclosurerequirementsin theRegulations?
What are theauditors’responsibilities?
What’s notcovered in theRegulations?
What’s new intheRegulations?
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FRC Exposure Draft of proposed GuidanceImplementation guidance requested by BIS
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Strategic report should be:
• Fair, balanced andunderstandable
• Concise
• Forward-looking
• Linked and signposting
• Entity specific
• Material
• The Regulations are therequirements
• Possible to make minorchanges and comply
BUT
• The Guidance indicates the realpurpose
• Need to think about structure,content and giving the reportthe appropriate strategic slant
• Consultation period on Exposure Draft – ended midNovember 2013
• Final Guidance expected early 2014
• Uses introduction of strategic report ascatalyst to look at narrative reportingas a whole
• Content elements – consistentwith Regulations
• Strategic report = ‘core’;rest = ‘supplement’
• Content of strategic report needsto be sufficiently material
• Rest as ‘appendix’ – online infuture?
Communicationprinciples
SummaryCore &supplementstructure
Details ofconsultation
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What we’re seeingFindings from survey of September 2013 year-ends
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Remuneration report is the major piece of work
55%: increase in length ofaverage remuneration
report
5%: increase in length ofstrategic report content(compared to equivalent
sections)
0
5
10
15
20
2013 201220
25
30
35
40
2013 2012
100%
100%: compliance withform of regulations – but
what about substance?
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Core & supplement - examplesLonmin 2013 - strategic report
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Core & supplement - examplesNational Grid 2013 - strategic report
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Base reporting on strategic themes
Current practice - how aligned is annual report content?Observations from 2013 reporting cycle - % of FTSE 100 companies
31
34%
Include strategic priorities
99%
Include the term ‘business model’
94%
Link their business model to otheraspects of their reporting
11%
Identify their principal risks and howthey’re mitigated
94%
Explain how the risks have changedover time
32%
Explicitly identify their KPIs
96%
Align their KPIs to strategicpriorities
38%
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Linking strategy KPIs and risksBalfour Beatty example
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Development of strategic themesARM Holdings example
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Accounting update
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Spotlight on the FRRP and accounting mattersWho are the FRRP and the Conduct Committee ?
• Established as part of the FRC
• From July 2012 following reform under direction of the ConductCommittee of FRC
• Review annual reports of public and large private companies
• Compliance with law and accounting standards
How do they work?
Selection of accounts:
• risk based approach
• select from certain industries (“priority sectors”)
• complaints from the public
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FRRP – Greater transparency
• Seek publicity where appropriate
• Take credit where they have effected change
- Expect more press notices
- Expect more committee references
• Improve transparency of reporting
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FRRP – Increasing effectiveness
• Prioritise FTSE 350 cyclical reviews
• Aim to complete before publication of next accounts
• Revised opening letter to company chairman; more direct
• Copy to Audit Committee chair and Finance Director
FRRP proposals to achieve effectiveness
• Expect auditor and Audit Committee Chair engagement
• Aim for quicker turnaround of correspondence
• Anticipate response within 28 days
• Be more ready to use the FRRP power
- to get company to respond
- to evidence board/auditor’s assertions
• Be ready to establish Review Groups at earlier stage
• Liaison with Audit Quality Review
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2013 Annual report - published 17 October 2013
Panel activity 2013 2012
Accounts reviewed 264 326
Companies written to 91 130
Review groups 4 5
Press notices 1 -
Committee references 10 6
Key messages – quality of corporate reporting
• FTSE 350 – complex or unusual transactions
• Smaller listed and AIM quoted companies – focus for 2014/15
• Making annual reports and accounts more concise and relevant
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FRRP – Press Notices
Pendragon – August 2012 – operating versus investing cash flows
WH Smith – October 2013 – Non-recognition of a liability in its accounts relatingto a schedule of contributions agreed between a subsidiary of the company andthe company’s pension trustee. Following correspondence with the FRRP, thecompany has accepted that the schedule of contributions is a minimum fundingrequirement within the meaning of IFRIC 14 and should have been accounted foras a liability in its accounts for the year ended 31 August 2012. Under IAS19, thecompany had a unrecognised surplus of more than £100m.
The effect of recognising the liability on the comparative amounts was to reducenet assets at 31 August 2012 from £149 million to £95 million (at 31 August 2011,a reduction of net assets from £156 million to £94 million). Profit after tax for theyear ended 31 August 2012 was reduced by £4 million. There is no change to profitbefore tax and no impact on cash.
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FRRP – What does the accounts disclosure look like?
The Group has recently concluded discussions with the Financial ReportingCouncil’s Conduct Committee (‘FRCCC’) with regard to certain aspects of its assetimpairment testing process. As a result, the Group has (i) amended its definitionof a cash generating unit so that non-monetary assets are reviewed forimpairment at a branch level, rather than at a brand level; (ii) refined itscalculation of the pre-tax discount rate; and (iii) restated and extended thecomparative sensitivity disclosures made below in respect of 2011.
The changes agreed with the FRCCC have not impacted the income statement,balance sheet or cash flow statement for 2011 or 2012; the Directors’ originalassessment that no impairment had occurred to goodwill, other intangible assetsor other non-monetary assets remains unchanged.
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FRRP – Key areas of questioning
Business reviews
• “Balanced and comprehensive”
• “Principal risks and uncertainties”
Revenue
Cash flow statements
• Cash flow information critical to investors particularly in difficult tradingconditions
Non-GAAP measures/Financial KPIs
Business combinations
Impairment
• Focus on value in use calculations with higher risk of impairment charge
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FRRP priority sectors for 2012/2013
Prioritysectors
2012/2013
Supportservices
Commercialproperty
Retail
Looking ahead? Retail,construction, naturalresources and businesssupport
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Important disclosure considerations
Business reviews –balanced andconsistent with backhalf disclosures.Include both goodand bad news (andwatch materiality)
Principal risks anduncertainties –mitigating actions toreduce risks
Accounting policiesnot specific –particularly revenuerecognition
Significantjudgements andestimates generic –need to be specific
Classification of cashflows – (operatingversusinvesting/financing)
Income taxes–deferred tax assetand liabilityrecognition
Impairment of assets– significantassumptions requiredisclosure
FRRP Interest inPensionrestructuringarrangements
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Expectedreturn /
discount rate
Old Method
£ £ £
Pension assets 800 8% 64
Pensionliabilities
(1,000) 6% (60)
Deficit (200) -
Net income /(expense)
4
NewMethod
£
-
-
(12)
(12)
6%
What is changing in accounting standards?
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For most, the only significant change is IAS 19 – defined benefit pensionsaccounting....
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Other changes that should be on the agenda - The future ofUK GAAP
• FRC has now issued three standards that will replace the current UK GAAP
- FRS 100 ‘Application of financial reporting requirements’
- FRS 101 ‘Reduced disclosure framework’
- FRS 102 ‘The financial reporting standard applicable in the UK and Republic ofIreland’
• These standards must be applied for years beginning on or after 1 January 2015– they may be early adopted.
• The options now are:
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• EU IFRS with reduced disclosures +amendments to comply with law
FRS 101(RDF based on IFRS)
• ‘New’ UK GAAP (reduced disclosuresalso available)
FRS 102(New UK GAAP)
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Audit tendering and mandatory firmrotation
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Audit tendering and mandatory firm rotation
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Discussion pointsWhat about the FRC’s tendering regime?Will the CC align their transition regime?
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