Audit Committee Institute KPMG Ireland

The UK Corporate Governance Code (Revised 2014)

The Financial Reporting Council (FRC) has revised the UK Corporate Governance Code (the Code) and Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (the Guidance). The primary objectives of the amendments are to improve the information available to investors about the long term viability of listed companies and around risk management.

The revisions will take effect for financial periods beginning on or after 1 October 2014 and focus on the following key areas:

• Going concern, risk management and internal control;

• Remuneration; and

• Shareholder engagement.

As with the existing Code, the changes fall within the ‘comply or explain’ framework.

The revised Code and associated guidance can be found via the FRC’s website www.frc.org.uk.

Going concern, risk management and internal control The revised Code now requires directors to provide a ‘viability statement’ in addition to enhanced going concern disclosures in the annual report. Further revisions include additional disclosure around principal risks and internal control systems.

The going concern and viability statements There are now two required statements in relation to going concern, which differentiate between the accounting ‘going concern’ concept and the broader assessment of long-term solvency and liquidity, or ‘viability’.

In respect of the first, the amended provision C.1.3 requires that in addition to the directors’ statement in the annual and half-yearly reports as to whether they have adopted the going concern basis of presentation, they now also need to state why this was considered appropriate and identify any material uncertainties.

Whether an uncertainty is material and therefore requires disclosure is a judgement of the directors. The existence of material uncertainties does not mean that the going concern assumption is inappropriate, however, it does add further disclosure requirements. The FRC guidance states that

uncertainties should be considered material if disclosure could affect the decisions of shareholders and other fi nancial statement users. Considerations should include the size of potential impacts of uncertainties and the likelihood of these occurring and the availability of effective actions the directors may utilise to reduce the impact of the uncertainties.

The second, ‘viability’ statement (provision C.2.2), requires that the directors explain in the annual report ‘how they have assessed the prospects of the company, what period the assessment covered, and why this period was appropriate. The directors should state whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, drawing attention to any qualifi cations or assumptions as necessary’.

The Guidance states that in normal circumstances, the period used should be a lot longer than 12 months. The length of the period should be decided by the directors, taking the following into consideration: the board’s stewardship responsibilities; previous statements made by the board and company; the nature of the business and its development stage; and the company’s investment and planning periods.

The assessment itself should include both quantitative and qualitative information, and directors should consider including sensitivity and stress-testing. Again, the assessment should also take into account any actions the board may realistically engage in to reduce risks.

Principal risks The Code now refers to ‘principal’ risks, rather than ‘signifi cant’ risks. This is to align the Code with the new Strategic Report terminology and does not imply a change in the nature of the risks disclosed.

The UK Corporate Governance Code (Revised 2014) / ACI / September 2014

© 2014 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

A new provision (C.2.1) requires directors to confirm in the annual report that they have performed a ‘robust’ assessment of the principal risks facing the company, ‘including those that would threaten its business model, future performance, solvency or liquidity’ and describe the risks and how they are mitigated by the company.

The description of the principal risks should provide shareholders with enough information so that they understand why these are important to the company and might include the likelihood of the risk and possible impacts on the company. Signifi cant changes in risks or their potential impact should also be explained. Many companies are already disclosing their principal risks (as required by the Companies Act) and how such risks are mitigated.

Ongoing monitoring The existing Provision setting out the board’s responsibility to at least annually, review the effectiveness of the company’s risk management and internal control systems has been amended to distinguish between the board’s ongoing monitoring of the risk and control systems and the formal annual effectiveness review. The FRC do not see the board’s involvement in relation to risk management and internal control systems as a once a year exercise.

There is a significant change proposed in relation to the disclosure of any significant failings or weaknesses identifi ed during the board’s review of the effectiveness of internal control and risk management systems. Rather than simply confi rming that any necessary actions have been or are being taken to remedy any significant failings or weaknesses identifi ed from the review, the Guidance now sets out that the board should explain what actions have been or are being taken. However, in reporting on such actions, the board would not be expected to disclose information which, in its opinion, would be prejudicial to the company’s interests.

The FRC guidance anticipates that the principal risks, internal control and going concern and viability statements should be interlinked and this is something that companies should consider how to address.

Remuneration The principles around executive remuneration have been amended to focus more strongly on the long-term success of the company and an appropriate balance between both fi xed and variable; and immediate and long-term remuneration. The changes also seek to remove any potential ambiguity in relation to the remuneration committee consulting the chief executive about proposals relating to other executive directors. The remuneration committee should now “take care to recognise and manage conflicts of interest when receiving views from executive directors or senior management, or consulting the chief executive about its proposals.”

Code provision D.1.1 has been revised to include a presumption that claw back arrangements exist whereby companies can recover or withhold variable pay where considered appropriate.

Relations with shareholders When a significant proportion of votes has been cast against a resolution at any general meeting, the Code now requires that the company should explain what action it will take to understand the reasons for the results. This explanation should be provided when the results are announced. The determination of what constitutes a ‘significant proportion’ is for the board of directors to decide.

Other changes Accounting Standards have been amended to require auditors to give a statement, based on the knowledge they have acquired during the audit, if they have anything material to add or draw attention to in relation to the additional statements by the directors.

The FRC has provided additional guidance for the directors of banks (Guidance for Directors of Banks on Solvency and Liquidity Risk Management and the Going Concern Basis of Accounting). This guidance does not create a different framework for banks but does discuss the situation of a bank using central bank liquidity facilities in relation to the going concern basis. The use of such facilities does not necessarily mean the bank would be unable to adopt the going concern basis, need to disclose material uncertainties, or disclose assumptions or qualifications as part of the viability statement.

Contact us If you would like further information on the new guidance, please talk to you usual KPMG contact or contact:

David MeagherChairman: ACI IrelandPartner Audit: KPMG in Ireland

T: +353 1 410 1847 E: david.meagher@kpmg.ie

www.kpmg.ie/aci

© 2014 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Ireland.

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