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Accounting roundup: FRC targets ESG for next reporting season

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The UK’s Financial Reporting Council has written an open letter to audit committee chairs and finance directors warning them it plans to target a number of environmental, social and corporate governance issues this reporting season.

The development could see companies in carbon-intensive industries held to greater account over the impact of their businesses on climate change.

It follows the introduction of new government regulations that now force UK companies to report their compliance with section 172 of the Companies Act 2006.

Climate finance lawyer Daniel Wiseman from environmental campaign group ClientEarth said:

“The FRC has now been explicit that companies must consider and report relevant climate-related information under existing disclosure laws. After repeated demands from the world’s biggest investors for detailed and TCFD-aligned climate-related disclosures, directors have run out of excuses for hiding this information from shareholders.

“The FRC and the Financial Conduct Authority must now enforce these laws properly and ensure investors have the information they need to protect our savings and the economy from the most disruptive climate change impacts.”

According to s172, a company’s management has a responsibility not only “to promote the success of the company” but also to have regard to a wide number of stakeholders such as employees, suppliers and even the wider environment.

Those that want to see s172 more rigorously enforced argue it could cast a light on a wide range of corporate misconduct and environmentally damaging practices.

The FRC letter expressly warn boards to “include a further statement within the strategic report, describing how they have had regard to a number of factors when working to promote the success of the business.”

The new requirement applies from 1 January 2019.

The issue of s172 reporting hit the headlines in August 2016 when environment law campaigner ClientEarth filed two regulatory complaints with the FRC about SOCO International and Cairn Energy.

ClientEarth alleged both companies were in breach of the duty to report how they had complied with s172. Both SOCO International and Cairn Energy have rejected the allegations.

PIRC claims FRC ignored s172

Pensions & Investment Research Consultants has claimed that the FRC had either misunderstood or ignored s172, telling the UK Parliament in a written submission that:

“There is clear evidence with Section 172 and Section 414, and Section 393 and Part 23 of the Companies Act 2006 that the FRC is not adhering to the law.”

The FRC, however, said it was unable to enforce reporting about compliance with s172 unless the government changed the law.

Since that row erupted, the government last year introduced The Companies (Miscellaneous Reporting) Regulations 2018.

In response, the FRC is now urging companies not only to report on their compliance with s172 but also to address the overlap between that section of the Companies Act 2006 and the UK government’s Green Finance Strategy and the UK Corporate Governance Code. 

Meanwhile, among the other areas of concern highlighted by the FRC in the letter are:

  • financial instruments,
  • lease accounting,
  • revenue recognition, and
  • goodwill impairment.

Last month, PIRC wrote to FTSE 100 boards and warned them to be alert to any discrepancies between the assets reported in their group accounts and those in their parent or holding company accounts.

In its letter, the FRC now warns that “where the carrying value of a parent company’s investment in subsidiaries exceeds the group’s market capitalisation … we will ask whether an impairment review has been carried out” and also challenge any “inadequate disclosure” in the accounts.

IASB completes amendments to hedge accounting requirements 

The International Accounting Standards Board has finalised its amendments to the hedge accounting requirements detailed in its financial instruments accounting literature.

The board has made the changes in response to the discontinuance of certain interest-rate benchmarks such as the London Interbank Offered Rate.

The amendment requirements grant relief to entities that use hedge accounting so that they are not forced to discontinue their hedge accounting as a result of the switch to a new interbank offered rate.  

The alterations also require entities to make certain disclosures to investors about the impact of the switch to new benchmark rates.

The three accounting standards affected are:

  • IFRS 9 Financial Instruments,
  • IAS 39 Financial Instruments: Recognition and Measurement, and
  • IFRS 7 Financial Instruments: Disclosures.

Hedge accounting is an accounting policy choice that focuses on reducing income statement volatility by offsetting a position on one security or exposure with an opposing position.

Under international standards, it is essentially an exception to the normal rules of fair value accounting that does not amount to an attempt to generate a profit in the same way that a bank or financial institution does when it invests or trades in securities.

The new requirements take effect from 1 January 2020 with early adoption permitted.

In its 2019 accounting priorities notice, the European Securities and Markets Authority urges issuers “to prepare for the timely implementation of these amendments and closely monitor development in the endorsement process in the European Union.”

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