September/October 2013

Financial Reporting Update


New narrative reporting regulations

With effect for financial years ending on or after 30 September 2013, the majority of companies are required to produce a separate strategic report as part of their annual report and accounts. This new strategic report is similar to the existing business review for most, although there are some key differences for quoted companies.

Directors' remuneration report: new requirements

New legislation has been issued that replaces the current directors' remuneration reporting requirements for quoted companies for periods ending on or after 30 September 2013. Perhaps the most substantive change is the introduction of the so-called 'single figure table' to the annual remuneration report. Furthermore, a change to the Companies Act 2006 effective from 1 October 2013 now requires mandatory voting by shareholders on the directors' remuneration policy at least every three years.

FRC Corporate Reporting Review: Annual Report 2013

The FRC has issued its Annual Report on corporate reporting for the year ended 31 March 2013. The review found that reporting continues generally to be of good quality although some smaller listed companies' reporting suffers from a lack of appropriate resource. Progress on delivering more concise and relevant annual reports was considered disappointing. The FRC has highlighted that it will continue to challenge companies when it appears directors' judgements have lead to aggressive accounting.

FRC's Conduct Committee review finding – WH Smith Plc

The FRC has reported on its review finding in respect of WH Smith Plc's financial statements for the year ended 31 August 2012. WH Smith Plc accepts that the schedule of contributions for its defined benefit pension scheme is a minimum funding requirement within the meaning of IFRIC 14 that should have been accounted for as a liability.

IFRS newsletters and other publications

New narrative reporting regulations

SI 2013/1970 The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 provides a new structure for narrative reporting in the UK. The new regulations are designed to ensure that relevant information can be more meaningfully presented to stakeholders, but stop some way short of the radical proposals introduced in the 2011 Consultation Paper, The future of narrative reporting. They are effective for financial years ending on or after 30 September 2013.

As well as minor amendments to align the requirements with those of the September 2012 UK Corporate Governance Code, one of the key requirements of the new regulations is that the majority of companies are required to produce a separate strategic report. This new strategic report is essentially the same as the business review it replaces, although there are some key differences for quoted companies(1).

Quoted companies

Quoted companies are required to include a description of the company’s strategy and business model and (to the extent necessary for an understanding of the business) any human rights issues. The strategic report should also contain a gender analysis showing the number of persons of each sex who are:

  • directors of the company;
  • senior managers of the company; and
  • employees of the company.

A quoted company’s directors’ report must now also state (to the extent it is practicable to do so) the annual quantity of emissions (in tonnes) of carbon dioxide equivalent from activities for which the company is responsible (including from the combustion of fuel and the operation of any facility) and resulting from the purchase of electricity, heat, steam or cooling by the company for its own use.


As is currently the case with the business review, companies are exempt from the requirement to prepare a strategic report if they are entitled to prepare accounts under the small companies regime, or would be so entitled but for being or having been a member of an ineligible group.

In common with the existing business review requirements, the new regulations do not require the disclosure of information about impending developments or matters in the course of negotiation if their disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company.

The following disclosure requirements are no longer required under the new regulations:

  • information about persons with whom the company has contractual or other arrangements that are essential to the business of the company;
  • the differences between the carrying value of land and the directors’ view of the value of that land;
  • charitable donations and the purpose of such donations;
  • certain information if a private company acquires its own shares during the course of the year; and
  • creditor payment policy and practice.

Summary financial statements

Under the new regulations, summary financial statements in their current form cease to exist. Those shareholders who elect to receive summary financial statements will, in future, receive a copy of the strategic report together with supplementary information including, for quoted companies, that part of the directors’ remuneration report which sets out the single total figure table.

As now, shareholders retain the right to request the full annual report.

Further guidance

While the new regulations seem to offer little change to the existing legal requirements around narrative reporting, the Financial Reporting Council (FRC) is keen to encourage companies to consider how the strategic report fits within the annual report as a whole and help enhance the quality of narrative reporting more generally. It has therefore issued for comment its Guidance on the Strategic Report, which builds on the requirements for the strategic report outlined in the new regulations, as well as on its ‘cutting clutter’ project that is aimed at improving the relevance of corporate reporting to investors.

This draft guidance sets out the purpose of the strategic report as well as addressing materiality, communication principles and the report’s content. KPMG’s Audit Committee Institute’s publication, Guidance on the Strategic Report, discusses the draft guidance in further detail and is available to download here.

It is intended that, once issued, the final FRC guidance will serve as a best practice statement and will have persuasive rather than mandatory force. The existing ASB Reporting Statement: Operating and Financial Review will be withdrawn.

The FRC has requested feedback on the draft guidance by 15 November 2013.

(1) As defined by the Companies Act 2006, i.e., companies registered in the UK and with equity listed on the main market in the UK, in another state in the European Economic Area or on the New York Stock Exchange or NASDAQ


Directors' remuneration report: new requirements

In August 2013 the UK government issued new legislation, SI 2013/1981, that replaces the current directors’ remuneration reporting requirements for quoted companies(1) for periods ending on or after 30 September 2013. The requirements for disclosure of directors’ remuneration for non-quoted companies remain unchanged. Furthermore, a change to the Companies Act 2006 effective from 1 October 2013 now requires mandatory voting by shareholders on directors’ remuneration policies at least every three years.

The legislation sets out the requirements for the new annual report on remuneration and the directors’ remuneration policy, which both form part of the directors’ remuneration report. The Financial Conduct Authority (FCA) is currently consulting on proposals to align the existing Listing Rules requirements (LR 9.8.8) with those of the new Schedule 8.

The directors’ remuneration report will now include three sections:

1 An annual report on remuneration that details the retrospective amounts awarded in the period and a narrative explanation of those amounts.
2 The remuneration policy, that is forward-looking and sets out the types of reward and related performance conditions as well as explaining other elements of pay such as policies on loss of office compensation and signing-on bonuses.
3 The annual statement, made by the chair of the remuneration committee, summarising the key decisions on and any substantial changes made to directors’ remuneration in the period.

Annual report on remuneration

The annual report on remuneration is retrospective and discloses the details of each director’s remuneration (including that of non-executive directors) for the financial year. The key element of this report is the so-called ‘single figure table’, which includes all benefits provided to each director. As well as salary and fees and taxable benefits, it will also now include long-term incentives and defined benefit pensions as part of the total. The table is supplemented with narrative disclosure describing the key terms and any performance targets relating to the benefits/awards.

All long-term incentive schemes, e.g. long-term profit-sharing arrangements and share-based payment arrangements, are included in the period in which all performance criteria, e.g. a total shareholder return or profit target, have been met. Performance conditions now explicitly exclude service conditions for the purposes of this requirement. If final vesting of the benefit/award depends on further service, this fact is disclosed. When an award has only service conditions, the value of the award is included in the single figure table, in the period of award, with further disclosures.

There is also a change to the measurement of a director’s pension entitlement. In a simplification to the current actuarial calculations, the entitlement will now be calculated using so-called ‘HMRC methodology.

The new disclosures required in the annual report on remuneration include:

  • disclosure of the percentage increase in the Chief Executive Officer’s (CEO) pay versus that of employees;
  • a comparison of all employees pay (including directors) with dividends and any other significant payments or other uses of profits or cash flow deemed by the directors to assist in understanding the relative importance of spend on pay;
  • disclosure of the CEO’s annual bonus and long-term incentive awards as a percentage of the maximum that the CEO could have received; and
  • disclosures about the voting at general meeting on both the directors’ remuneration report and the remuneration policy.

Directors' remuneration policy

The new legislation now requires quoted companies to be bound by a directors’ remuneration policy that is set out in a separate section of the directors’ remuneration report. The policy is subject to a mandatory shareholder vote at least every three years.

In order that shareholders have clear information on how directors will be paid in future, the policy should include:

  • a description of each component of pay in a tabular format with detailed disclosures in respect of each component;
  • a statement of the policy to be applied on the appointment of directors, including those components that would be considered for inclusion in a remuneration package and the maximum level of variable remuneration that could be granted;
  • details of service contracts and potential loss of office payments; and
  • remuneration scenarios for each executive director, detailing minimum, target and maximum remuneration in the form of a bar chart.

The policy report may be omitted from the directors’ remuneration report for a particular financial year so long as the company does not intend to move a resolution to approve the directors’ remuneration policy at the annual general meeting in which the annual report is laid and appropriate disclosures are included in the annual report.


FRC Corporate Reporting Review – Annual Report 2013

The FRC’s Annual Report on corporate reporting for the year ended 31 March 2013 sets out a comprehensive analysis of the issues it has discussed with companies in the period, along with an indication of areas it will focus on in the future. It has also taken this opportunity to restructure the report and to set out the FRC’s intentions for a more transparent and targeted approach to operating, which is already evident in this report.

The report demonstrates that enquiries are wide-ranging and probing, with an increased tendency to request documentation to gain a clearer understanding of the issue in hand. The report also notes enhanced liaison of the Conduct Committee with other FRC bodies, including the Audit Quality Review Team.

The overall review findings noted were:

  • FTSE 350 company reporting continues to be of good quality, with issues typically arising on unusual or complex transactions when the FRC often finds it necessary to examine source documents for assurance on the specific facts and circumstances.
  • For smaller listed companies more straightforward issues arise as a consequence of those companies not having access to appropriate technical resource. The report encourages them to consider how to address this issue.
  • Disappointing progress in companies seeking to make their annual report more concise and relevant.
  • The FRC challenges companies when the directors’ exercise of judgement appears to result in aggressive accounting or when companies overlook a specific requirement in a standard using arguments based on the overriding spirit of the standard.
  • However, the report includes a reminder that, in rare cases, the standards should be overridden to present a true and fair view, with full disclosure given.
  • The FRC continues to monitor presentation, disclosures and explanation of movement in exceptional provisions made in the economic downturn which are now being released.

Being open on procedures

The report sets out the FRC’s steps to improve its effectiveness and openness. These include:

  • Its aim to review FTSE 100 annual reports at least once every three years and FTSE 250 at least once every four years.
  • Letters that set out its concerns in a clear and concise manner.
  • Unless a Review Group is formed to consider a complex issue, it will aim to complete enquiries within companies’ annual reporting cycles. To achieve this the FRC now expects companies to reply within 28 days and it will, in turn, aim to reply to responses within 28 days.
  • Look, on certain enquiries, to establish a Review Group earlier to support speedier resolution.
  • Seek further opportunities to discuss issues with the Audit Quality Review Team and to take advantage of expertise across the FRC.
  • For the first time the report has disclosed the names of companies that have published references to reviews within their annual report. The FRC intends to consult on a change in procedure to confirm that approach. The report notes that it is key that the wording of these references is agreed before publication.
  • The report confirms that the FRC follows up on all undertakings given on completion of a review and, when the promised improvements are not evidenced, pursues the matter with the company.

Issues noted for the future

Bearing in mind the updated Corporate Governance Code, the FRC believes that audit committees should consider, when preparing their annual report, whether issues discussed with the FRC may need to be included as significant issues they considered along with an explanation of how those issues have been addressed.

The FRC will monitor the application of IFRS 13 Fair Value Measurement this year, noting the additional disclosure requirements for investment properties, along with monitoring of any early application of the new consolidation standards. For the newly-introduced strategic report it will consider the additional disclosure requirements that apply for listed entities.

It will also be considering what needs to be done to improve financial reporting for small listed and AIM entities and will incorporate this project in its 2014/15 Plan and Budget.

Detailed findings

The report sets out the FRC’s current common areas of challenge including business reviews, cash flow statements and alternative performance measures and sets out the key issues to address, along with two case studies on how two actual issues were addressed in the year. There is also a separate more detailed presentation of actual technical findings in the year.

The number of reviews during the year (264 compared to 326 in 2011/12) dipped due to the complexity of a number of cases that were being addressed in the year. Consequently the FRC wrote to 91 companies (2011/12: 130) for further information or explanation, the drop in numbers reflecting the lower number of initial reviews. One company specific press release (2011/12: nil) was issued and another has been issued since the year end. Since the last annual report ten companies made a reference to the FRC in their explanation of a correction in their accounts.

The Report and Technical Findings are available here.


FRC's Conduct Committee review finding – WH Smith Plc

The Financial Reporting Council has reported on its review finding in respect of WH Smith Plc’s financial statements for the year ended 31 August 2012. As a result of the review the company has accepted that the schedule of contributions for its defined benefit pension scheme is a minimum funding requirement within the meaning of IFRIC 14(2) that should have been accounted for as a liability.

In the consolidated financial statements to 31 August 2012 the company did not recognise an asset in respect of an IAS 19 Employee Benefits surplus in the group’s main defined benefit pension scheme, since it was considered to be irrecoverable: the FRC made no comment on this treatment. However, the company did not view a schedule of contributions agreed with the Trustees as a minimum funding requirement within the meaning of IFRIC 14. In such circumstances, any additional surplus that would be generated by making agreed future contributions could not be recognised as an asset. However, no liability had been recognised for the future payments. Irrecoverable contributions payable under a minimum funding requirement would be viewed effectively as an onerous contract liability under IFRIC 14, to be recognised when the obligation arises. In its 31 August 2013 preliminary announcement the group has restated the comparative amounts to recognise the liability in respect of this minimum funding requirement.

The FRC’s press release is available here.

(2) IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction


IFRS newsletters and other publications

KPMG in the UK has recently published Breaking News UK, a new publication that summarises key developments in UK and International Financial Reporting Standards and UK company law. It is available for download here. Alternatively, you may subscribe by sending an email to Breaking News UK.

KPMG IFRG Limited has published the following since the July/August 2013 Update , which are available on its web site at
Insights into IFRS: An overview (September 2013)

Guide to annual financial statements: Illustrative disclosures (September 2013)

Guide to annual financial statements: Disclosure checklist (September 2013)

KPMG IFRG Limited also publishes In the Headlines, which provide information in relation to new exposure drafts and standards issued by the IASB, as well as any other relevant developments affecting current and future IFRS reporters.

In the Headlines, Issue 15 – Reminder: Effective dates of IFRS

In the Headlines, Issue 16 – Shaping the future of IFRS



New narrative reporting regulations

Directors' remuneration report: new requirements

FRC Corporate Reporting Review: Annual Report 2013

FRC's Conduct Committee review finding – WH Smith Plc

IFRS newsletters and other publications