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12 Oct 2016 02:11pm

FRC sticks to its guns over distributable profits

The Financial Reporting Council (FRC) has written to the finance directors and audit committee chairs of all listed companies reiterating its view that company law does not require the separate disclosure of a figure for distributable profits in the financial statements

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Caption: Regulator reiterates position on distributable profits in letter to plcs

It says that the companies do not need to change their current practice in light of the recent letter from the Local Authorities Pension Fund Forum (LAPFF) which urged them to “disregard” the FRC’s position.

“Our position remains that we encourage good disclosure and companies paying close attention to their investors’ views while noting that the Companies Act 2006 does not require the separate disclosure of a figure for distributable profits or, specifically, multiple figures for distributable profits,” FRC chief executive Stephen Haddrill says.

“The Act is a matter for the Department for Business, Energy and Industrial Strategy. Its public statements are consistent with the FRC’s.”

The FRC has a pattern of writing the law down wrongly

LAPFF spokesperson

In September, LAPFF, which brings together 71 local government pension funds with combined assets totalling more than £175bn, wrote to the chairmen of FTSE 350 companies, on the basis of information it had uncovered under a freedom of information (FOI) request, which it argued undermined the FRC’s claims that its interpretation of the law on true and fair is backed by government.

It accused the FRC of “reading the law wrongly” and warned the companies that if they followed the FRC line on distributable profits, their accounts would not give a true and fair view. This would render any distribution unlawful, even if the distributable profits existed at the time the distribution was made.

The forum, which bases its own stance on a legal opinion from leading company lawyer George Bompas QC, added, “The FRC position will be particularly problematic for directors if a company later becomes insolvent, or has an unfunded pension fund deficit, after periods in which unlawful distributions were made.”

The LAPFF dismissed Haddrill’s latest statement as “another red herring from loose wording”.

“The fact is more than one reserve could be distributable, just as several reserves could be undistributable. Indeed, the FRC has a pattern of writing the law down wrongly,” a LAPFF spokesperson said.

“The government has said it has never disagreed with Mr Bompas. Mr Bompas is clear that there can’t be two sets of books. Indeed, how do the auditors sign off that the accounts agree to the records if the numbers are different? That would be misrepresentation, and especially relevant if director pay was justified off the misleading numbers.”

The latest round in the four-year battle between the FRC and the Forum is contained in Haddrill’s second annual letter to listed companies ahead of the new reporting season.

The intention is to remind the companies of changes to UK reporting requirements and to highlight areas of annual reports that could do with improvement.

The FRC decided to make the letter an annual event after response from the companies, auditors and investors to the first one, sent out last December, proved to be overwhelmingly positive.

This year it warns companies to make their annual reports more user-friendly and the provision of information clearer and more concise. This applies, in particular, to the strategic reports of smaller companies, “including the need to consider whether they have adequately discussed their financial position and cash flows as well as their company’s performance”.

Companies should ensure that the use of alternative performance measures doesn’t obscure or replace IFRS or UK GAAP information, they should consider a wider range of factors – including cyber security and climate change – when determining the principal risks and uncertainties facing the business, and they will need to decide what disclosures to make about the consequences for the business of the Brexit decision.

FRC research into the first viability statements, Haddrill says, has shown that there is currently little variation in disclosures between business sectors. “We encourage companies to provide clear disclosure of why the period of assessment selected is appropriate for the particular circumstances of the company, what qualifications and assumptions were made, and how the underlying analysis was performed.”

He also points to tax reporting as an area for improvement, particularly in the light of the increasing public focus on companies’ tax arrangements.

He says there is scope for highlighting the factors affecting effective tax rates and their sustainability. “Companies should articulate better how they account for material tax uncertainties by explaining the bases for recognition and measurement and we expect more companies to disclose the amount of their tax provisions than do so presently.”

Haddrill also urges audit committees (ACs) to be more informative about the significant issues they have considered and the specific actions taken.

In particular, he mentions: issues relating to the financial statements and how these were addressed, bearing in mind matters communicated to the AC by the auditors; the nature and extent of interaction with the FRC’s corporate reporting review team; and where a company’s audit has been reviewed by the FRC’s audit quality review team, the disclosures that need to be made about the findings and the actions the AC and the auditors plan to take.

Julia Irvine

 

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