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EQ Bulletin October 2022

EQ Bulletin - October 2022

Tuesday, 18 October 2022

Keeping you up-to-date with industry changes and updates impacting the world of share registration and employee share plans.

Welcome to our October Edition of EQ Bulletin.

Thera PrinsThera Prins
CEO - UK Shareholder Services

It has been another relatively quiet period for Corporate Governance, with the Financial Reporting Council issuing the only matters of note. Covering research into current practice in auditor reporting, published regulations relating to the registration of auditors for Public Interest Entities, published reports on methods of improving Environmental, Social and Governance Data Production (through the FRC Lab) and the published thematic review of earnings per share.


Snapshots of current practice in auditor reporting

The Financial Reporting Council (FRC) has published research in the form of six infographic snapshots into the state of auditor reporting in the UK. The research follows the analysis of the auditors' reports of 396 companies issued in 2021 (FTSE350 and AIM companies) conducted by academics based at the Universities of Portsmouth, Southampton and Brunel. The snapshots cover six areas:

  1. Understandability and usability of auditor reports;
  2. Communicating judgements on materiality and the scope of the group audit,
  3. Key audit matters,
  4. Key audit matters on climate change, COVID-19, alternative performance measures and graduated findings,
  5. Going concerned and
  6. Fraud and other irregularities.

The research represents the first step in meeting the FRC's undertaking to improve auditor reports' usability in addition, informativeness following the publication of the Position Paper on Restoring Trust in Audit and Corporate Governance. The research provides a foundation for understanding current practice and is intended as a basis for engaging the users of auditor reports and other stakeholders to identify potential areas for improvement.

Read more: FRC publishes snapshots of current practice in auditor reporting

Regulations for PIE Auditor registration

The Financial Reporting Council (FRC) has published regulations for the upcoming Public Interest Entity (PIE) Auditor Register. All audit firms and responsible individuals undertaking statutory audit work for PIEs are to be registered by the FRC from 5 December 2022. Audit firms currently auditing PIEs will need to apply and get approval to be included on the PIE Audit Register to prevent any disruption to their work. There will be a transition period from 5 September to 4 December 2022 for existing audit firms of PIEs to submit transitional applications.

Read more: FRC publishes regulations for PIE Auditor Register  

Improving ESG Data Production

The Financial Reporting Council (FRC) Lab has published a report FRC Lab ESG Data Protection Report _August2022, on improving companies' Environmental, Social and Governance (ESG) Data Production. The report follows interviews and roundtables with various organisations across sectors, including large listed companies, private companies and housing associations. The report identified three elements of ESG Data Production:

  • Motivation – What motivates the company to collect ESG data, and how does it determine what is needed?
  • Method – How is ESG data collected?
  • Meaning – How is data used within the company, and how does it affect decision-making?

The report sets out a recommended systematic approach to ESG data production, which includes, amongst other things:

  • Performing a materiality assessment to understand the ESG topics and data points relevant to the company, including identifying current and future drivers for ESG data; engaging internal stakeholders across all levels to understand what is needed operationally and strategically and identifying what is already collected and what is missing. Engaging with key investors and other stakeholders to understand what data is important to them and reviewing regulation and framework requirements.
  • Identifying the internal and external sources for the data and setting out the methodology and frequency for gathering the data.
  • Engaging with finance and internal audit teams to apply controls over the data, including evidence trails, reviews and sign-offs.
  • Assessing which data should be subject to internal and external assurance.
  • Documenting responsibilities and processes for knowledge retention.
  • Considering training and education for the board and the company on why ESG data is required and how to use it for strategic decision-making.
  • Not treating ESG data just as part of an annual reporting cycle, but integrating it in regular processes, embedding it in the company's culture to understand company performance and impact, risks and opportunities, progress against commitments, and what action (including strategic change, capital allocation and incentivisation) is necessary.
  • Review whether existing data and data quality support strategic decision-making and whether an investment in systems and resources are needed.

The report also includes questions for boards to consider about how ESG data is collected and used.

Thematic Review of Earnings Per Share

The Financial Reporting Council (FRC) has published a thematic review of earnings per share (EPS). All companies with listed ordinary shares need to report EPS by IAS 33 Earnings per share in both interim and annual reports (including companies reporting under the UK GAAP standard FRS 102). While EPS is a well-understood metric widely used by companies and investors, some aspects of its calculation are not straightforward. The findings from the FRC's Corporate Reporting Review (CRR) team's routine monitoring of company reporting show that some of the main principles of IAS 33 are not always well understood or applied correctly.
The FRC’s review identifies how companies can improve their disclosure of EPS:

  • Companies should consider providing further information to explain the basis for the weighted average number of shares used in the EPS calculation if it is significantly different from information disclosed about issued ordinary shares and potential ordinary shares (for example, share options).
  • Judgements that have a material effect on EPS should be disclosed by paragraph 122 of IAS 1 (or paragraph 8.6 of FRS 102).
  • Disclosures provided for non-GAAP 'adjusted EPS' should meet the ESMA Guidelines on Alternative Performance Measures (APMs) requirements and explain the methodology applied in the adjusted calculation, including the basis used for tax on adjusting items.

The review highlights the more common errors in EPS calculations and reminds companies of specific key requirements. Including the definitions of dilutive and anti-dilutive, the treatment of share reorganisations that include a bonus element, adjustments required for equity preference shares, and the methodology for calculating EPS when a reverse acquisition has occurred. To encourage improvement in the general quality of the application of IAS 33 by companies, the review includes a summary of the main requirements of the standard; examples to explain some more complex aspects of calculating EPS; and observations on the importance of EPS for investors.

Read more: FRC CRR Thematic Review on Earnings per Share 

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