EQ Bulletin - September 2022

In This Edition

• Thematic Review of Judgements and Estimates
• CRR Thematic Review of TCFD Disclosures and Review of TCFD Disclosures by Premium Listed Companies
• Digital Security Risk Disclosure
• Market Abuse Regulation Breach
• Digital Securities

Thematic Review of Judgements and Estimates

The Financial Reporting Council (FRC) has published an updated Thematic Review (the Review) on judgements and estimates, and the original Review was published in November 2017. The Review notes that companies need to disclose their more complex accounting judgements and the most significant sources of estimation uncertainty to enable readers to assess how the accounting policies have been affected by the decisions taken by management. This is intended to give a better understanding of assumptions about the future and the extent to which changes to those assumptions may affect a company's future position. The Review has identified some improvement in the quality of judgement and estimate disclosures since the original 2017 review. However, areas identified for improvement include:

• Companies should explicitly state whether estimates have a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
• Sensitivity disclosures should be provided to readers more frequently and in the most meaningful way.
• Companies should assess whether disclosure of climate-related significant judgements or assumptions and sources of estimation uncertainty are required by paragraphs 122 or 125 of IAS 1 and consider whether information about beliefs with a longer-term effect is needed.
• Where additional estimate disclosures are provided, such as those with lower risk, minor impact, or crystallising over a longer timeframe, they should be clearly distinguished from those with a short-term effect.

The Review includes examples of good practice, including quantified assumptions and amounts at risk of material adjustment, detailed explanations of management's judgements and the nature of the uncertainties relating to significant estimates, and a discussion of the effects of climate change on estimates.

Read More: FRC Judgements & Estimates Thematic Review_July 2022

CRR Thematic Review of TCFD Disclosures and Review of TCFD Disclosures by Premium Listed Companies

The Financial Reporting Council (FRC) and Financial Conduct Authority (FCA) have published two reports which found that premium listed companies have made significant steps forward in the quality of climate-related information provided in their financial reports, but further improvements are needed.

Read More: CRR Thematic review of TCFD.

The FRC reviewed 25 larger companies more impacted by climate change and found that companies could provide many of the TCFD disclosures expected by the FCA's Listing Rule, and climate-related reporting in the financial statements, marking a significant improvement in comparison with previous years.

The report notes that there are several areas where companies will need to raise the quality of their disclosures in future years, including:

• Providing more granular information about the effect of climate change on different business sectors and geographies.
• Balancing the discussion of climate-related risks and opportunities appropriately.
• Linking climate-related disclosures to other risk management and governance processes.
• Explaining how they have decided which climate-related information should be disclosed.
• Explaining more clearly how the effects of different global warming scenarios, and their net-zero commitments, may affect the valuation of their assets and liabilities.

The FCA reviewed 170 companies at a high level and 30 companies in more detail. Their report is available from The FCA, which found that over 90% of companies self-reported that they had made disclosures consistent with the TCFD's Governance and Risk Management pillars, but this dropped to below 90% for the Strategy and Metrics and Targets pillars. 81% of companies indicated that they had made disclosures consistent with all seven recommended disclosures, which the FCA would ordinarily expect a company to comply with. There were, however, some instances where companies indicated that they had made disclosures consistent with the recommended disclosures, but the revelations appeared to be very limited in content. The FCA report also contains a reminder that the reporting obligations now extend to standard and premium listed companies and includes a list of 11 steps listed companies are expected to consider in preparation for making TCFD-aligned climate-related disclosures.

Market Abuse Regulation Breach

The Financial Conduct Authority (FCA), in a 53-page final notice available from: Final Notice 2022: Sir Christopher Gent the Chairman of a quoted company has been fined £80,000 under section 123 of the Financial Services and Markets Act 2000 for unlawfully sharing inside information which was deemed to be a breach of the Market Abuse Regulation (MAR).

The events in October 2018 followed a verbal indication from a critical customer that it would significantly reduce its orders, resulting in the company's revenue growth for the quarter falling outside market expectations. Following this, the Chairman had a conversation with the CEO, suggesting that the CEO consider their position. In a subsequent discussion, the CEO indicated that they would retire due to remuneration and exit arrangements being agreed upon. The Chairman then called two of the company's largest investors to advise them of this information and let them know that the company would likely be announcing a revision to its financial growth guidance and the retirement of the CEO the following week. The company had not classified the information about revised financial guidance and the retirement of the CEO as inside information. When the announcement was made, the company's share price fell by 33%. There was no evidence to suggest that the Chairman intended to make a personal gain or avoid a loss.

The FCA findings included the following:

• The information about the retirement of the CEO and the change in the financial growth forecast was inside information. Even though the information was not certain did not prevent it from being "precise". It was enough that there was a "realistic prospect".
• The fact that the executives responsible for MAR compliance, and one of the company's two brokers who were aware of the proposed conversations, did not tell the Chairman not to make the calls did not absolve him of his responsibility. Failure to apply his mind to the question amounted to negligence.
• The Chairman had unlawfully disclosed inside information outside the proper course of his employment, profession or duties in sharing this with two key investors ahead of a market announcement, which amounted to a breach of MAR.
• The disclosures were unreasonable, and they didn't need to be made for the Chairman to perform his proper functions, nor was it a proportionate way for him to discharge his duties as Chairman.
• The Chairman's explanation that he did not want to "surprise shareholders of scale with announcements" was not a good reason for making the disclosures.