UK Parliament considers insolvency law changes

The UK government introduced this week into Parliament the Corporate Insolvency and Governance Bill, which will amend insolvency and company law to support businesses amid the continuing economic impact of the coronavirus. At the same time the UK’s Financial Reporting Council (FRC) issued corporate reporting guidance on exceptional items and alternative performance measures.

MPs will consider all further stages of the fast-tracked bill on 3 June, following its formal First Reading in the House of Commons on 20 May.

The UK’s business secretary Alok Sharma said: “The bill will help companies that were trading successfully before the COVID-19 emergency to protect jobs and put them in the best possible position to bounce back.”

Insolvency measures

The bill introduces insolvency measures that include:

• A company moratorium that will provide struggling businesses “a formal breathing space to pursue a rescue plan during which time no legal action can be taken against a company without leave of the court”, the government said.
• A permanent change to the use of termination clauses in supply contracts. A company’s supplier will, with certain exceptions, no longer be able to end a contract or vary its terms on the basis of the company becoming insolvent.
• A new “restructuring plan” as an option for companies in financial difficulty.
• Temporary measures to void statutory demands. These measures are intended to prevent aggressive creditor action against otherwise viable companies struggling because of the coronavirus.
• Temporary removal of the threat of personal liability for wrongful trading between 1 March and 30 June from company directors while they make their best efforts to continue to trade. “All the other checks and duties on directors remain in place,” the government confirmed.

Certain financial services firms and contracts are excluded from some of the reforms.

The bill will also temporarily ease burdens on businesses by enabling them to hold closed annual general meetings and to conduct business and communicate with members electronically, and by extending filing deadlines.

The measures relating to meetings are intended to be retrospective from 26 March.

The UK’s Financial Reporting Council and the government’s Department for Business, Energy, and Industrial Strategy have updated their joint guidance in this area.

Corporate reporting guidance

The FRC issued guidance on Wednesday on how exceptional or similar items and alternative performance measures should be treated in corporate reporting and accounts.

Exceptional or similar items

Under the International Accounting Standards Board’s standard IAS 1, Presentation of Financial Statements, companies disclose individually material items on the face of the income statement or in the notes to their accounts.

The FRC said that companies need to consider whether additional income or expenditure items that arise as a result of the COVID-19 crisis should be disclosed separately in accordance with existing policies for exceptional or other similar items.

In disclosing these items — such as “restructuring costs, impairment charges, incremental health and safety costs, and the costs of onerous contracts” — the FRC said companies should:

• Be even-handed in identifying any gains as well as losses;
• Not describe amounts as “non-recurring” or “one-off” if they are also expected to arise in future periods;
• Not disclose costs (sometimes described as “stranded”, “sunk”, or “excess”) as exceptional solely because of a reduction in, or elimination of, the related revenue streams due to the COVID-19 crisis; and
• Not identify incremental costs as exceptional if they result in incremental revenue that is not also described as exceptional; for example, additional staff costs related to managing unusually high levels of sales of in-demand items.

The FRC said it discouraged companies from “splitting discrete items on an arbitrary basis in an attempt to quantify the portion relating to Covid-19 [as this] is unlikely to provide users with reliable information”.

The guidance includes further information.

Alternative performance measures (APMs)

The FRC said that when presenting alternative performance measures (APMs) in their interim and annual reports and accounts to supplement information provided under International Financial Reporting Standards (IFRS), companies should ensure that the APMs:

• Have clear and accurate labelling;
• Have an explanation of their relevance and use;
• Are reconciled to the closest IFRS measure; and
• Are not given more prominence than the equivalent IFRS measures.

The FRC said: “APMs should also be presented consistently year-on-year.” However, where there are changes to APMs as a result of COVID-19 changing a company’s operations or business model, readers of company reports or accounts “should be informed of any such changes and provided with an explanation of why they provide reliable and more relevant information”.

The guidance updates earlier guidance on corporate governance and reporting issued on 12 May.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the pandemic, visit FM’s coronavirus resources page.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.