Companies need only consider "specific, rather than generic" Scottish independence risks in annual reports, says expert

Out-Law News | 13 Feb 2014 | 9:57 am | 2 min. read

Companies subject to UK reporting requirements need only consider the potential impact of Scottish independence on their business as part of their annual reports if it is likely to present a "specific, rather than generic" risk to their business, an expert has said.

The Scotland on Sunday newspaper has claimed that a "number of big companies" plan to produce "independence risk assessments" as part of their annual reporting requirements. 

However, corporate governance expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com said that expecting companies to include a generic 'risk of Scottish independence' as part of the directors' report would "seem to go against" recent FRC guidance to companies about the type of risks that should be disclosed to comply with reporting requirements as set out in the Companies Act.

He said that independence, if voted for in September's referendum, would take place within the next reporting period for many companies preparing their annual reports now.

"The FRC has been telling companies for a number of years now that they need to be better at describing specific, rather than generic, risks and the perceived impact of those risks on their business as part of their annual reporting requirements. What the regulator doesn't like is a statement of the obvious: that a company is subject to the risk of a downturn in the economy, or adverse weather conditions, for example; without further linkage to the precise effect that risk may have on the business. To suggest the inclusion of a generic 'risk of Scottish independence' would seem to go against this drive," he said.

Unless exempted under the small companies regime, quoted companies must produce two separate non-financial reports: a high-level Strategic Report and a more detailed Directors' Statement. The information that each of these reports must contain is set out in the Companies Act and the Corporate Governance Code. Of particular relevance is section 417 of the Companies Act, which states that the directors' report must contain a description of "the principal risks and uncertainties facing the company".

Speaking to Scotland on Sunday a spokesperson for the FRC said that the rules "essentially require directors to set out the prospects for the business, highlighting principal risks". Disclosure should be made if boards "consider that a vote in favour of Scottish independence is a strategic issue or a principal risk", the FRC, which oversees the Corporate Governance Code, said.

"If, as the statement provided to the Scotland on Sunday suggests, the FRC will merely require a company to include the possibility of Scottish independence if they consider it to be a 'strategic issue or a principal risk' - for example, if a company could end up with substantial operations in two separate countries after independence - then this would seem to be common sense, and in line with what directors are already required to disclose under the Companies Act," said corporate governance expert Martin Webster.

Editor's note 14/2/14: A sentence in this story describing the FRC's position was removed after the FRC contacted us to tell us that it did not accurately reflect the statement it had made.