Baroness Bowles of Berkhamsted

No consideration has been given to amending the response to HL4706. The Companies Act 2006 does not establish a requirement for the company to disclose its undistributable reserves. The publication referenced provides guidance for auditors when making reports required, in certain circumstances, by The Companies Act 2006. Proposals to require certain companies to disclose their distributable reserves were included in the Government’s response to Restoring trust in audit and corporate governance.

The UK Endorsement Board (UKEB) is required to assess international accounting standards (IAS) in accordance with Regulation 7(1) and with regard to the matters in Regulation 7(2). The interpretation of these functions is considered by the UKEB within the context of the Companies Act. However, the UKEB is not required to assess IAS against individual sections of the Companies Act nor publish any evidence in that regard. With regards to the quoted sections of the Companies Act regarding the calculation of distributable profits, I refer the noble Baroness to my response to HL31 on 20 May 2022.

The Government does not intend to amend its response to HL31 and does not believe that the two statements quoted in the question are in contradiction with one another. The UK Endorsement Board (UKEB) is required to assess international accounting standards (IAS) against the criteria in Regulation 7(1). This also requires the UKEB to have regard to the matters set out in Regulation 7(2). The interpretation of these functions is considered by the UKEB within the context of the Companies Act. However, the UKEB is not required to assess IAS against individual sections of the Companies Act.

Regulators and other public bodies will consider case law to the extent that it is directly applicable to their legal functions.

All members of the UK Endorsement Board’s Secretariat are FRC employees and are appointed following an open and transparent recruitment process as set out in the attached document taken from the FRC website.

As noted in my response for HL866 on 21 June, the UK Endorsement Board Secretariat provides an administrative role with no executive function so staff in the Secretariat should not be subject to parliamentary questions about their previous experience.

The Secretary of State delegated statutory powers to the UK Endorsement Board. The Secretariat, including the Technical Director, have no decision-making powers. Their role is to provide technical advice to the UK Endorsement Board to support the delivery of its statutory functions. The UK Endorsement Board Secretariat is also ring-fenced from the Financial Reporting Council functions and is not involved in the decision-making of the Financial Reporting Council, nor do members of the Secretariat sit on the FRC’s Executive Committee.

I refer the noble Baroness to the Government’s response to HL760, which supplements the Government’s response to HL404.

As the UK Endorsement Board is not regulated by the Commissioner for Public Appointments, it does not appear on the Public Appointments Order in Council, which was last reviewed in 2019 – prior to the UK Endorsement Board being established. With the exception of the Chair, appointments to the UK Endorsement Board are made by the Chair, with the consent of Ministers rather than being full public appointments.

BEIS officials have not discussed the UK Endorsement Board with the Commissioner for Public Appointments and the National Audit Office. The Government undertakes to consult the Commissioner’s office to discuss whether to include the UK Endorsement Board in the Order.

Diversity summary

Of seven applications to the role of Chair of the UK Endorsement Board, two were female and five are male. A detailed split is as follows:

Panel Summary

• Panel Chair and BEIS Representative: Eoin Parker, Director, Business Frameworks
• Other Panel Member: John Coomber, Non-Executive Director, Financial Reporting Council
• Other Panel Member: Clare Cole, Director of Market Oversight at the Financial Conduct Authority
• Independent Panel Member: Shrinivas Honap, Audit and Risk Assurance Committee Chair, UK Space Agency

As this campaign is still ongoing, no announcement on the successful candidate has been made.

There are no plans to place a copy of the candidate pack in the Libraries of the House.

The profile of Mike Ashley on the UK Endorsement Board website sets out his career with KPMG. A copy of the profile is attached for reference. It is a matter for the UK Endorsement Board to decide what information they include on their website.

The UK Endorsement Board secretariat provides an administrative role with no executive function so staff in the secretariat should not be subject to parliamentary questions about their previous experience. However, I can assure the noble Baroness that all members of the secretariat were recruited through fair and open competition.

The Government did not ask Mike Ashley for information in preparing its response to the previous questions. Officials contacted Mr Ashley during preparation of a response to this question and he informed officials that, to the best of his recollection, he was the KPMG audit engagement partner for years ending 31/12/2001 until 31/12/2004 inclusive.

SI 2019/685 was made under powers conferred by the European Union (Withdrawal) Act 2018 and not the Companies Act 2006. Nevertheless, the Government is satisfied that the UK Endorsement Board has interpreted its statutory functions in accordance with the Companies Act and the provision in Section 11 of the Interpretation Act 1978 that is quoted in the question.

The Government did not make an assessment in providing the Written Answer on 1 June 2022 to Question HL473. The interpretation of court judgements is not a matter for the Government, but for relevant regulators and the courts.

As set out in the answer I gave the noble Baroness on 27 May 2022 to Question HL402, both the Secretary of State and, following the delegation of statutory functions, the UK Endorsement Board have adopted international accounting standards in accordance with the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019.

The Chair campaign was not regulated by the Commissioner for Public Appointments as the role is not currently included on the Public Appointments Order in Council. Only roles included on the Order are regulated by the Commissioner. The classification and form of the UK Endorsement Board means it was not included on the Order, however this position may be reviewed in future.

Nevertheless, the campaign was run in accordance with the usual regulated process in all respects other than the advert remaining on the Cabinet Office website after the closing date.

The matter in the question was not considered in the January 2007 impact assessment on the Companies Act 2006.

The directors are responsible for signing off the accounts and making sure they comply with the requirements of the Companies Act 2006. The Companies Act requires that companies take into account the additional factors in Part 23 of the Companies Act when calculating distributable profits. This is to ensure that a company may only make distributions out of profits available for the purpose of distribution.

Companies are required to take account of all of the matters in Part 23 of the Companies Act 2006 before paying a dividend.

The Conceptual Framework issued by the International Accounting Standards Board is not an international accounting standard and therefore is not adopted into UK law. Nevertheless, it does provide a basis for the use of judgement in resolving accounting issues. It is only of relevance in situations where no specific international accounting standard applies to a transaction, event or condition (as set out in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).

Pauline Wallace has informed the Government that she had no involvement in the tribunal between the Accountancy Investigation and Discipline Board and PwC.

The Government did not make an assessment of the Caparo V Dickman case in providing the Written Answer on 20 May 2022 to Question HL31.

As noted in the answer I gave to HL31, section 833A is an example of a factor that directors in certain insurance companies may need to consider when using their relevant accounts to determine their company’s distributable profits. Section 833A works in tandem with other sections that reference the accounts, to create a dual test.

UK-adopted international accounting standards require the directors of a company, when preparing the accounts, to make an assessment of the company’s ability to continue to operate as a going concern for at least 12 months from the balance sheet date. These standards also require disclosure where there are material uncertainties related to events or conditions that may cast significant doubt upon the company’s ability to continue as a going concern.

Section 836 of the Companies Act 2006 requires that the calculation of distributable profits is determined by reference to the relevant accounts. Part 23 includes other criteria that must be assessed before the amount of distributable profits for the company can be determined. In taking a decision to pay a dividend, directors must also consider their duty under s172 of the Companies Act 2006 to promote the success of the company for the benefit of shareholders as a whole. Consideration of the success of the company may include an assessment of whether the company would, following the payment of the proposed dividend, be solvent and continue to be able to pay its debts as they fall due, in the context of the current and likely future position and needs of the company.

Regulation 5 of the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/685) gave the Secretary of State the responsibility to adopt international accounting standards, with a view to harmonising the financial information presented by companies preparing accounts required by section 403(1) of the Companies Act 2006. This responsibility was delegated to the UK Endorsement Board via the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021, which was approved by Parliament and came into force on 22 May 2021. The delegation also includes the requirement to abide by the basis for adoption of international accounting standards set-out in Regulation 7 of SI 2019/685.

Companies calculate their distributable profits under Part 23 of the Companies Act 2006, and as such, it is an individual decision at the company level as to whether to make a distribution.

An impact assessment on the Companies Act 2006 was published in January 2007 and is attached to this response.

The Companies Act 2006 (the Act) requires UK-registered companies which use international accounting standards when preparing their accounts to use UK-adopted international accounting standards. UK-adopted international accounting standards are defined in Section 474 of the Act as the international accounting standards which are adopted for use within the United Kingdom by virtue of Chapter 2 or 3 of Part 2 of SI 2019/685. These are any international accounting standards endorsed by the EU as at the end of the EU Exit transition period, and any subsequent UK adoptions of international accounting standards by the Secretary of State or, following the delegation of this function, by the UK Endorsement Board. A consolidated text of UK-adopted international accounting standards can be found on the UK Endorsement Board’s website.

The advert for a campaign to recruit a new Chair to the UK Endorsement Board was published on the Cabinet Office website on 15 December 2021, and remained there until the closing date for applications on 23 January 2022. Campaigns that are not regulated by the Commissioner for Public Appointments are no longer visible to the public on the website after they have closed for applications.

Mike Ashley was a serving member of the UK Accounting Standards Board, which was a Board of the FRC, when he acted as an expert witness on behalf of PwC during the Tribunal between the Accountancy Investigation and Discipline Board and PwC. The judgement for this case is available on the FRC’s website (and a copy is attached to this response). The Government does not hold information relating to the procedures of the UK Accounting Standards Board which was a Board of the FRC and ceased operating in 2012.

The Government does not hold information relating to the recruitment of staff to the UK Accounting Standards Board which was a Board of the FRC and ceased operating in 2012. All permanent posts for staff recruited to the Secretariat of the UK Endorsement Board are subject to public advertising and open competition.

Information from the UK Endorsement Board website explains that Mike Ashley retired as the Partner and the Head of Quality and Risk Management of KPMG Europe LLP in September 2013, having spent about 35 years with the firm and its predecessor firm, Peat Marwick. The Government does not hold information relating to the specifics of Mr Ashley’s role at KPMG.

The UK Endorsement Board operates independently from the Government. BEIS is therefore unable to provide information relating to members of staff, including information on job history, supporting its work.

The Government does not hold information relating to the recruitment of staff to the UK Accounting Standards Board which was a Board of the FRC and ceased operating in 2012.

Mike Ashley was a member of the UK Accounting Standards Board, which was a Board of the FRC, from 2004 to 2010.

BEIS is unable to provide information relating to members of UK Endorsement Board staff, including information on job history, because the UK Endorsement Board operates independently from the Government.

Pauline Wallace was at partner at PwC between 2002 and 2013. The judgement for the tribunal between the Accountancy Investigation and Discipline Board and PwC was provided in 2006 and is available on the FRC’s website. HM Government does not hold information on whether Pauline Wallace had any involvement in the tribunal.

The calculation of distributable profits must take the profits of the company as set out in the company’s accounts as its starting point. However, directors must also take into account additional factors set out in Part 23 of the Companies Act 2006. For example, for certain insurance companies that are authorised under the Solvency 2 Directive this includes the factors set out in s833A. The effect of these additional factors is to ensure that a company may only make distributions out of profits available for the purpose. The UK Endorsement Board is only required to assess international accounting standards against the criteria in Regulation 7(1) in SI 2019/685.

The UK Endorsement Board’s Endorsement Criteria Assessment (ECA) for IFRS 17 sets out the results of the UK Endorsement Board’s assessment of the standard against the adoption criteria in SI 2019/685. The ECA states that this assessment has not identified any requirement of IFRS 17 that would prevent individual or consolidated accounts prepared using the standard from giving a true and fair view of the entity’s assets, liabilities, financial position and profit or loss. Following discussion of this matter by the UK Endorsement Board at its meeting on 9 May 2022, the final version of the ECA makes specific reference to the fact that the UK Endorsement Board is satisfied that the circumstances in which the application of IFRS 17 would result in accounts which did not give a true and fair view would be extremely rare.

The UK Endorsement Board has sought advice to clarify the legal position and the approach to be taken when assessing an international accounting standard against the criteria in Regulation 7(1)(a) of SI 2019/685 (the true and fair view criteria). In April 2022, it obtained an Opinion from Counsel on the interpretation of Regulation 7(1)(a). This Opinion was only one piece of a wide range of information that has been considered by the UK Endorsement Board as part of its responsibilities relating to the endorsement and adoption of international accounting standards.

The UK Endorsement Board website contains links to prior Counsel opinions, that were obtained by a number of different organisations, in order to provide contextual background for stakeholders.

The UK Endorsement Board has sought advice to clarify the legal position and the approach to be taken when assessing an international accounting standard against the criteria in Regulation 7(1)(a) of SI 2019/685 (the true and fair view criteria). In April 2022, it obtained an Opinion from Counsel on the interpretation of Regulation 7(1)(a). This Opinion was only one piece of a wide range of information that has been considered by the UK Endorsement Board as part of its responsibilities relating to the endorsement and adoption of international accounting standards.

The UK Endorsement Board website contains links to prior Counsel opinions, that were obtained by a number of different organisations, in order to provide contextual background for stakeholders.