NON-FINANCIAL FTSE 100 companies are subjectively reporting exceptional items, which can give investors a misleading impression of the financial health of the company, Standard & Poor’s has said.
According to the rating agency’s study of non-financial FTSE 100 companies’ last four years of financial reporting, underlying earnings have been presented that exceed the equivalent audited and unadjusted figures in almost three-quarters of cases.
The net result is that a company’s profitability can appear higher than is the case when reporting under IFRS, S&P said.
“Companies reporting under IFRS frequently separate exceptional items they believe are non-operating or nonrecurring to produce adjusted or underlying earnings information that purports to better reflect business performance,” said Standard & Poor’s accounting specialist Sam Holland. “Taking underlying earnings without taking into account the nature of the exceptional items that a company has excluded can sometimes give a misleading picture of its earnings and future performance.
“The presentation of underlying earnings can lead users of financial statements to focus on companies’ subjective, adjusted profit measures, rather than on the unadjusted, audited figures that the IASB mandates companies to disclose.”
S&P added that more prescriptive and specific guidance is required to help auditors scrutinise underlying earnings and exceptional items.
“Where such financial metrics are disclosed, we would prefer them to be incorporated into the financial statements to elevate the level of audit assurance,” S&P said.
Increased disclosure will only provide clarity for investors if they are able, like the way HBO has chopped Martin’s gargantuan tome’s down to size, to effectively help business edit out the irrelevant clutter
ICAEW highlights the importance of avoiding unnecessary confusion and duplication of work
Failure to properly recognise intangibles on balance sheet affects companies' performance, research from Brand Finance, produced with CIMA and the IPA finds
The Rules: FRS 102 presents an opportunity to rethink the way information is presented in financial statements
With the implementation of FRS 102, now the time to revise and revamp your financial statements, posits Mary Starr, manager at Grant Thornton UK