Accounting: Quarter pounder

Finance directors are facing additional reporting burdens as a result of the
latest regulations issued by the European Union. The cold comfort for UK-based
FDs is that the changes arising from the implementation of the EU Transparency
Obligations Directive will not be as dramatic as the changes for listed
companies based in other countries. But even so, there are a significant number
of changes for all companies and their investors to get to grips with. Companies
with a 31 December year-end will not be covered by the new rules until next
year, but for those with a financial year beginning on 1 April the clock is
ticking loudly.

The key change – and one that has been the subject of little discussion – is
the requirement for all fully listed companies to issue interim management
statements (IMS) twice a year in between annual and half-yearly reporting.

You don’t have to have the mathematical skills of an average FTSE FD to work
out that if you are reporting twice a year between annual and half-yearly then
that adds up to quarterly reporting – a frequency that has constantly been
rejected by UK corporates. But just because you report four times a year that
doesn’t amount to quarterly reporting, at least not according to the Financial
Services Authority (FSA).

According to the FSA, IMS is not a quarterly report, and FDs of companies
traded in New York who are used to producing quarterly figures and commentary
under SEC rules, may agree. The requirement here is for no more than an
explanation of material events and transactions that have taken place during the
relevant period and their impact on the financial position and a description of
the financial position and performance of the company during the relevant
period.

In defence of these EU reporting requirements, it should be noted that any
company under a separate obligation to produce a quarterly financial report
under overseas rules will not also have to produce an IMS. For those that do,
the FSA has issued some informal views, which say that the content will depend
on the circumstances of the companies and the markets in which they operate. A
trading statement might fulfill the IMS obligation and, in some situations,
financial information may not need to be included. The idea is that the format
will be driven by best practice and the progress of the IMS will be reviewed in
18-24 months.

There is also some uncertainty over when IMS should be produced. Lawyers who
have pored over the rules tell us that it does not relate to a specific
three-month period in the way that the half-year report relates to the first six
months of the financial year. Instead, the requirement is to produce the IMS at
any time during a window which opens 10 weeks after the beginning of the
relevant six-month period and closes six weeks before its end. The existing
obligation to make a preliminary announcement of full-year results within 120
days of the year end disappears because it is likely to coincide with the date
for the following year’s first IMS. But companies can continue to make a
preliminary announcement if they wish. All this should lead to a degree of head
scratching and poring over diaries to work out the suitable time slots.

Research by accountancy firm Deloitte has revealed that nine out of ten
companies are going to have to step up the amount of reporting they currently do
to meet the obligations laid out in this new directive.

At the same time, the deadline for reports have been brought forward, with
half-yearly reports now having to be published within two calendar months of the
period end and annual reports within four months. And that means, according to
the research, that 46% of listed companies are going to have to tighten their
half-yearly reporting to squeeze into the two month gap. This is going to cause
some real pain among those producing the numbers.

The other major change for companies concerns the how, as well as the when
and how often. Under the directive, all international financial reporting
standard half-yearly group reports must comply with IAS34 interim financial
reporting. This, of course, seems entirely logical. Astonishingly, however, just
9% of half-yearly reports have adopted the standard. So if some finance
departments decided that IFRS implementation could take a back seat for a while
they have to think again. But some listed companies still report under UK GAAP
and so have to look to the Accounting Standards Board’s statement on half-yearly
reports to satisfy the directive and the requirement to present a true and fair
view. The ASB is in the midst of tweaking its guidance to bring it into line
with the directive.

In many ways, this should be an important step in European corporate
reporting with a pan-European disclosure system becoming a reality. The current
view among FDs is that a regimented burdensome reporting regime will merely
result in the bland and the boiler plate, not the commentary and analysis style
they keep being told we want them to produce.