UK: Reviewing and Revising Corporate Interim Reporting - The half-time results

It is a truth that nothing in company reporting is simple these days.

The above statement reads like an exam question to be followed by the word "discuss". For those studying what is happening in UK corporate interim reporting, the case for the affirmative answer is powerful. Two major changes are about to happen:

• the EU’s Transparency Directive has to be introduced into UK regulation; and

• as part thereof, companies will have to comply with the International Accounting Standards Board’s standard, IAS 34 Interim Financial Reporting.

The key findings in this work are:

• the Transparency Directive’s requirement for the half-yearly results to be published within two months of the period end will affect 38% of listed companies who currently report in the third month after the period end. UK companies’ speed of reporting has improved from 51% taking over two months in 2002 to only 38% in the past 2004/5 season;

• 46% of companies produced only six-monthly and annual performance numbers. The others produced a variety of reports from formal quarterly reports and monthly reports from the investment trusts to one ad hoc trading statement. Thus, apart from the 21% of monthly and quarterly reporters, the remaining 79% will be hit by the burden in the Transparency Directive of producing at least two "interim management statements";

• the explanatory narrative sections within the half-yearly reports will require significant attention to ensure that the detailed requirements in the Directive are met. Of particular interest will be the need to focus on the principal risks and uncertainties for the remaining six months of the year and to report on major related party transactions; and

• while segmental information is more frequently given by the largest companies, overall 50% of companies currently provide no segmental analysis within their financial information. Of course, some may have only one business segment. But it is likely that a significant percentage will be affected by IAS 34’s requirements for such information.

The requirements for accounting information to be provided in interim reports are set out in the Listing Rules of the Financial Services Authority, which require that:

"A company which has listed shares must prepare a report, on a group basis where relevant, on its activities and profit or loss for the first six months of each financial year."

These interim reports act as a progress report in the continuing reporting process, fulfilling a confirmatory and predictive function. Interim reports should enable users to monitor the progress of a business from its financial position as stated in the last set of annual financial statements and to assess the impact of recent events and developments on operating performance and financial position.

Only five years ago all that was required in interim reports were some profit and loss account numbers and a short explanation. For periods commencing on or after 23 December 1999, companies also had to provide a balance sheet and a cash flow statement. This change to the Listing Rules incorporated the main recommendations set out in a non mandatory Statement on Interim Reports produced by the Accounting Standards Board in 1997. That Statement remains extant to this day.

The UK Listing Authority (UKLA) will make further changes over the next two years as it will be obliged to implement the EU Transparency Directive. This Directive was finalised on 15 December 2004 and member states are required to comply with it by 20 January 2007. Proposals from the UKLA on its intentions for implementing this Directive are expected later this year.

For the half-yearly financial reports there will be a number of changes. These include the following.

• The reports must be published within two months of the period end.

• The companies concerned will have to ensure that the reports remain publicly available for at least five years.

• Those responsible within the company for the half-yearly report must make a statement therein to the effect that:

"to the best of their knowledge, the condensed set of financial statements which have been prepared in accordance with the applicable set of accounting standards gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole…, and that the interim management report includes a fair review of the information required…".

• The interim management report, which is the explanatory narrative section of the half-yearly report, has to include not only a report on events that occurred during the first six months of the year but also a description of the principal risks and uncertainties for the remaining six months of the financial year and a report on major related party transactions.

• If the company is caught by the 2002 EC Regulation on reporting under International Accounting Standards then the financial information in the half-yearly report must be prepared in accordance with the relevant standard on interim financial reporting, which is currently IAS 34.

Compliance with IAS 34 will create more changes for UK reporters. Those changes include the following.

• Present UKLA rules require that the comparative balance sheet is that at the previous interim date. In other words, if an interim report is to 30 June 2005 then it is the balance sheet at 30 June 2004 that must be given as the comparative information. IAS 34 requires that the balance sheet at the end of the immediately preceding financial year, namely December 2004 in the above example, must be given.

• The segmental revenue and results for the business or geographical segments used as the company’s primary basis of reporting in its annual financial statements must be given in the half-yearly report.

• Detailed disclosures on for example major acquisitions or disposals of subsidiaries, changes in estimates or contingent liabilities or contingent assets, changes in equity statements and so on are required by IAS 34. Appendix 1 to this report sets out a disclosure checklist covering the present requirements and highlighting the additional rules from IAS 34.

A further change in the reporting landscape is that the Companies (Audit, Investigations and Community Enterprise) Act 2004 has extended the remit of the Financial Reporting Review Panel (FRRP) so that interim reports are now caught. In a recent press notice, the FRRP stated that "in 2005 the Panel will pay particular attention to interim reports with a view to identifying companies whose year-end accounts are expected to be subject to significant changes following the adoption of international accounting standards from 1 January 2005".

It is in the context of all these new rules coming into force over the next two years that this survey of current corporate interim reporting practice was carried out.

The main objectives of this survey were to consider:

• what information companies provide in their interim reports;

• how disclosure may vary depending on the size of the company;

• how promptly companies are reporting and what means they use to publish the reports;

• how the findings on current corporate interim reporting compare to the results of previous surveys undertaken in 2002, 1999 and 1995; and

• the impact of adopting IAS 34, the international accounting standard on interim reporting.

To determine current practice, the interim reports of 100 listed companies, published in 2004/5, were obtained. The sample is, as far as possible, consistent with that selected at random and used in previous surveys. Because of the recent trend of delisting and the reduction in the number of UK listed companies, the sample could not be identical. 75 of the companies surveyed in 2002 were still fully listed in 2004/5. 10 of these companies did not have interim dates that matched our 2004/5 selection criteria, so 65 companies in our 2004/5 sample were also surveyed in 2002.

35 additional companies were selected for the 2004/5 survey, based on market capitalisation to provide a final population stratified into three categories; companies within the top 350 companies by market capitalisation, those companies ranking 351-965 by market capitalisation and the third category of smallest 350 companies by market capitalisation. As a result of the significant reduction in the number of fully listed UK companies, the three categories listed above had to be amended from the categories used in the 2002 survey to ensure a sufficiently large population within the third category. Not surprisingly, the top 350 list of companies looks most similar to the equivalent list from the 2002 survey.

In view of the constant demand by stakeholders for faster, more reliable and more extensive reporting, this section examines to what extent interim reports meet these demands, including:

• the speed of publication of interim reports;

• quarterly reporting;

• the level of involvement of auditors when preparing interim reports;

• the mode of delivery including e-reporting; and

• the visual style and extent of the interim report.

Companies are required by the Listing Rules to report their interim results within 90 days of the period end. The ASB Statement is more stringent and recommends the interim report be produced within 60 days.

Companies take on average 55 days to report (2002: 61 days). All companies in the sample reported within 90 days, although three companies took exactly 90 days to report. 38 companies failed to meet the 60 day deadline recommended by the ASB compared to 51 companies in 2002, of which eight were companies in the top 350 (2002: 15). The 14 companies reporting within 30 days were relatively evenly spread across the three categories.

In its December 2004 newsletter "List!", the UK Listing Authority referred to its option to extend the 90 day publication deadline, for the first interims prepared using IFRS, to 120 days in line with current European legislation. However, the Transparency Directive 2004/109/EC of the European Parliament and the European Council, which has been published in the Official Journal late in 2004, will require that half-yearly reports should be made public at the latest two months after the period end. This is currently expected to come into force in the UK in 2006/7.

Companies are now reporting more quickly than in previous years, following an insignificant change in reporting speed between 1999 and 2002.

The ASB Statement recommends that the date on which the report is approved by the board of directors is disclosed. In the 100 interim reports surveyed, there were five instances in which there was no obvious indication of the date of publication. For these companies, the date of publication has therefore been derived from other information sources such as press releases. In one instance, the board only reviewed but did not explicitly approve the interim information, as recommended by the ASB Statement.

A number of companies issue quarterly statements or trading updates, either voluntarily or as a result of dual listings. In most cases quarterly statements are produced as separate statements in addition to the half-yearly report. Of the 100 companies surveyed, 13 made quarterly trading statements available on their websites. Ten companies produced a quarterly statement for only the first or the third quarter, on an ad hoc basis to explain significant events or transactions. In eight cases, all of which were investment trusts, monthly fact sheets containing information about financial performance and position were available online. 23 companies prepared pre-close trading updates for their interim and/or annual results, but no quarterly information. 46 of the 100 companies surveyed did not produce trading updates in addition to their interim and annual reports.

Only one interim report contained quarterly information in addition to the cumulative six month figures.

As mentioned earlier, the Transparency Directive is expected to come into force in 2006/7. The Directive contains the requirement for listed companies to issue at least two "interim management statements", one during the first half, and another during the second half, of the financial year. Such statements should contain:

• an explanation of material events and transactions during the period and their impact on the financial position of the group; and

• a general description of the financial position and performance of the group during the period under discussion.

Companies which prepare quarterly reports, either voluntarily or because of particular listings, are exempt from the requirement to prepare interim management statements. Based on the 2004/5 experience of quarterly reporting practice amongst UK listed companies, the requirements for interim management statements by the Transparency Directive will result in an additional reporting burden particularly for smaller companies, and more systematic reporting for others.

Since the 2002 survey, auditor involvement in the interim reporting process has fallen slightly overall. 49 of the companies surveyed showed evidence of auditor involvement, compared to 54 in 2002. Interestingly, the auditor involvement remains most widespread in the largest companies where the number of companies referring to auditor involvement has notably increased from 62% in 2002 to 79%. In contrast, in the smallest 350 companies auditors’ involvement has fallen from around 50% in 2002 to 30%.

The Listing Rules require that "where the figures in the halfyearly report have been audited or reviewed by auditors […], the auditors’ report should be reproduced in full". No company in the survey went to the extent of having its interim report audited in full. 49% (2002: 54%) of companies had a review performed and reproduced the review report as required.

Of the 51 companies that did not include a review report in their interim statements, only 12 companies stated explicitly that the interim information had been neither audited nor reviewed. The majority of the remaining companies stated only that the interim information was unaudited. The Transparency Directive will introduce a rule in this area. If the interim report has not been audited or reviewed by auditors, the company must make a statement to that effect in its report.

The Listing Rules require a company either to "send the half-yearly report to the holders of its listed securities; or insert the halfyearly report, as a paid advertisement, in at least one national newspaper". It was not always clear from the report or other company information such as press releases, which companies have sent copies of the interim reports to shareholders and which published in a national newspaper. Of the companies surveyed, at least 52 companies sent out their interim report.

Companies increasingly use the Internet as a means to communicate quickly and cheaply with their shareholders. 80% of the companies surveyed had published interim information on their company websites.

As expected, web reporting is more common in the larger companies. Of the companies surveyed, only did not appear to have a website, all of which were in the smallest 350 companies.

There was a wide range of styles and extents of interim reports. Some companies produced mini-annual reports, up to 62 pages long, providing extensive commentary and detailed information to capture their shareholders’ and investors’ interest and to communicate effectively on the development and performance of their companies. In contrast a small number of companies continue to produce typescript documents of as little as three pages (excluding one page newspaper adverts) that merely seek to comply with the minimum Listing Rules requirements.

The average number of pages contained in the interim reports surveyed, excluding one page newspaper adverts, was 13 pages. Probably unsurprising, the average length of the interim report overall varies according to the size of the company.

The Listing Rules require half-yearly reports to contain "an explanatory statement which includes:

(a) any significant information enabling investors to make an informed assessment of the trend of the group’s activities and profit or loss;

(b) an indication of any special factors which have influenced those activities and the profit or loss during the period;

(c) enough information to enable a comparison to be made with the corresponding period of the preceding financial year; and

(d) so far as possible, a reference to the group’s prospects in the current financial year".

The explanatory statement gives the opportunity for management to place their results in context, outline the activities of the group during the period and convey their thoughts on what the future might hold for the group. In difficult times the narrative can be used to explain and justify decisions which the board has taken and to update on the progress made.

This section examines:

• the author of the explanatory narrative;

• its length; and

• the contents.

While commentary is mostly presented in one main section, 28 of the companies surveyed provide more than one section. In some cases, there was a short statement by the Chairman, followed by a more detailed commentary from one or more other directors. Overall the Chairman remains the main commentator in interim reports.

The results show that:

• in 64 interim reports the Chairman was the main author of the commentary whereas the Chief Executive was the main commentator in only eight cases. Included in these numbers are cases where there was only one report. In these cases, the Chairman was sole commentator in 52 interim reports and the Chief Executive in two cases;

• in one instance the chairman and chief executive was one person;

• in 16 interim reports the commentary was provided by both the Chairman and the Chief Executive, six of which were in combined, and ten in separate, sections;

• six interim reports also included a commentary by the Finance Director, together with the commentary by the Chairman (2), the Chief Executive (3) or both (1);

• in one report the company secretary provided the commentary, as did the board of directors in another company;

• in nine interim reports, the author of the commentary was not identified. Two of these reports contained quotes from the Chief Executive, but no signature. Of the unidentified reports, eight were in the top 350 category;

• a further nine reports included additional sections for which the authors were not identified; and

• in one instance only highlights were given but the report did not contain an explanatory commentary as such.

This is an area in which there is likely to be a change in practice, following the introduction of the Transparency Directive. While it does not detail who must give the "interim management report" as it calls the explanatory section, it requires a confirmatory statement, from those responsible for the management report, to the effect that the report gives a fair review and that the condensed set of financial statements gives a true and fair view of the group’s assets, liabilities, financial position and profit or loss. The names and functions of those taking these responsibilities must be clearly identified.

The length of the narrative varies extensively. Following the increase of the number of words since the first survey in 1995 up to 2002, the trend is now reversing. The length of the commentary has reduced in favour of shorter commentaries below 500 words. This finding is consistent with the message that emerged from a recent Deloitte survey on annual reporting.

The content and quality of the commentary given was found to be as varied as its length.

The vast majority of the companies surveyed (96%) made some attempt to discuss the significant events and trends in the interim period. 83% of the companies sought to provide more helpful and useful information by putting the company’s results into the context of the industry and general economy (2002: 77%). However, the quality of comments made here was variable, ranging from a detailed analysis of the company’s activities and the industry in which it operated, to bland comments on the state of the economy. A few examples follow.

"The economy has slowed in the last quarter but we remain well placed to continue to build on our success."

"Overall, we believe that the Group is on track to meet market forecasts for the full year and, in the absence of unforeseen circumstances, we would expect to maintain the level of final dividend paid last year."

More incisive comments are not necessarily lengthy. The following seek to explain industry developments and their impact on performance.

"Corporate rumour and speculation continue to abound in this sector, where further consolidation is perhaps overdue, and competition for the attraction and retention of competent staff remains fierce, often to the advantage of only the legal profession. However we will continue to nurture and protect our recognised areas of niche excellence, and our balance sheet strength: therefore my cautiously confident view of the longer term future is undiminished."

"Oil refining capacity is fully utilised and refinery throughputs are at maximum levels in many countries, particularly the US. Consequently the industry is experiencing the highest margins for many years. This environment provides many opportunities to utilise our technology and experience to increase refining capacity while respecting environmental constraints and to develop cohesive site-wide energy conservation strategies. […] We expect these opportunities to translate into stronger demand for our improved services and software next year as clients utilise higher profits to optimise operations."

The following comments were enjoyable.

"The rise in benefit claimants and the compensation culture are two more unholy hags that bode badly for our economy in the months ahead. Their malicious allies are the looming iceberg of the private sector pension deficit and the rising cost of raw material, especially oil. We learn that the price of West End property is being inflated by the demand from Hedge Funds and Government Agencies. Whilst it is reasonable for the investors in the former to pay for the proximity to Purdey’s and Wilton’s, it is baffling to the point of incomprehension why the Curriculum and Qualifications Agency or its ilk needs to occupy a prime position on Piccadilly; particularly if […] can thrive in the obscurity of Isleworth; the gravy train of government contracts ultimately seeps out of the productive pockets of the tax payer."

The ASB Statement on Interim Reports recommends that the following bold matters should be discussed in the commentary, so that the user can make an informed assessment of the company’s financial position and performance. The survey findings on these matters are also summarised.

• Reference to the company’s prospects in the current financial year – in many cases this remains often no more than a couple of sentences at the end of the commentary.

• Information on perceived trends – this should include information such as an indication of the company’s plans for the future, any major uncertainties or the possible effects on the annual result. 13% of interim reports did not contain such information.

• Treasury analysis – only 10% of the companies surveyed provided a meaningful, added value financial review or treasury analysis. 31% of companies merely gave a factual discussion on the balance sheet. The remaining companies did not include some sort of treasury analysis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.