IFRS update October 2005 - Interim reports
The story so far...
The story so far...
As the first interim reports
prepared under international financial reporting standards are issued, so the
reality of life under the new regime becomes clearer. Despite protests about the
potential complexity of IFRS accounts, companies are trying hard to comply with
the spirit of the new requirements.
The summer has seen much media comment about whether the move to reporting
under IFRS accounts is really worth the effort.
Jon Symonds, the chairman of the Hundred Group of Finance Directors, has
voiced concerns about the trend towards more technical and theoretical standards
which are in danger of masking real business performance, while some companies
have announced plans to present their headline figures in much the same way as
before adjusting IFRS results to achieve an outcome close to previous UK GAAP
These signs of disquiet are understandable and unsurprising. The process of
converting to IFRS is not easy and companies and analysts alike are on a steep
learning curve. With the deadline for the first interim accounts arriving,
pressure inevitably comes to a head.
However, the early teething problems that come with first-time adoption
should not obscure the value of IFRS accounts, which mark the start of an era of
greater comparability of corporate reporting across Europe. There is a degree of
complexity that all preparers and users of accounts must come to grips with, but
this is short-term pain for long-term gain.
While companies are under an obligation to communicate business performance
in the most appropriate way, this does not mean IFRS results can be sidelined. A
balance needs to be struck between providing users of accounts with information
that is understandable and transparent, while also providing the new-look
figures that, in time, will enable far greater comparability across all industry
How companies are meeting their interim reporting requirements provides a
useful insight into how they are managing this balance. Approximately half of
FTSE350 companies have December year-ends, creating the need for June 2005 IFRS
interims. To gain a snapshot of emerging practice, PricewaterhouseCoopers
analysed the first 60 interim reports issued by the FTSE350. One of the least
surprising findings was the increased size of the interim reports.
The average length of the FTSE100 interim reports within this sample
increased by 23% from 38 pages in 2004 to 47 pages in 2005. FTSE250 interim
reports also increased by 30% from 20 to 26 pages.
However, there is huge variation between companies. The longest FTSE100
interim report came in at 192 pages, while the shortest was just 14. Not
surprisingly given the amount of information involved, very few companies (just
22% of the FTSE350) provided their interim results via a press release as
opposed to a full report.
The average increase in report size was largely due to the provision of
additional notes, including accounting policy disclosures, as well as the need
for significant reconciliation. Of the companies considered, the vast majority
(90%) of the FTSE100 sample, and nearly 75% of the FTSE250, included additional
notes or information in their 2005 interims compared to 2004.
However, only 19% of the FTSE100 chose to include full accounting policies in
their interim accounts although 43% of the FTSE250 did. Many companies disclosed
their accounting policies elsewhere, such as on their websites, in 2004 annual
reports, 2004 restated results announcements or separate IFRS transition
Referring to earlier communications is an understandable and logical response
to the challenge of keeping interim reports to a manageable size. However, for
users trying to find all the information they need to understand interim reports
properly, having to consult multiple sources creates an extra complication.
There is no easy answer for companies: including all relevant data in one
place could lead to a doorstop publication; producing a slimmer interim report
with references to other sources may be more efficient for preparers, but harder
work for users.
In reality this is less likely to be an issue for companies that have put in
significant effort prior to their interims in communicating the likely effect of
IFRS, particularly larger companies with dedicated analysts who will feel
compelled to make the effort to pursue an information trail across
announcements, reports and websites. Smaller companies vying for attention
within their sector may find it more valuable to try to help users find
Few companies complied in full with non-mandatory IAS34, the standard on
interim reporting. Only nine of the 60 reports (15%) applied it.
Of the rest, almost all chose to refer to EU-endorsed standards, but this
does not tell the whole story. Some 82% of companies within the sample described
the interim report as being prepared on the basis of accounting standards either
endorsed or ‘expected’ to be endorsed by the year end.
Use of this language has enabled the companies concerned to apply the recent
revisions to IAS19 on employee benefits and IAS39 on financial instruments,
which are currently making their way through the endorsement process.
The majority decision not to adopt IAS34 is understandable because it allows
companies more flexibility in a period of evolving interpretations and best
practice. Whilst companies would not want to change their accounting policies
between the interim and final accounts, this can be achieved with less
Companies may want to compare policy decisions with those of competitors to
ensure that they are treating similar items in a consistent manner.
As regards the presentation of information, there is also evidence of a
desire to maintain a sense of continuity with the past perhaps on the grounds
that users will respond more warmly to familiar formats. Almost 80% of the
FTSE100 and 70% of the FTSE250 opted to keep a UK GAAP-based presentation for
their balance sheets. Only eight of the 37 FTSE100 companies and four of the 23
FTSE250 changed their balance sheet presentation.
A desire for consistency can also be seen in the income statement, as most
entities took a columnar approach to presentation and only three of the 60
companies chose to include boxes.
Given the challenge companies have faced in meeting their IFRS interim
requirements, it was surprising how many FTSE350 companies made an effort to
provide additional segmental reporting analysis, although this does not
necessarily comply in full with the IFRS requirements that companies will need
to comply with at the year end. Only 10 out of the 60 companies did not provide
any segmental information.
A significant proportion of the companies showed new or different segments
41% of the FTSE100 and 35% of the FTSE250 had changed their segments as a result
of moving to IFRS.
Segmental reporting is potentially one of the more controversial issues for
companies, having the potential to reveal commercially sensitive data to
competitors and other stakeholders. The fact that so many companies have taken
this aspect of IFRS reporting seriously indicates a high degree of willingness
to embrace the new regime.
What is clear is that although practices and approaches vary significantly in
this early stage of the transition to IFRS, many companies have gone to
considerable efforts to embrace the new standards and explain the impact.
As more companies produce their first IFRS reports, lessons will need to be
learned to ensure that the concerns voiced by commentators are alleviated so
that more comparable and transparent information is available in the longer