The latest issue of Company Reporting, the monthly review of financial reporting practice, looks at the topical issue of the independence of non-executive directors, impairment charges and accounting for internet start-up costs.
Non-executive independence is one of the corner stones upon which the Hampel Combined Code is built. It stipulates that the majority of non-executive directors should be independent of management and free from any business or other relationship which could interfere materially with the exercise of their independent judgement. However, the principle is not accepted universally.
Photo-Me is of the opinion that the very principles that compromise the independence of its non-executive directors are the reasons for choosing them as non-executives. It discloses that the board has recognised the contribution made by each of the non-executive directors which, in most instances, has been of benefit to Photo-Me due to the very relationships which are deemed to make a director non-independent. Indeed, only two out of six of its non-executives are said to be independent.
The Code also recommends the appointment of a senior independent non-executive director. In the case of Photo-Me, its senior independent non-executive holds a 95% shareholding in a company, which has sold its 48% minority interest in one of Photo-Me’s subsidiaries. The consideration paid amounted to #14.8m. Many analysts will feel that having an interest in such a transaction would compromise independence. However, given the lack of independence that exists on Photo-Me’s board, his selection as senior independent non-executive suggests that perhaps he is simply the least non-independent of them all.
The super exceptional impairment charge
FRS11, Impairments of fixed assets and goodwill, states that impairments should be taken to the profit and loss account and be reflected as an operating charge; classified as exceptional if appropriate. This month, racetrack operator Arena Leisure goes a stage further with its profit and loss account and discloses the impairment of its fixed asset investment after operating profit. This presentation is surprising given that this position is usually reserved for super exceptional items.
Pharmaceutical company KS Biomedix creates a provision for the #0.3m write down of its Malaysian subsidiary to #1. It states that this reflects the carrying value of the investment due to the current economic environment in Malaysia. FRS12, Provisions, contingent liabilities and contingent assets, states that a provision should be recognised when, inter alia, there is a present obligation. Whether or not an obligation arises when writing down the value of a subsidiary is a moot point. The company tells us that the write down is viewed as a temporary diminution and consequently a provision is raised while the carrying value of the subsidiary’s assets is not reduced. But analysts may view this write down as bona fide impairment and expect FRS11 to be applied.
KS Biomedix tells us that, putting technical accounting arguments to one side, its clear concise disclosures provide analysts with a full understanding of the transaction. Indeed, we always comment companies for making clear and concise disclosures. However, we caution that clear disclosure is not a licence to sidestep relevant accounting standards.
Internet development costs expensed
UITF24, Accounting for start up costs, requires costs to be recognised under a relevant accounting standard before they can be carried forward.
Otherwise, they must be written off as incurred.
Previously, Arena Leisure carried forward within prepayments the costs of developing its online services in relation to broadcasting horse races over the internet. However, this year the company states that it would be more appropriate to write these costs off as they arise and amends its accounting policy accordingly.
Publican Regent Inns carried forward previously the pre-opening costs of its pubs within prepayments. On its balance sheet, prepayments amounted to £3.1m. The accounting policy for pre-opening costs but still includes prepayments of £3.3m on its balance sheet. We invited Regent Inns to clarify its accounting policy but no response was forthcoming.
Patenting its own proforma
BTG is in the business of exploiting intellectual property rights and believes its business is sufficiently different to justify presenting its financial information in a manner which best measures the impact of different types of transactions. To show this view, BTG publishes a pro forma profit and loss account, which includes the profit on sale of patents as part of turnover. This presentation differs from the statutory accounts where the profit is excluded form turnover and shown as a profit on sale of fixed assets after operating profit.
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