Analysts tend to thrive on quality information, and it is often theand time-based analysis. case that we heap praise on companies that choose to disclose items above and beyond the requirements of statute and accounting standards. However, in the case of Securicor, our praise is tempered with caution.
Baker Tilly, Securicor’s auditor, has undertaken a review of the company’s risk management structures, with extracts from their findings being published in Securicor’s annual report. The extracts emphasise positive features of Securicor’s control and monitoring procedures, while the financial review discloses that the report highlighted a number of areas for improvement that are being tackled.
There is always the worry that selective disclosures reveal only the positive sections of a report, when the results should really be disclosed in their entirety, warts and all. Alternatively, the external body that carried out the review could provide its own summary.
FRS9: ‘Associates and Joint Ventures’ does not come into effect until accounting periods ending on, or after, 23 June 1998, and this month sees two companies adopting disclosure practices, whose days may be numbered.
The property company Crest Nicholson has disclosed that associates with which it has a long-term relationship are treated as fixed-asset investments, whereas those involved in acquiring or developing land in the normal course of trade, are treated as current assets. While SSAP1: ‘Accounting for Associated Companies’ does not specify a balance sheet location for associates, FRS9 treats them all as fixed-asset investments.
SSAP1 requires that profit & loss accounts include the aggregate of a group’s share of pre-tax profits, less losses of associates, which most companies take to mean a single-line entry. The illustrated p&l account examples given in FRS9 all take the single-line approach, although this is not demanded explicitly in the body of the standard itself. It remains to be seen if Securicor’s presentation catches on.
ICI bridges the GAAP
In these days of globalisation, UK companies are finding it increasingly attractive to disclose additional information required by US GAAP, especially if the company has, or is intending to seek, a US listing.
This month, ICI has stated that, in order to provide all investors with the same information, it has published a report that combines the UK annual report and accounts with the US Form 20-F.
In addition to a note that sets out the principal differences between UK and US GAAP, comment and figures are added to selected individual notes that deal with areas in which the divergence of the two is material. ICI’s integrated approach enables analysts to see better individual differences in context.
Impairment avoids profit loss
Both the Companies Act and SSAP12: ‘Accounting for Depreciation’ require that diminutions be charged to the p&l account when they are recognised.
However, this month we report on a company that has discovered, at least in the short term, the secret of pain-free impairments.
Some time ago, First Leisure recognised a temporary diminution in the value of its bingo operations. Only permanent diminutions need be charged to the p&l account, and First Leisure followed its policy of treating such diminutions as downward movements on revaluation reserve.
This year, prompted by an intended sale, the company has decided that the diminution has become permanent and has transferred the #3m to the p&l reserve. At no point has this amount been charged directly to the p&l account. Two arguments can be made in favour of First Leisure’s actions. First, the relevant provisions of SSAP12 do not apply to revalued assets and the bingo operations have been revalued (albeit downwards) in the past.
Second, the reserve movement could, at a push, be seen as a way of retrospectively accounting for the impairment. Either way, such treatment will not be possible for much longer, because the distinction between temporary and permanent diminutions is expected to be dropped when FRED 15: ‘Impairment of fixed assets and goodwill’ evolves into a full FRS, scheduled for publication in the summer of this year.
Hampel efforts are thwarted
Despite the best efforts of Hampel, a variety of disclosures in this month’s accounts suggests that all is not rosy on the corporate governance front.
Readers of the financial press will be aware of events down at Astec regarding the actions of its majority shareholder, Emerson Electric, which is attempting to force through an agenda that is the subject of an ongoing court action.
Astec’s directors’ report notes that if this agenda goes ahead unchecked, changes to the composition of the board will result in the company falling foul of the Cadbury Code of Best Practice. It will flout the ruling that the majority of non-executive directors be independent, and that non-executive directors be appointed through a formal process, this being a matter for the board as a whole.
The note goes on to stress that the changes could also lead to the company failing to meet further Cadbury recommendations relating to the calibre, number and effectiveness of non-executive directors.
Elsewhere, both Lonrho and First Leisure disclose changes to directors’ contracts that conflict with the Greenbury recommendation that directors’ service contracts be reduced to one year or less. Lonrho expands the notice periods for two directors from no more than one year, to not less than two, in order to provide job security during a major reconstruction.
At the same time, First Leisure has increased its managing director’s service contract from a normal notice period of two years, to a fixed-term contract of three years that expires in 2000. A bonus has been paid to the managing director as consideration for signing the new contract.
Hot on the heels of First Choice Holidays’ time-based segmental analysis comes a second set of accounts that adds a time dimension to its disclosures.
The engineering company Chemring is providing a time-based analysis of exceptional items, segmenting them into two six-month periods. The company tells us this presentation complements the less detailed disclosures in its interims and provides a clearer picture of the year’s events, particularly in view of the large goodwill impairment suffered in the second half of the year.
ISSUE OF THE MONTH
We examine the translation of foreign subsidiaries’ financial statements and find that, over the last decade, companies have moved from closing rates to average rates, for the purpose of translating p&l accounts. However, while there is nothing wrong with companies switching policies, this move tends to be made inconspicuously and seems to contradict the SSAP20: ‘Foreign Currency Translation’ requirement that methods be applied consistently. This is an edited version of the review published in Company Reporting, a monthly publication monitoring financial reporting practices in the UK. Company Reporting is available on subscription. Details from Company Reporting, 0131 558 1400.
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