Company Reporting – Disclosing performance.

Qualified audit reports affect less than one per cent of companies. We have reported on only one qualified audit report in the last two years, but this month, steel manufacturer Firth joins the list. This arose because one of Firth’s major subsidiaries was placed in the hands of a receiver and its auditors were unable to determine whether proper accounting records had been kept. The qualification arises from a limitation in the scope of the audit. It has been commonplace for analysts to use EBITDA (earnings before interest, tax, depreciation and amortisation) as a measure of performance. Its prominence, however, has increased recently as companies provide it themselves. Now it is finding its way onto the primary financial statements. Cable & Wireless was one of the pioneers of EBITDA disclosures, publishing it upfront on the face of the profit and loss account. This month, Cable & Wireless is joined by fellow telecommunications company Fibernet, which, having stated last year its intention to monitor closely EBITDA, now discloses it on the face of its profit and loss account. This new disclosure phenomenon is not exclusive to the telecommunications sector with broadcasters Scottish Radio and Chrysalis disclosing EBITDA also on the face of their profit and loss accounts. Which sector catches the EBITDA bug next remains to be seen. Goodwill and intangible assets The rebuttable presumption of FRS10: ‘Goodwill and intangible assets’, is that the lives of these assets are limited to periods of twenty years or less. Tobacco company Imperial Tobacco acquired a portfolio of cigarette tobacco and paper brands in Australia for £123m via the purchase of various businesses. Recognising these as intangible fixed assets, Imperial Tobacco amortises them over twenty years, but states that it expects their life to extend into the future. On the other hand, broadcaster Chrysalis has purchased a music business. Its intangible assets are catalogue music titles that have been revalued on acquisition from £95,000 to £7.9m and are being amortised over a life in excess of fifty years. Retailer WH Smith purchased publishing company Hodder Headline, with no intangible assets recognised on the acquisition. On the basis that its economic life is unlimited, the goodwill arising, some £172m, is not amortised. FRS10 permits the non-amortisation of goodwill as long as the durability of the life can be demonstrated. One of the factors is the life-span of the products to which the goodwill attaches. In WH Smith’s case, there are no identified titles or rights, which would suggest justification for an unlimited economic life. However, analysis of Hodder’s accounts, prior to the acquisition, shows intellectual property rights of £1.4m, classified as intangible fixed assets. WH Smith would not comment on the accounting treatment of these assets between Hodder’s December 1998 year-end and its May 1999 purchase. The net asset value of a company’s balance sheet is often considered one of the most important ways to monitor performance. This being the case, it is unsurprising that Shaftesbury revalues its listed investment on a share of net assets basis and increases the investment by some £2m. Previously, it was measured at cost. Distributor African Lakes is also a proponent of valuing its listed investments at net asset value, even though it discloses that its £0.9m investments actually had a market value of £0.7m. This use of net asset value continues from last year when market value was also less than net asset value. African Lakes justifies its stance by stating that the directors believe the market value of the shares is not a reliable measure of worth. It discloses that, as net asset value is significantly in excess of both market value and cost, no impairment is necessary. Tangible fixed assets FRS 15: ‘Tangible fixed assets’, provides companies with options of whether to revalue fixed assets and whether to depreciate them. Although either restating to historical cost or revaluing properties might be most analysts’ preferred choice of FRS15’s transitional arrangements, all companies which this month adopt FRS15 carry forward their revaluations indefinitely. WH Smith continues to carry forward revaluations made in 1990 while builder Redrow’s valuations are carried from 1989. Engineering company L Gardner updates the value of its properties this year but states that this represents their final valuation. Smiths Industries continues to hold the record for the oldest revaluations carried forward, following adoption of FRS15, with its valuations having taken place back in 1974. Depreciation policies Revaluations aside, publicans Enterprise Inns and hoteliers Swallow – currently not depreciating certain properties – discuss the effects that FRS15 will have on their depreciation policies. Enterprise Inns states the board is unsure whether to depreciate its pub estate or to carry it forward without depreciation, reviewing it for annual impairment. Swallow commendably calculates, in its financial review, that the effect of depreciating its non-depreciated properties would have been a charge to profit of £3.5m depreciation. The Hampel Combined Code has forced boards of directors to admit current levels of corporate governance fall short of what is expected of recommended practice. As well as setting tough guidelines, the code requires those companies that do not follow its recommendations to report on the areas they fail to take on board. – The above analysis is drawn from the latest issue of Company Reporting magazine, a monthly title monitoring financial reporting practices in the UK. For subscription details, telephone 0131 558 1400.

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