Company Reporting – Focusing on material matters.

The following extracts look at whether companies are following rules on the depreciation of operating fixed assets, and at the increasing frequency of companies using their financial statements to publicise EBITDA in an effort to enhance understanding of their results. They also look at the trend for publishing pro forma accountants and identifies another trend for companies to classify profits or losses on disposals of fixed assets as operating income. Another extract analyses the impact of changes in the rules for reporting national insurance costs on share options.

Universal depreciation of operating fixed assets

Universal depreciation of operating fixed assets is expected to be the norm following the publication of FRS 15 ‘Tangible fixed assets’. FRS 15’s stated objective is that depreciation is calculated in a consistent manner and recognised as the economic benefits are consumed. It was surprising this month to see two companies not depreciating their land and buildings.

Aircraft outfitter AIM discloses no depreciation has been charged as revaluations were made during the year and no material difference in value existed in the two months between the valuations taking place and AIM’s year end.

Distributor Adam & Harvey also makes no depreciation charge against its land and buildings policy of a continual improvement and repairs to protect residual values. Both companies assertions may have been acceptable in the past but are no longer looked upon sympathetically. FRS 15 states neither continual improvement nor a current year revaluation negate the need to make a depreciation charge.

Pro forma highlights depreciation

Pro forma accountants are useful and versatile tool for those companies wishing to show a different view of the business. Both telecommunications company Alantic Telecom and brewer Greene King publish pro information but do so for very different reasons.

Atlantic Telecom publishes a pro forma statement to illustrate the effect of a business acquisition, which was carried out after its year-end. The company publishes its pro forma in a note, which discloses; (i) its own balance sheet; (ii) the acquired company’s balance sheet; (iii) consolidation goodwill; and (iv) a pro forma statement of combined assets. On the other hand, Greene King publishes a pro forma comparative column to show what the effect of depreciating its land and buildings would have been on last year’s results.

EBITDA finding its own frequency

It’s becoming common for companies to use financial statements to publicise EBITDA (earnings before interest, tax depreciation and amortisation) performance. Cable and Wireless is joined by fellow telecommunications company Kingston Communications which also publishes it on face of its p&l account. But EBITDA is not exclusive to this industry. Brewer Greene King also publishes EBITDA at the foot of its p&l account and throughout its segment analysis.

It’s a matter of materiality

Following the publication of FRS 3 ‘Reporting financial performance’, it has become established practice that profits or losses on disposal of fixed assets be treated as ‘super exceptionals’ and be disclosed after operating profit but before interest. However, this month we have identified a trend to classify such items as operating items.

Pharmacueutical Company Protherics classifies a #0.3m loss on disposal of a tangible fixed asset as an operating expense. The company tells us it does not view the loss to be sufficiently material to be reported on the face of the p&l account. But by disclosing this item separately suggests it is material. Further, given that it represents a considerable 15% of turnover, we expect many analysts will view it as material too.

Share options equal NI costs

The issue of shares to employees may shelter companies from the cash strains of standard performance bonuses. However, this month we see how the consequent NI obligations are treated in both the profit and loss account and balance sheet. Engineering consultant WS Atkins previously spread the cost of NI over the period in which the options were expected to vest in the employees. But this year it changes the policy and makes full use of UITF 37 ‘National Insurance contributions on share options gains’. Computer services company F.I makes a similar charge to its p&l account while software company Cedar treats the #0.5m profit charge as an exceptional item. Cedar informs analysts that in order to mitigate the effect of any future NI expense, it is evaluating various alternatives for future use.

– Company Reporting is a monthly journal which monitors the financial reporting practices of UK companies. Tel: 0131 558 1400 Fax: 0131 556 0639 e-mail:

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