Companies Face New Half-yearly Reporting Challenge

by Robert Lee, Tax-News.com, London

31 October 2007

As many UK listed companies prepare to produce half-yearly reports in the next few months under international accounting standards (IAS 34) for the first time, a survey by KPMG in the UK of German and UK companies suggests that the introduction of the new requirements may produce some significant changes in communication between companies and capital markets.

To gauge the impact of the new requirements, KPMG in the UK looked at practice in Germany, where the new EU regime was implemented earlier than in the UK, and at six examples of the very first UK companies to apply the new requirements. The rules were implemented in the UK from 20 January 2007. Companies with a March year end will be releasing their interim results under the new rules before the end of November.

The introduction of International Financial Reporting Standards in the European Union in 2005 generally increased the length and complexity of annual financial reports. The survey suggests that half-yearly reports also are likely to get longer. In KPMG’s survey, the length of UK half-yearly reports ranged from 11 to 24 pages (17 pages on average); generally shorter than the German equivalents, which ranged from 20 to 86 pages (44 pages on average).

“The challenge for companies is once again to make sure that more translates into better,” observed David Littleford, accounting partner with KPMG in the UK. “The flexibility to present more focused disclosure in half-yearly financial reports than in the longer annual financial statements make it essential that companies devote the necessary effort to preparing this important element of their communication cycle.”

The new half-yearly reports contain both a narrative interim management report and a condensed set of financial statements. The narrative section is an opportunity for the company to explain the financial information, and must give a fair review of the important events in the first six months of the financial year. It is also required to be forward looking, describing the principal risks and uncertainties in the remaining six months.

In KPMG’s survey, the interim management report of UK companies averaged six pages (23 in Germany). The longer interim management reports of German companies partly reflected a requirement in Germany to discuss the results of the second quarter as well as the first half of the year. In general, German companies also tended to include within the management report more analysis of financial data.

KPMG’s survey additionally found that the condensed set of financial statements of UK companies averaged nine pages (19 in Germany). The extent of financial information varied by company and sector; financial institutions, in particular, generally gave more extensive disclosures.

David Littleford noted: “Disclosures can be very specific to the events and circumstances of the entity, so some variation in practice is to be expected. However, UK companies should be prepared to make more disclosure than has historically been given in half-yearly reports. Given that the deadline for publication is down from 90 days to two months, this may need careful planning.”

KPMG concluded that it is early days for this new regime in the UK, and the survey suggests that there may initially be divergence in the approaches taken. In the meantime, KPMG says that the winners may be those that lead the way towards best practice in this new area of corporate communication, rather than follow behind.

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