UK: Six of One - Surveying Half-Yearly Financial Reporting

Last Updated: 22 March 2011
Article by Deloitte Audit Group

Most Read Contributor in UK, August 2017

1. EXECUTIVE SUMMARY

Take the first six months of the year and that's the period for the half-yearly financial report (formerly known as interim report).

Take the average interim report from the year 1999 and multiply it by six and it is shorter in length than the 2011 equivalent report.

For those wishing a trip down memory lane, take a look at the five rules applying in 1999. The London Stock Exchange's Yellow Book prescribed:

  • a summarised profit and loss account covering ten specific items;
  • an explanatory statement to enable investors to make an informed assessment of the trend of the group's activities and profit or loss;
  • an indication of any special factors influencing the above;
  • enough information to allow a comparison to be made with the corresponding period in the previous year; and
  • so far as possible, a reference to the group's prospects in the current financial year.

Words such as "indication", "enough" and "so far as possible" are not routinely found in today's rules. Appendix 2 takes more than a dozen pages to summarise the disclosure requirements for the 2011 reports.

The evidence from this year's survey, which as usual considered separately investment trusts and corporates, indicates that all are broadly doing a good job in complying enough:

  • the average length of the corporates' half-yearly financial report was 18 pages (2009: 19 pages) although, for one bank, its interim report was a massive 253 pages;
  • only 5% of corporates did not discuss going concern or financial resources, contrary to the recommendations in the related FRC Guidance for directors;
  • 48% (2009: 43%) met or exceeded the minimum requirements for details of principal risks and uncertainties;
  • 67% (2009: 66%) of companies elected to have a formal review report from their auditors; and
  • all corporates and investment trusts reported within the two month deadline.

In 2011, there are only a few relatively modest changes to accounting standards with which to contend. These include IAS 24 Related Party Disclosures (revised) and the 2010 improvements to IFRS. The illustrative half-yearly financial report, at Appendix 1, is there to help.

Please be aware that the regulators have been sceptical on finding identical wording adopted by very different companies. But plagiarisation before improvisation may be a useful motto. Companies have to tick lots of boxes these days and reports are checked by the regulators. It is not safe to say "that should be enough".

2. REGULATORY REQUIREMENTS

This section summarises the regulatory requirements for half-yearly financial reports of UK listed companies, covering:

  • the timing and dissemination of half-yearly financial reports;
  • the content of an interim management report (IMR);
  • the inclusion of a responsibility statement in half-yearly financial reports;
  • the content of a condensed set of financial statements;
  • the provisions for single companies reporting under UK GAAP; and
  • the application of these requirements to companies with securities listed or admitted to trading on the various exchanges operating in the United Kingdom.

The requirements stem from section 4.2 of the Disclosure and Transparency Rules (DTR) contained within the Financial Services Authority (FSA) handbook and have applied for all accounting periods commencing on or after 20 January 2007. There have been no significant changes to these rules since their implementation. However, the UK Listing Authority (UKLA) has periodically issued additional guidance to clarify the requirements of the DTR.

Going concern in half-yearly financial reports

In October 2009, the Financial Reporting Council (FRC) published revised guidance for the directors of UK companies on going concern assessment and disclosures1. This provided for the first time detailed guidance on the assessment of going concern expected to be undertaken in preparing half-yearly financial reports and the disclosures arising from that assessment. The UK Corporate Governance Code provision C.1.3 is applicable for periods commencing on or after 29 June 2010, and requires that "The directors should report in annual and half-yearly financial statements that the business is a going concern, with supporting assumptions or qualifications as necessary". The equivalent provision of the 2008 Combined Code did not refer to half-yearly financial statements.

Assessment of going concern

The FRC guidance requires directors to exercise judgement on the nature and extent of procedures undertaken in assessing going concern for the purposes of half-yearly financial reports. It also suggests that the following issues may trigger a need to re-examine the going concern assumption:

  • a significant adverse variation in operating cash flows between prior budgets and forecasts and the outturn in the first half of the year;
  • a significant reduction in revenues or margins forecast in the second half of the year;
  • a failure to obtain renewal or extension of bank facilities that had been anticipated; and
  • a failure to sell capital assets for their expected amounts or within previously forecast time-frames.

These examples are not intended to be exhaustive and directors should be alert to any other potential going concern issues.

The FRC guidance also states that where going concern has become a significant issue, directors should undertake procedures similar to those that would be carried out for annual financial statements to ensure that all relevant issues have been identified and considered. Where no new issues have been identified, the FRC guidance recommends that procedures are undertaken to roll forward the previous budgets and forecasts by the length of the half-yearly period.

The review period

The FRC guidance makes clear that the review of going concern should cover a period of at least 12 months from the date of approval of the half-yearly financial report.

Disclosures in respect of going concern

The FRC does not suggest that the same level of disclosure on going concern that is included in annual reports should routinely be given in half-yearly financial reports. What is recommended is that additional explanation should be given of any new events and circumstances arising subsequent to approval of the previous annual report. Where no new issues have arisen, a short statement confirming the use of the going concern basis should suffice. This is illustrated in Appendix 1 to this publication.

Where the review period for going concern has been limited to a period of less than 12 months from the date of approval of the half-yearly financial report, the FRC guidance requires disclosure of that fact and the directors' justification for not complying with the guidance in this respect.

A half-yearly financial report should cover the first six months of the financial year. It should contain, as a minimum, a condensed set of financial statements, an interim management report (IMR) and a responsibility statement, each of which is discussed in further detail below.

Timing of half-yearly reporting and dissemination of information

The half-yearly financial report must be published within two calendar months of the end of the six-month period and disseminated in unedited full text (including the auditors' review report where applicable) via an RIS2. The UKLA has clarified this requirement, noting that inclusion of required information on a company's website but not in an RIS announcement is not considered to fulfil the requirements of the DTR3.

Further clarification was offered in March 2009, with the UKLA making clear that a link to a pdf is not considered an acceptable method of disseminating regulated information4.

However, the announcement relating to the publication of the half-yearly report must include an indication of which website the document is available on.

Interim management report

The IMR is the narrative report which includes, as a minimum:

  • an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements;
  • a description of the principal risks and uncertainties for the remaining six months of the financial year; and
  • information on related party transactions.

Principal risks and uncertainties in half-yearly financial reports

The UKLA has given further guidance5 on the extent of disclosure of principal risks and uncertainties expected to be included in half-yearly financial reports.

In particular, where those risks are deemed to be consistent with those disclosed in the previous annual report, it is acceptable for a company to:

  • state that the principal risks and uncertainties have not changed;
  • provide a summary of those principal risks and uncertainties; and
  • include a cross-reference to where a detailed explanation of the principal risks and uncertainties can be found in the annual report.

Where risks and uncertainties have changed since the annual report, a full description of the new principal risks and uncertainties should be given.

The following information on related party transactions should be disclosed in the IMR:

  • related party transactions that have taken place in the first six months of the financial year which had a material effect on the financial position or performance of the company/group; and
  • any changes in the related party transactions described in the latest annual report which could have a material effect on the financial position or performance of the company/group in the first six months of the financial year.

There is, perhaps, a lack of clarity around the latter requirement. There may be few instances of a change in a previously reported related party transaction which would not in itself be a transaction (and therefore already be disclosed under the former requirement). An example of such a situation may be sales made to a related party in the previous financial year where the absence of these in the current period has had a material impact on the group's financial performance. Given this apparent ambiguity, it may be advisable for companies either to give comparative information from the last annual report for any material related party transactions or to state explicitly that no such changes have occurred.

In respect of related parties, companies not preparing consolidated accounts (regardless of whether they report under IFRSs or under UK GAAP) must also disclose as a minimum:

  • any transactions entered into with related parties by the company;
  • the amount of such transactions;
  • the nature of the related party relationship; and
  • other information about the transactions necessary for an understanding of the financial position of the issuer;

if those related party transactions are material and if they have not been carried out under normal market conditions, i.e. at arm's length. The information disclosed may be aggregated according to the nature of the transactions, unless separate disclosure is necessary for an understanding of the financial position of the company.

Responsibility statement

All companies must provide a responsibility statement in their half-yearly financial report. Such a statement must be made by the persons responsible within the company (usually the board of directors). The responsibility statement should include the name and function of any person making a statement. One or more people are expected physically to sign the responsibility statement, usually on behalf of the board of directors. Each company decides who is considered responsible for the report.

Each person making a responsibility statement must confirm that to the best of his or her knowledge:

  • the condensed set of financial statements, which has been prepared in accordance with the applicable set of accounting standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the company or the undertakings included in the consolidation as a whole;
  • the interim management report includes a fair review of the information required (i.e. an indication of important events and their impact and description of principal risks and uncertainties for the remaining six months of the financial year); and
  • the interim management report includes a fair review of the information required on related party transactions.

"True and fair" in half-yearly financial Reports

The requirement to confirm that the condensed set of financial statements gives a true and fair view will be satisfied if the responsibility statement includes a confirmation that the condensed financial statements have been prepared in accordance with:

  • IAS 34; or
  • for UK companies not using IFRSs, the Accounting Standards Board (ASB) statement 'Half-yearly financial reports'6; or
  • for all other companies not using IFRSs, a national accounting standard relating to interim reporting.

In all such cases, the person making the statement must have reasonable grounds to be satisfied that the condensed set of financial statements, prepared in accordance with such a standard, is not misleading.

Condensed set of financial statements

UK companies preparing consolidated or single company financial statements under IFRSs should prepare their half-yearly condensed set of financial statements in accordance with IAS 34 'Interim Financial Reporting'7. An illustrative half-yearly financial report in accordance with IAS 34 and the DTR is included in Appendix 1 and a disclosure checklist containing all the requirements is in Appendix 2 to this publication.

Condensed half-yearly financial statements should normally be based on accounting policies and presentation that are consistent with those in the latest published annual financial statements.

Where the accounting policies and presentation are to be changed in the subsequent annual financial statements, the new accounting policies and presentation should be followed in the half-yearly condensed financial statements. Such changes, and the reason for these, must be disclosed in the condensed half-yearly financial statements.

If the condensed set of financial statements has been audited or reviewed in line with Auditing Practices Board (APB) guidance, the audit report or review report must, under the DTR, be included in the half-yearly financial report in full. If no audit or review has been performed, the condensed set of financial statements must include a statement to this effect.

Changes to half-yearly financial reporting in 2011

A number of new or revised accounting standards are effective for companies reporting under IFRSs for periods beginning on or after 1 January 2011. These include two specific amendments to IAS 34 included in the Improvements to IFRSs issued in May 2010 and the revised version of IAS 24 Related Party Disclosures.

The amendments to IAS 34 included in the Improvements to IFRSs made little substantive change to the standard. However, various requirements therein were rearranged and the principles to be applied in determining the disclosures required in an interim financial report were clarified, including how those principles should be applied in respect of financial instruments. In particular, the list of events and transactions for which disclosures would be required if they are significant has been extended to include:

  • losses on impairment of financial assets;
  • changes in the business or economic circumstances that affect the fair value of the entity's financial assets and financial liabilities, whether those assets or liabilities are recognised at fair value or amortised cost;
  • transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments; And
  • changes in the classification of assets as a result of a change in the purpose or use of those assets.

These amendments follow the addition of similar, although more detailed, requirements for annual reports in the 2009 amendments to IFRS 7.

The revised version of IAS 24 Related Party Disclosures will also be effective for periods beginning on or after 1 January 2011. A clarified definition is included in the revised standard, which may impact the scope of persons/entities qualifying as related parties.

Half-yearly financial reports under UK GAAP

UK single companies which continue to report under UK GAAP should follow the ASB statement 'Half-yearly financial reports'. The DTR requirements for non-IAS 34 condensed financial statements8 are set out below.

Minimum content of non-IAS 34 condensed financial statements

The condensed set of financial statements should include at least a condensed balance sheet, a condensed profit and loss account and explanatory notes on these condensed financial statements.

The condensed balance sheet and the condensed profit and loss account should:

  • be prepared using the same principles for recognition and measurement as in the annual financial report; and
  • show each of the headings and subtotals included in the company's most recent annual financial statements. Additional line items should be included if their omission would result in giving a misleading view.

The half-yearly financial information contained in the condensed financial statements must include comparatives as follows:

  • the comparative balance sheet as at the immediate preceding financial year end; and
  • the comparative profit and loss account for the comparable period in the preceding financial year.

Although not explicitly required by the DTR, the condensed financial statements should also include a statement of total recognised gains and losses and a cash flow statement with their respective comparatives to comply with the ASB statement.

In terms of comparative information, the ASB statement goes further than the DTR and IAS 34, requiring comparatives for the corresponding half-yearly period and the previous full financial year for each of the profit and loss account, statement of total recognised gains and losses and cash flow statement.

The explanatory notes in the condensed financial statements should contain sufficient information to enable a user to compare the condensed half-yearly financial statements with the annual financial statements. Also, sufficient information and explanations should be included to aid the understanding of any material changes in amounts and any developments in the half-year.

Summary of application

The DTR 4.2 requirements outlined above apply in full to companies with shares listed on a regulated market. Other companies may also be required to follow these requirements. A summary of the application of DTR 4.2 and the AIM rules for companies is provided in the table opposite.

Application of DTR 4.2 'Half-yearly financial reports'

Type of company

Does DTR 4.2 apply?

Other comments

Ordinary shares listed on main market

ü

Required for companies with either a premium or a standard listing.

Preference shares listed on main market

ü  

Shares admitted to trading on Alternative Investment Market (AIM)

×

The AIM Rules for Companies require a half-yearly financial report to be published within three months. It must include at least a balance sheet, an income statement, a cash flow statement and comparatives for the corresponding period in the preceding financial year. Accounting policies should be consistent with those which will be applied in the annual report. Application of IAS 34 is not mandatory.

Retail debt9 listed on main market

ü

Requirements around related parties in the IMR do not apply. Delayed until 2015 for debt securities admitted to the official list before 1 January 2005.

Retail debt listed on Professional Securities Market (PSM)10

×

 

Wholesale11 debt listed on main market

Exempt per DTR 4.4.2

 

Wholesale debt listed on PSM

×

 

Listed convertible securities

Exempt per DTR 4.4.5

 

Listed depositary receipts

Exempt per DTR 4.4.7

 

Footnotes

1. Going concern and liquidity risk: Guidance for directors of UK companies 2009. Available at www.frc.org.uk/press/pub2141.html. Guidance on half-yearly financial reports is included in paragraphs 47-50 and 86-88.

2. RIS = Regulated Information Service

3. UKLA Technical note: Disclosure and Transparency Rules

4. UKLA Publications Update – March 2009

5. UKLA Technical Note: Disclosure and Transparency Rules

6. As revised and issued by the ASB in July 2007

7. Companies may choose to prepare full financial statements in accordance with IFRSs. However, this is not common UK practice

8. Included at DTR 4.2.5R

9. Debt with a denomination per unit of less than €50,000 (or an equivalent amount)

10. The PSM is a non-regulated market for listed debt of any denomination. It is Listed for the purpose of the Listing Rules

11. Debt with a denomination per unit of at least €50,000 (or an equivalent amount)

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