Executive summary

For the last two years, the emphasis has been on providing more information in existing reports. Consequently, as Deloitte reported in October 2006, the average number of pages in a listed company’s annual report in 2006 was 85 compared to 71 in 2005. 2007 will see change in this trend. Instead of the rules simply calling for more information in existing reports, the cry will be more information and more reports.

The principal cause of the current changes is the implementation of the EU Transparency Obligations Directive (TOD) through amendments to the UK Listing Authority’s rules. The impact of the TOD includes:

  • requiring fully listed companies to issue interim management statements (IMS) twice a year;
  • amending half-yearly reports so that they comply with IAS 34 on interim financial reporting;
  • bringing forward the deadlines for reports so that half-yearly reports now must be issued within two calendar months of the period end and annual reports within four months; and
  • directors having to report explicitly that financial statements give a true and fair view and narrative reports provide a fair review of the performance and position of the business.

This publication looks at how these changes will affect British companies by comparing the new requirements with present practice in half-yearly and other reports as measured in a survey of current practice. It also looks at how reporting practice has changed by comparing the results of this survey with four previous surveys published in 2005, 2002, 1999 and 1995.

The findings are, in short, that most companies will need to do much to comply with the new rules. In particular:

  • only 54% of companies currently publish their interim reports within 60 days of the period end. With the TOD introducing a deadline of two months almost half of listed companies will have to bring forward their reporting deadlines;
  • the four months publication deadline for annual reports should be more easily met. Deloitte research indicates that only 7% of companies failed to publish within this timescale;
  • while nine companies claimed early adoption of IAS 34 on interim financial reprting, only one of these demonstrably complied with all its disclosure requirements. Compliance with this standard, which will be required for all consolidated financial statements, will increase disclosure particularly on segmental results and business combinations; and
  • 78% of the survey companies currently provide some form of reporting outwith the cycle of annual and half-yearly reports. In that respect, the new IMS may not appear too much of a burden. However, at present only 34% of companies reported within the prescribed periods for an IMS. Furthermore, only 14% of companies would have met the content requirements for an IMS, which are to explain the material events and transactions during the period and their impact on the financial position of the group and to describe generally the financial position and performance of the group during the period under discussion. While the IMS is expected to be only a relatively short narrative statement, clearly the significant majority of companies will have to change their processes and deadlines to ensure that the new requirements are met.

So the theme for 2007 is going to be more disclosure more often. Will all then be clear? Or, will this reporting in a more regimented fashion simply lead to more bland reporting rather than focussed commentary as appropriate?

New rules in UK periodic Reporting

This section provides an overview of the new requirements for periodic financial reporting for a UK listed company for periods beginning on or after 20 January 2007. The new rules emanate mainly from the UK Listing Authority (UKLA) in its Disclosure and Transparency Rules (DTR), which implement the recent changes arising from the EU Transparency Obligations Directive (TOD). New publications from the Accounting Standards Board (ASB) and the Auditing Practices Board (APB) are also considered.

The EU Transparency Obligations Directive (TOD)

During 2006, the UKLA consulted on the implementation of the TOD in the UK. The directive, which seeks to enhance transparency through an EU-wide framework, has been inserted into the Disclosure Rules sourcebook of the UKLA and is now called the ‘Disclosure and Transparency Rules’ (DTR). These new rules amend the existing Listing Rules.

The DTR specifically deal with periodic financial reporting (chapter 4 of the DTR), including annual financial reports, half-yearly financial reports and interim management statements (IMS). The DTR also include rules on major shareholdings notification (chapter 5 of the DTR) and the dissemination of regulated information (chapter 6 of the DTR). These latter areas are not discussed in detail herein. The UKLA has provided further information in its December 2006 newsletter, List!, which is available on www.fsa.gov.uk/pubs/ukla/list_dec06.pdf.

Periodic financial reporting
One of the main aims of the TOD is to improve the quality, quantity and timeliness of periodic financial information provided by companies to ensure investor confidence in financial markets. The implementation of the DTR results in the following:

  • shorter reporting deadlines for annual and half-yearly financial reports;
  • more requirements on the content of periodic financial reports; and
  • additional periodic financial reporting for many companies through the introduction of the IMS.

The following chart illustrates the main content of each periodic financial report and its timing for a company with a financial year from 1 February 2007 to 31 January 2008.

Applying the DTR

DTR 4 on periodic financial reporting applies directly to companies "whose transferable securities are admitted to trading and whose home state is the United Kingdom". This means that UK companies which have shares and/or debt listed on a regulated market are within the scope of the DTR.

DTR 4.4 contains an exemption from the rules on periodic financial reporting for public sector companies and for companies which have only listed wholesale debt1. Therefore, the DTR requirements set out in the following sections apply to debt-only companies with retail debt2 listed on a regulated market. Other debt-only companies such as all Professional Securities Market (PSM)3 companies and all wholesale debt-only companies are outside the scope of the DTR or exempted, except that the rules in DTR 6.3 dealing with the dissemination of regulated information apply to all debt-only companies, regardless of whether they are listed on a regulated market or the PSM (LR 17.3.9B).

AIM companies and companies admitted to trading on PLUS (previously OFEX) are not listed on a regulated market and hence are not required to comply with the DTR on periodic financial reporting. But other areas of the DTR, such as the rules on major shareholding notifications (DTR 5) apply to companies admitted to trading on AIM and PLUS. The UKLA newsletter, List! December 2006, contains more information on the rules contained in DTR 5.

Q1 I am listed on the PSM – how am I affected by the TOD?

Companies with debt listed on the PSM are admitted to the Official List, but the PSM is not a regulated market. The periodic reporting requirements of the TOD apply only to companies with securities listed on a regulated market. In implementing the TOD, the UKLA has not widened the scope of the DTR. Therefore, the DTR on periodic reporting do not apply to companies with only debt listed on the PSM.

However, the Listing Rules (LR 17) include the requirement for debt-only companies to prepare audited annual financial statements and publish those financial statements within six months of the year end. These LR requirements apply to debt-only companies not following DTR 4 on periodic reporting.

Companies with debt listed on the main market may want to consider moving to the PSM to avoid the impact of the DTR on periodic financial reporting, especially if the company has retail debt listed on the main market (see Q3). Moving to the PSM is free and does not require the preparation of listing particulars. But companies should consult with their sponsors prior to such a move.

Other areas of the DTR, such as the rules on the dissemination of regulated information in DTR 6 apply to companies listed on the PSM.

Q2 I have wholesale debt listed – how do the changes impact me?

Generally speaking, companies with listed wholesale debt are not impacted by the DTR on periodic reporting. Wholesale debt listed on the main market (which is regulated) is within the scope of DTR 4, but DTR 4.4 exempts companies with exclusively wholesale debt from all the requirements on periodic financial reporting. Wholesale debt listed on the PSM is not within the scope of the DTR as the PSM is not a regulated market.

However, the Listing Rules (LR 17) require debt-only companies not following DTR 4 to produce and publish audited annual financial statements within six months of the year end.

Q3 I have retail debt listed – how do the changes impact me?

For companies with listed retail debt, the impact of the DTR will depend on the market on which the retail debt is listed. If a company has retail debt listed on the PSM, the DTR 4 requirements do not apply (see Q1).

If a company has retail debt listed on the main market, it falls within the scope of DTR 4. Such companies are probably the group of companies most affected by the implementation of the DTR. The DTR do not provide any exemptions from the requirements on periodic financial reporting for retail debt. Therefore, companies with retail debt on the main market will now be required to prepare half-yearly financial reports for the first time. They would also have to comply with the more detailed and stringent reporting requirements for annual reports in the same way as companies with shares listed on the main market. However, the IMS requirements only apply to companies with listed shares on a regulated market and hence do not affect companies with retail debt only.

Q4 I have preference shares listed on the main market – am I caught?

Companies with preference shares listed on the main market are within the scope of DTR 4. This is also reiterated by new rule LR 9.1.2A which states that companies with listed preference shares should follow the DTR in the same way as debt-only companies. DTR 4.4 provides an exemption from the IMS requirements for companies with listed preference shares.

Q5 What are the requirements for AIM companies?

The AIM market is not a regulated market and companies admitted to trading on AIM are not on the Official List. Therefore, AIM companies are not within the scope of the DTR 4 requirements and are not considered "listed" for the purpose of the Listing Rules. But other areas of the DTR, such as the rules on major shareholding notifications in DTR 5, apply to companies admitted to trading on AIM.

The AIM rules, which were last updated during 2006, include specific requirements for AIM companies in respect of annual reports and half-yearly financial reports. Please refer to Q8 and Q10 for more information on the detailed requirements.

Annual financial reports
The DTR on annual financial reports apply to companies with securities admitted to trading on a regulated market. DTR 4.4 exempts public sector companies and companies which have only wholesale debt listed from the rules on annual financial reports.

The DTR define the minimum content of an annual financial report as the audited financial statements, a management report and a responsibility statement (DTR 4.1.5).

The DTR bring no new rules on the audited financial statements. For companies that are required to prepare consolidated financial statements, the DTR require the consolidated financial statements to be prepared in accordance with IFRS. The company only accounts of the parent as well as single company accounts should be prepared in accordance with national law (that is UK GAAP or IFRS as permitted by the Companies Act 1985). The financial statements must include the audit report in full.

These requirements reflect those already incorporated into the Companies Act 1985 and the 2002 IAS Regulation, which came into effect for periods beginning on or after 1 January 2005. The management report required by the DTR effectively represents the requirements for a business review already contained in section 234ZZB of the Companies Act 1985, which became effective for periods beginning on or after 1 April 2005.

s234ZZB Directors’ report: business review (also management report content in DTR 4.1.8 – 4.1.10)

(1) The directors’ report for a financial year must contain:

(a) a fair review of the business of the company; and

(b) a description of the principal risks and uncertainties facing the company.

(2) The review required is a balanced and comprehensive analysis of:

(a) the development and performance of the business of the company during the financial year; and

(b) the position of the company at the end of that year, consistent with the size and complexity of the business.

(3) The review must, to the extent necessary for an understanding of the development, performance or position of the business of the company, include:

(a) analysis using financial key performance indicators; and

(b) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.

(4) The review must, where appropriate, include references to, and additional explanations of, amounts included in the annual accounts of the company.

(5) In this section, "key performance indicators" means factors by reference to which the development, performance or position of the business of the company can be measured effectively.

In addition to the s234ZZB requirements above, DTR 4.1.11 states that the management report must give an indication of:

  • any important post balance sheet events;
  • the likely future development of the company/group;
  • any activities in the field of R&D;
  • the acquisition of own shares;
  • the existence of branches; and
  • in relation to the use of financial instruments, the financial risk management objectives and policies, including the company’s policy for hedging each major type of forecast transaction for which hedge accounting is used and the exposure to price, credit, liquidity and cash flow risk where this is material for the assessment of the assets, liabilities, financial position and profit or loss of the company/group.

These requirements are already in the Companies Act 1985 in Schedule 7 ‘Matters to be dealt with in directors’ report’ which became effective for periods beginning on or after 1 January 2005. However, the Companies Act 1985 requirement to give information about the existence of branches is limited to those branches outside the UK. Therefore, the disclosures to be given in the DTR management report go beyond those required under UK law.

The DTR introduce the requirement for a statement to be made by the "persons responsible within the issuer". The responsibility statement should include the name and function of any person making a statement. The persons responsible would usually be the directors of the company, rather than one individual. It is expected that only one person would be required physically to sign the responsibility statement and would sign on behalf of the board of directors. Ultimately, it is for each company to decide which persons are responsible.

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

  • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and
  • the management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face".

Directors’ liability for disclosures
Following pressure from companies, their representative bodies and some institutional investors, the Companies Act 2006 contains section 463 providing directors with some protection from liability for disclosures made in, inter alia, the directors’ report. This is extended to include the IMR in half-yearly reports. This new section is now in force.

Under this new protection, a director is held liable only to the company itself (although existing civil or criminal offences are unchanged). Such liability exists only if the director knew that a statement was untrue or misleading, or was reckless as to whether this was the case. For an omission from the relevant report, liability arises only if he or she knew that the omission was "dishonest concealment of a material fact".

Publication of annual financial reports

The DTR require companies to publish their annual financial reports within four calendar months of the financial year end. This is shorter than the six months deadline previously given by the Listing Rules. Following their publication, annual financial reports have to remain publicly available online for at least five years.

The recent Deloitte survey, ‘Write to reason’, showed that 7% of the companies surveyed failed to approve and publish their annual report within 120 days.

This suggests that the shorter deadline for publication imposed by the DTR will mean that some companies will have to speed up their year end reporting process to comply with the new requirements. Companies should work with their auditors to amend reporting timetables to fit in with their new deadline.

General provisions regarding the dissemination of regulated information, such as the requirement to communicate to as wide a public as possible and as soon as possible are contained in DTR 6.3. For annual financial reports, the information required to be disseminated by way of a Regulated Information Services (RIS) provider is that which would be required in a half-yearly financial report (see below). Such information must be communicated in unedited full text. The announcement should refer to the website on which the annual financial report is made available. This could be the company’s website or a third party website on which the annual financial report can be downloaded.

The DTR allow a purely electronic form of communication. This is supported by the Companies Act 2006 which now defaults to electronic communication provided shareholders have been asked in writing for their approval. The Companies Act 2006 electronic communication rules are effective for financial years beginning on or after 20 January 2007. In any case, shareholders retain their right to request hard copies.

A section 240 statement indicating that the information published does not represent statutory accounts should be included in the dissemination announcement, unless the annual financial report is disseminated in full unedited text.

The rules regarding the dissemination of regulated information also apply to debt-only companies that are otherwise scoped out or exempted from the DTR, such as companies listed on PSM or wholesale debt-only companies.

Preliminary announcements

Preliminary announcements for annual financial reports are now optional for periods beginning on or after 20 January 2007. The previous requirements in LR 9.7 (including the requirement to publish a preliminary announcement within 120 days) were deleted and have been replaced with a new rule, LR 9.7A. If a company chooses to produce a preliminary announcement, LR 9.7A sets out the requirements and these are largely unchanged. For example, the optional preliminary announcement should be published as soon as possible after approval by the board, be agreed with the auditors, include details of any likely modification of the audit report and disclose the items required for a half-yearly report. The optional preliminary announcement has to be disseminated in full text and should contain a section 240 statement indicating that the information published does not represent statutory accounts.

Companies still need to provide and communicate a statement of dividends, including details such as the amount payable per share and the payment date, as soon as possible after the board has approved any dividend decision. Such a dividend statement can be combined with a preliminary announcement where the company chooses to produce one.

Q6 Should I continue to prepare a preliminary announcement?

Preliminary announcements are now voluntary. If a company chooses to prepare a preliminary announcement, the requirements in LR 9.7A need to be met.

Preparing a preliminary announcement (either unaudited or audited) may still be of benefit or necessity to companies in complying with Listing requirements where there is a time delay:

  • between the annual audit being substantially complete and the annual accounts being approved; and/or
  • between the annual accounts being approved and the accounts being published, including where dividend decisions are made in those periods, which need to be communicated to the market.

Q7 What are the annual report rules for debt-only companies on the PSM?

As the PSM is not a regulated market, the requirements of DTR 4 do not apply to companies listed there. But, the Listing Rules require in chapter LR 17 that debt-only companies prepare audited annual financial statements and publish those accounts within six months of the year end.

Because the PSM is not in the remit of the IAS Regulation, IFRS is not mandatory and companies can continue to report under UK GAAP.

Q8 What are the relevant annual reporting requirements for AIM companies?

AIM companies are not within the scope of DTR 4 on periodic financial reporting. The AIM rules govern the minimum requirements for financial reporting.

AIM companies are required to publish their annual financial statements within six months of the year end. Also, for periods beginning on or after 1 January 2007, AIM companies that are required to prepare consolidated accounts will have to prepare their group accounts in accordance with IFRS. Companies not preparing group accounts continue to have a choice between UK GAAP and IFRS.

Half-yearly financial reports
The DTR on half-yearly financial reports apply to companies which have shares or debt listed on a regulated market. DTR 4.4 contains some exemptions from the requirements to produce a half-yearly financial report for:

  • public sector companies;
  • companies with wholesale debt only;
  • credit institutions with listed debt only, if the total nominal amount of all listed debt is less than €100m and if the credit institution has not published a prospectus in accordance with the prospectus directive;
  • companies already existing on 31 December 2003 with exclusively listed debt unconditionally and irrevocably guaranteed by the company’s home member state or a regional or local authority of that state;
  • companies with listed convertible securities only; and
  • companies with listed depositary receipts.

The Listing Rules do not alter these exemptions. The main change is for companies with retail debt listed on the main market, which are now required to prepare half-yearly financial reports.

A half-yearly financial report should cover the first six months of the financial year. It should contain at least a condensed set of financial statements, an interim management report (IMR) and a responsibility statement (DTR 4.2.3).

Companies preparing consolidated accounts in accordance with the EU Seventh Directive (incorporated into UK company law) are now required to prepare their half-yearly condensed set of financial statements in accordance with IAS 34 ‘Interim Financial Reporting’. An overview of the impact of IAS 34 is provided below.

Impact of IAS 34
IAS 34 ‘Interim Financial Reporting’ prescribes the minimum content of an interim financial report. It outlines the recognition and measurement principles which are to be followed in interim financial statements. IAS 34 applies to all interim reports, including quarterly reports, if such reports are described as complying with IAS 34. Consequently, in this section reference is made to "interim reports" rather than "half-yearly reports". Generally, the requirements of IAS 34 are more onerous than those previously included in the Listing Rules or those in the AIM rules. Some, but not all, requirements from the Listing Rules are included in IAS 34, but IAS 34 also contains various additional requirements. Many of those requirements are already recommended by the ASB Statement, but the detailed requirements differ in some areas.

For example, IAS 34 requires that companies include full year comparatives for the balance sheet in their interim report, but it does not require balance sheet comparatives for the corresponding period in the preceding financial year. The disclosures required by IAS 34 are more extensive than those generally provided by companies at present. Examples include the requirement to disclose segmental revenue and results for the group’s primary segments and to provide the disclosures required by IFRS 3 for any business combinations that occur during the relevant period. A detailed disclosure checklist, containing all disclosure and presentation requirements of IAS 34, is included in Appendix II.

Appendix I includes a model half-yearly financial report in accordance with IAS 34 and the DTR for the six months ended 31 July 2007. In addition, detailed guidance on IAS 34, including examples and interpretative material, is contained in Appendix V.

For companies that are not required to prepare consolidated accounts and therefore are not required to follow IAS 34, the DTR prescribe the minimum content for condensed financial statements as set out below.

Minimum content for non-IAS 34 condensed financial Statements

Companies not complying with IAS 34 should include in their condensed set of financial statements 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. The DTR delay the requirement for comparatives in the condensed profit and loss account by two years, that is for periods beginning on or after 20 January 2009. However, in practice this exemption could not be taken by UK companies as comparatives are required by IAS 34 and the ASB Statement, compliance with which is required to give a true and fair view in the half-yearly financial report (see below).

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.

DTR 4.2.6 sets out the general requirement that condensed halfyearly financial statements (both IAS 34 and non-IAS 34) should be based on the accounting policies and presentation that are consistent with those in the latest published annual accounts. 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 condensed set of financial statements. Such changes and the reason for the changes are to 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 be included in the condensed financial statements in full. If no audit or review has been performed, the condensed set of financial statements should include a statement to this effect.

The DTR require that a half-yearly financial report contains an interim management report (IMR) 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; and
  • a description of the principal risks and uncertainties for the remaining six months of the financial year.

For companies with listed shares, DTR 4.2.8 requires the following additional information on related party transactions to be included 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 group in the first six months of the financial year.

These disclosure requirements seem strange. The first requirement appears to result in less disclosure than in the annual financial report, whereas the second disclosure point could be read to be quite onerous and go beyond that required in the annual financial report. It is unclear how this second disclosure requirement will be interpreted in practice.

Companies with listed shares which are not required to prepare consolidated accounts, and therefore do not prepare their halfyearly financial report in accordance with IAS 34, are required to 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, that is at arms 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.

Although the rules for non-IFRS companies seem to require only disclosure of non-arm’s length transactions, in practice this would result in a split between related party transactions that are at arm’s length and those that are not. This is likely to be testing. Sufficient evidence would be required for a company to conclude that a related party transaction was carried out at arm’s length. On this basis it is likely to be easier for UK companies to give full related party disclosure as required by FRS 8 ‘Related Party Disclosures’.

Similar to the rules for annual financial reports, DTR 4.2.10 requires companies to provide a responsibility statement in their half-yearly financial reports. Such a statement must be made by the persons responsible within the company (usually the directors). The responsibility statement should include the name and function of any person making a statement. It is expected that only one person would be required physically to sign the responsibility statement, and sign on behalf of the board of directors. Ultimately, it is for each company to decide which persons are considered responsible within the company.

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 by DTR 4.2.7 (indication of important events and their impact, and description of principal risks and uncertainties for the remaining six months of the financial year); and
  • in the case of a company with listed shares, the interim management report includes a fair review of the information required on related party transactions. Similar directors’ liability provisions as those for annual financial reports also apply in this area.

"True and fair" in the context of half-yearly financial reports
In its consultation on the implementation of the TOD, the UKLA discussed the "true and fair" requirement for half-yearly financial reports. The UKLA recognises that "true and fair" has a different meaning in the context of half-yearly financial reports and condensed financial statements compared to annual reports. Consequently, the UKLA clarified in its Policy Statement PS06/11on the Implementation of the Transparency Directive (October 2006) that the requirement to provide a true and fair view in half-yearly financial reports is satisfied by a statement in accordance with DTR 4.2.10(4) (see below). The UKLA further clarified in that Policy Statement that this decision has no effect on the interpretation of the true and fair view for annual accounts.

DTR 4.2.10(4) establishes that 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 IFRS, pronouncements on interim reporting issued by the ASB; or
• for all other companies not using IFRS, a national accounting standard relating to interim reporting.

In all cases, the above applies provided the person making the statement has reasonable grounds to be satisfied that the condensed set of financial statements prepared in accordance with such a standard is not misleading. The December 2006 edition of List! states that a further explicit statement confirming that the condensed financial statements give a true and fair view is not necessary.

ASB draft Statement ‘Half-Yearly Financial Reports’ In light of the DTR requirement for UK companies not using IFRS to confirm compliance with the ASB Statement on interim reports, the ASB is currently revising its 1997 Statement 'Interim Reports’ and is publishing an exposure draft of a Statement on ‘Half-Yearly Financial Reports’.

The draft Statement seeks to ensure consistency with all major aspects of IAS 34 and the DTR and to avoid conflicting guidance. In revising the 1997 Statement, the wording is updated to ensure consistent language is used between the draft Statement, IAS 34 and the DTR. For example, "interim report" is changed to "half-yearly financial report". Otherwise, the intention is to keep changes to a minimum.

The draft Statement, although not mandatory by definition, becomes effectively mandatory for companies within the scope of the DTR not using IFRS. This follows from the true and fair requirement for non-IFRS companies to confirm compliance with pronouncements by the ASB.

Publication

Companies should publish their half-yearly financial reports within two calendar months of the end of the six month period to which it relates. This compares to 90 days previously allowed for publication by the Listing Rules. As required for annual financial reports, halfyearly financial reports have to remain publicly available online for at least five years.

Note that the publication deadline under the DTR are calendar months – hence the deadline could be from 59 days (31 December period end) to 62 days (30 June period end).

The half-yearly financial report must be disseminated in unedited full text. But it is no longer required that companies publish their half-yearly financial report in a national newspaper or send it to their shareholders. Online communication is sufficient.

Q9 I am a retail company with 13 four week periods. How does the reporting deadline apply to me?

Many companies in the retail and other sectors prepare financial information based on 13 four week periods instead of calendar months. This results in uneven periods for the half year reporting. Retail companies commonly report on the first 24 or 28 weeks of the financial year, instead of the first six months of the financial year. It is unclear from the UKLA rules, whether 24 or 28 week periods are permitted in half-yearly financial reports and it remains to be seen how practice develops in this area.

The DTR require that the half-yearly financial report should be made public no later than two months after the end of the period to which it relates. Therefore, a retail company preparing its half-yearly financial report for the 28 weeks ending 11 August 2007 should publish it by no later than 11 October 2007.

Q10 What are the half-yearly reporting requirements for AIM companies?

AIM companies are not within the scope of the DTR on periodic financial reporting. Hence the above requirements for half-yearly financial reports do not apply.

The AIM rules require that AIM companies publish a half-yearly financial report in respect of the first six month of each financial year. The half-yearly financial report must be published within three months of the period end. The information contained in the halfyearly report of an AIM company should include as a minimum:

  • a balance sheet;
  • an income statement;
  • a cashflow statement; and
  • comparative figures for the corresponding period in the preceding financial year.

The AIM rules also require that the half-yearly report is presented and prepared in a form that is consistent with the subsequent annual financial statements of the company. This extends to taking into account the accounting policies that will apply to the subsequent annual financial statements. Where the half-yearly report has been audited, a statement to this effect should be included.

AIM companies required to prepare consolidated financial statements have to prepare their group accounts in accordance with IFRS for periods beginning on or after 1 January 2007. The question arises, whether in their half-yearly reports AIM companies should follow IAS 34. The AIM rules do not contain an explicit requirement to that regard. As the AIM rules require consistent accounting policies, presentation and preparation in the half-yearly report compared to the subsequent annual report, AIM companies reporting under IFRS should prepare their half-yearly reports using accounting policies and measurement consistent with IFRS.

Compliance with IAS 34 is not required, but companies can apply IAS 34 voluntarily.

Q11 I am listed on the PSM – what do I need to do at the half-yearly reporting date?

PSM companies are not required to prepare half-yearly financial reports. They are not within the scope of the DTR on periodic financial reporting and the Listing Rules do not require any interim financial reporting by debt-only companies not caught by DTR 4.

Q12 I have wholesale debt listed – which half-yearly requirements do I need to follow?

Exclusively wholesale debt companies are not required to prepare half-yearly financial reports.

Wholesale debt listed on the main market is specifically exempted by the DTR from its requirements on periodic financial reporting and wholesale debt listed on the PSM is outside the scope of the DTR 4 rules.

Q13 I have retail debt listed on the main market – which halfyearly requirements do I need to follow?

Companies with retail debt listed on the main market are within the scope of the DTR on periodic financial reporting. The DTR do not contain any exemptions for retail debt. Therefore the requirements for half-yearly financial reports in DTR 4.2 apply to retail debt companies on the main market in the same way as for companies with listed shares. This is new for retail debt companies, as they previously were not required to report financial information outwith the annual financial report.

Q14 I am a stand-alone company, preparing accounts in accordance with IFRS. Do I need to comply with IAS 34?

The DTR and UKLA guidance is not entirely clear in this area. DTR 4.2.4 only mandates IAS 34 in half-yearly financial reports for companies that are required to prepare consolidated financial statements in accordance with the Seventh Directive. Therefore, companies not required to prepare group accounts which nevertheless chose to adopt IFRS would not be required to adopt IAS 34.

DTR 4.2.10 states that the requirement to confirm a true and fair view in the responsibility statement is satisfied by "including a statement that the condensed set of financial statements have been prepared in accordance with:

(a) IAS 34; or

(b) for UK issuers not using IFRS, pronouncements on interim reporting issued by the Accounting Standards Board [...]". The reverse of (b) is that UK companies using IFRS should apply IAS 34 to give a true and fair view in the half-yearly report. This is also reiterated by the UKLA newsletter, List! December 2006, which states that "issuers using IFRS for their annual accounts [...] will be required to produce half-yearly reports in accordance with IAS 34 on Interim Financial Reporting".

Therefore, it is strongly recommended that single companies reporting under IFRS adopt IAS 34 in their half-yearly financial reports.

Q15 Do the DTR change the basic rules on auditors reviewing half-yearly reports?

Under the DTR, companies can still choose whether or not to have their half-yearly report reviewed by their auditors. However, they must now either publish the review report if the auditors have performed a review or state explicitly where this is not the case.

Q16 How does proposed ISRE 2410 change the work of the auditor at the half year?

The Auditing Practices Board (APB) issued an exposure draft of proposed International Standard for Review Engagements (UK and Ireland) 2410 ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ (ISRE 2410) on 9 January 2007. Once issued as a final standard, auditors asked to perform a review on half-yearly reports under the DTR will apply ISRE 2410 instead of the existing APB Bulletin 1999/4.

The new standard will not be a major change from the current APB Bulletin 1999/4. There is only a small increase in the list of procedures to be carried out. The only change in scope identified by the APB is to require more work on agreeing the financial information back to underlying accounting records and the consideration of consolidation journals.

Another ISRE 2410 change will be in the timing of work to be carried out by the auditors. ISRE 2410 requires that auditors update their understanding of the company and its internal controls as part of their review. This may mean that work traditionally done close to the year end is performed earlier in the year, particularly where systems have changed between the previous year end and the half year date. The biggest impact on the amount of review work will come from the increased length of the half-yearly report from the adoption of IAS 34 and the need for auditors to review these disclosures.

Interim Management Statements (IMS)
The DTR on IMS apply only to companies which have shares listed on a regulated market. DTR 4.4 contains some exemptions from the requirements to produce an IMS for:

  • public sector companies;
  • companies with listed convertible securities only;
  • companies with listed preference shares only; and
  • companies with listed depositary receipts.

Companies that publish quarterly reports, in accordance with national legislation, in accordance with the rules of a regulated market or voluntarily, do not have to produce a separate IMS. The quarterly report is taken to satisfy the requirements for an IMS (DTR 4.3.6). Each IMS must contain information covering the period from the beginning of the relevant six month period up until the date of publication of the statement.

The IMS must provide:

  • an explanation of material events and transactions that have taken place during the relevant period and their impact on the financial position of the company/group; and
  • a general description of the financial position and performance of the company/group during the relevant period.

In essence, the purpose of the IMS is to give stakeholders a brief update on events since the last annual or half-yearly financial report and how the company is developing.

A company must publish one interim management statement in each six month period of the financial year. This means one IMS during the first six months and another IMS during the second six months of the financial year.

The IMS must be made in a period between ten weeks from the beginning, and six weeks before the end, of the relevant six month period. For example, a company with a 31 January 2008 year end is required to publish its first IMS between 12 April 2007 and 19 June 2007. The second IMS is due between 9 October 2007 and 20 December 2007.

The UKLA was asked to provide further information about what an IMS should contain and how the UKLA seeks to enforce the IMS in practice. Information and further details have been published in the UKLA newsletter, List! December 2006, some of which has been incorporated below.

Q17 What is the minimum content of the IMS?

Other than the general requirements set out above, there is no detailed guidance on the content of the IMS. Items and events included in the IMS should not be generic. The content of the IMS should be company-specific and tailored to the specific market requirements. The UKLA reiterates that the content of the IMS should be market-led, based on discussions between preparers and users. Companies should use their professional judgement to decide whether something is important and should be reported in the IMS.

Q18 Does the IMS need to include financial data?

There is no explicit requirement for the IMS to contain financial information. However, the content of an IMS will depend on the facts and circumstances for each company and the markets in which it operates. The nature, scale and complexity of the transactions and events within the company will determine the content of the IMS and the manner in which they are best reported. Where major events and transactions, their impact on the financial position as well as a general description of financial position and performance can be provided in a meaningful way without using financial data, a purely narrative statement may be sufficient.

Q19 Am I now required to produce a quarterly report?

It is not expected that, in preparing an IMS, companies need to look at requirements for quarterly reporting. The UKLA confirms this in its December 2006 edition of List!. It reports that it is "...our expectation that IMS would be less demanding than producing quarterly reports. We would not expect issuers to apply the conventions currently required for annual and interim reporting".

Q20 I already produce quarterly reports. Do these have to comply with IAS 34?

There are no explicit requirements in either the DTR or other UKLA guidance that requires quarterly reports to be prepared in accordance with IAS 34. IAS 34 applies to all forms of interim reporting but only to the extent that these reports purport to comply with the standard. Therefore, unless a company wishes to state compliance with IAS 34, the standard does not apply to quarterly reports.

Q21 How is the UKLA going to enforce the IMS?

The UKLA has indicated that it intends to adopt a risk-based approach to enforcing the IMS regime. This will take into account the high-level nature of the rules on interim management statements and their openness to interpretation. The UKLA is planning to review market practice in approximately 18 to 24 months with a view to providing further guidance if necessary.

Q22 Do auditors review the IMS?

The UKLA does not require any auditor involvement in interim management statements. However directors may wish to consider whether there are any areas or processes on which their auditors should carry out specific agreed-upon procedures.

In summary

The table opposite summarises the application of the requirements on periodic financial reporting in DTR 4 to UK companies, together with other requirements arising from the Listing Rules and AIM rules. The table does not cover the requirements for non-UK companies listed in the UK. The table also does not include requirements which may arise from other sources.

Please Click Here to read this article in full, including:
  • How companies are reporting
  • Appendix I - Model half-yearly financial report
  • Appendix II - Half-yearly financial report disclosure checklist
  • Appendix III - Illustrative interim management statement
  • Appendix IV - Interim management statement disclosure checklist
  • Appendix V - A guide to IAS 34 ‘Interim Financial Reporting’
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.