UK: Financial Reporting - Aiming High - The First IFRS Financial Statements

Last Updated: 15 October 2008
Article by Yvonne Lang

The first IFRS financial statements Aim companies appear to be standing up well to the challenge of reporting under IFRS.

The revised Aim Rules require Aimlisted companies to present their financial statements in compliance with IFRS. This applies to periods beginning on or after 1 January 2007.

In the spring edition of this newsletter, we looked at some of the choices available to Aim companies for presenting their interim results and discussed the findings of our survey of 100 Aim companies' interim reports. We have since continued our research into the accounting choices available under IFRS by reviewing the annual reports of 100 Aim companies with December 2007 year ends, including the top 20 by market capitalisation as at April 2008.

The content of the annual report

Nearly half (47%) of the companies surveyed voluntarily presented a directors' remuneration report, despite this only being a mandatory requirement for fully listed companies. This proportion increases, as might be expected, to 65% when the 20 largest companies are considered.

The trend of Aim companies voluntarily disclosing increased narrative information was also illustrated by the following:

  • 98% presented a separate chairman's statement in addition to the mandatory directors' report
  • 70% presented a corporate governance statement, despite the Financial Service Authority (FSA) regulations on the Combined Code only applying to companies on the full list of the London Stock Exchange.

We also noticed an increased focus on environment and social issues, with 16% of the companies presenting a separate corporate social responsibility statement/ report alongside their financial statements.

Of those surveyed, the longest annual report contained 112 pages, while the average length was 65 pages. On average, narrative information made up 37% of the total content.

Reporting performance

In many areas of performance reporting IFRS allows for more choice and flexibility than UK GAAP.

In the income statement, IAS 1 provides the option to present expenses either by function (e.g. distribution costs, administrative costs, cost of sales) or nature (e.g. depreciation, amortisation, payroll costs, advertising costs) – a choice similar to that offered by the Companies Act. However, unlike UK GAAP, IFRS contains no requirement to draw a subtotal at operating profit.

97% of the surveyed companies continued to report an operating profit sub-total and 90% disclosed expenses by function rather than by nature.

In reporting other gains and losses outside the income statement, companies again have a choice under IFRS whereby they can present as a primary statement either a statement of changes in equity or a statement of recognised income and expense. Just over half of our sample (59%) chose to present a statement of changes in equity.

IAS 33 'Earnings per share' contains strict requirements as to how a company reports basic and diluted earnings per share. While additional per share measures (non-GAAP per share measures) can be calculated and presented, they cannot be included on the face of the income statement. 17% of the companies surveyed calculated a non- GAAP per share measure, although only 2 of the 20 largest companies presented such information.

The non-GAAP measures used included adjustments to profit after tax for amortisation and depreciation, provisions for impairments (primarily of goodwill or other intangible assets), exceptional costs or profits, fair value changes and share option or other 'non cash' expenses.

Parent company financial Statements

As permitted by UK company law, 47% of the groups surveyed opted to remain with UK GAAP for the parent's individual accounts. All of these companies presented the group and parent financial statements as separate sections in the annual report.

Share options

Out of the companies surveyed, only four had no employee share options in issue.

Under IFRS 2 'Share-based payments', accounting for equity-settled share-based payments results in a credit entry to equity. However, the standard does not specify where in equity this credit entry should be recorded. Therefore, there is a choice of treatment; the credit can either be taken to the profit and loss reserve or to a separate reserve established for this purpose.

67% of companies with employee options in issue opted to take the credit arising from the IFRS 2 share option charge directly to the profit and loss reserve rather than a separate reserve. Where companies established a separate reserve, the terminology was fairly consistent, with the most frequently used names being share-based payment reserve, share option reserve, equity option reserve and share scheme reserve.

Smith & Williamson commentary

Reporting under IFRS has undoubtedly been a challenge for Aim companies, many of which operate with relatively small finance functions. It is thus interesting to see that despite the additional requirements of the first year under a new financial reporting framework, narrative reporting has not taken a back seat.

Many Aim companies continue to provide levels of reporting which are close to those of full list companies – most notably in respect of corporate governance matters, including directors' remuneration reporting. This adds credence to the view that the importance of financial statements as a communication medium goes beyond just the numbers.

It is also interesting to note that, while it is no longer possible to show alternative measures of earnings per share on the face of the income statement, many companies still present such amounts as they offer useful information to shareholders about year-on-year performance.

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.

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