UK: Measuring By Halves - Surveying Half-Yearly Financial Reporting

1. Executive summary

Niccoló Machiavelli counselled the medieval prince that "above all, half measures should be avoided, these being most dangerous". Preparers of half-yearly financial reports might also suggest that complying with the requirements of the Disclosure and Transparency Rules (DTR) and keeping up with the frequent changes to IFRSs in general and IAS 34 in particular require an equally hard-nosed approach.

There may have been some who fell short of Machiavelli's ideal. But overall the majority of companies in this Deloitte survey have produced reports with a high level of compliance with the various requirements.

In summary:

  • 87% of companies complied with the DTR requirement to disseminate the half-yearly financial report in unedited full text and all reported within the statutory two month deadline;
  • 95% of companies included a responsibility statement in their half-yearly results announcements, with 87% including all of the content required by the DTR;
  • 21% of companies clearly provided the required information in their interim management reports (IMR), an increase from the 10% reported in the previous Deloitte survey 'Our better halves';
  • 33% of companies reporting under IFRS 8 met the increased level of segmental analysis required in halfyearly financial reports;
  • the majority of companies applying IFRS 8 for the first time continued to disclose information based on their previously reported segments, with 70% of companies showing no change in either the number of segments or the basis of segmentation; and
  • companies adopting the suggested terminology in IAS 1 (revised) of 'statement of financial position' and 'statement of cash flows' were in the minority, with most choosing to retain the familiar terms 'balance sheet' and 'cash flow statement'.

Overall, the trend seems to be one of continuing improvement as companies become more familiar with the DTR requirements and with the clarifying guidance periodically provided by the FSA. The status quo is not, however, an option as the challenges for companies will continue to grow in 2010. In particular, companies making acquisitions will be required to apply IFRS 3(2008) with its increased disclosures in both annual and half-yearly financial reports.

The above results exclude investment trusts. As with other recent Deloitte surveys, this group is considered separately. The results are discussed in section 7 of this publication.

Going concern and liquidity risk continue to be issues for many companies in these uncertain times. Previously, there has been limited explicit guidance on how this should be dealt with in half-yearly financial reports. The FRC guidance published in October 2009 now offers clear pointers to directors in both assessing going concern at interim reporting dates and making appropriate disclosures in half-yearly financial reports. This will be of assistance to many preparers of halfyearly financial reports in 2010.

Avoiding half-yearly financial reports is not an option for listed companies. But, hopefully, the illustrative report, the disclosure checklist and the commentary on current practice in this publication will assist preparers to reduce the dangers.

2. Regulatory requirements

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

  • the requirements for the timing and dissemination of half-yearly financial reports;
  • the required content of an interim management report (IMR);
  • the requirement for inclusion of a responsibility statement in half-yearly financial reports;
  • the requirements for a condensed set of financial statements;
  • the requirements 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.

These 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.

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 RIS.1 The UKLA clarified this requirement in March 2008, 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 DTR.2

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 information.3

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.

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 disclosures.4 This provides 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.

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 of 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, however, 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 half-yearly financial report.

Disclosures in respect of going concern

The FRC do 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.

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

Principal risks and uncertainties in half-yearly financial reports

The UKLA gave further guidance in March 20085 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 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 IFRS 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;
  • for UK companies not using IFRSs, the ASB (Accounting Standards Board) statement 'Half-yearly financial reports';6 or
  • for all other companies not using IFRSs, 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.

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 in Appendix 2 of 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 is required to include a statement to this effect.

Changes to half-yearly financial reporting in 2010 and proposed changes 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 2010. The new standard likely to have the greatest effect on half-yearly financial statements is the revised IFRS 3 on business combinations.

The revised IFRS 3 (which applies prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009), as well as making several changes to the accounting for business combinations,8 significantly increases the disclosure requirements for these transactions. IAS 34 requires those disclosures to be given in full in half-yearly financial reports. Application of these disclosure requirements is illustrated in Appendix 1 to this publication and the requirements are detailed in full in Appendix 2.

The IASB's Exposure Draft 'Improvements to IFRSs', issued in August 2009, includes proposed amendments to IAS 34 which would add a requirement to include certain information on financial instruments in a half-yearly financial report, namely:

  • losses on impairment of financial assets;
  • significant changes in the business or economic circumstances that affect the fair value of the entity's financial assets and financial liabilities, notwithstanding whether these assets or liabilities are recognised at fair value or amortised cost;
  • significant transfers between levels of the fair value hierarchy in the measurement of 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 proposals follow the addition of similar, although more detailed, requirements for annual reports in the 2009 amendments to IFRS 7. '

Improvements in IFRSs' is due to be finalised in the second quarter of 2010 and, if issued in its current form, the amendments to IAS 34 would be effective for periods beginning on or after 1 January 2011.

Half-yearly financial reports under UK GAAP

UK single companies which continue to report under UK GAAP should follow the revised ASB statement 'Half-yearly financial reports'. The DTR requirements for non-IAS 34 condensed financial statements9 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.

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1 RIS = Regulated Information Service

2 List! Issue No. 18 – March 2008

3 UKLA Publications Update – March 2009

4 Going concern and liquidity risk: Guidance for directors of UK companies 2009. Available at . Guidance on half-yearly financial reports is included in paragraphs 47-50 and 86-88

5 List! Issue No. 18 – March 2008

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 The accounting requirements of IFRS 3 (2008) are outside the scope of this publication, but are covered in detail in the Deloitte publication iGAAP 2010: IFRS reporting in the UK

9 Included at DTR 4.2.5R

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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