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Use of underlying profit leaps post GFC


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New research from Deloitte Assurance & Advisory (A&A) reveals that the use of underlying earnings figures in ASX 100 annual reports has leapt 18%, up from 50% (2007-9) to 68% in the 2008-9 financial year.

Deloitte analysed the published annual reports of all ASX 100 companies (excluding listed trusts) in 2009.

According to the research, the three most common adjustments were impairment/revaluation of assets (68%), purchases/disposal of assets and/or businesses (40%) and restructuring costs (29%).

Following a review of those companies who reported underlying figures, more than half (52%) posted a more favourable figure while 25% converted a loss into a profit when they made their adjustments.

The application of fair value accounting and recent economic volatility has led to a larger number of companies reporting underlying profit, to offer shareholders and analysts a clearer view on business performance by stripping out non-recurring adjustments from the statutory profit figure.

This adjusted figure is increasingly being used as the key indicator for reviewing a company’s performance.

Deloitte A&A partner, Rod Smith said, “Considering the economic climate we’re not surprised that more companies are providing the earnings that they believe more accurately reflect the company’s underlying financial performance.”

“However, there is concern among audit committees about the type of adjustments that are made to the statutory profit figure and the lack of consistency and comparability between companies. In fact the majority of the 100 ASX 200 audit committee chairs we spoke to earlier this year as part of our Audit Committee Effectiveness* research identified underlying profit as one of the top ten issues on their committee agendas for the next 12-24 months.”

In this research audit committee chairs expressed concern about the growing prevalence of reporting underlying profit and the fact that the figure was often un-audited and not required to undergo the same scrutiny as the statutory accounts.

More recent Deloitte analysis shows that more than a third (37%) of Australia’s largest listed companies are not reconciling the underlying profit figure with the statutory profit, or explaining adjustments in the format recommended by the Australian Institute of Company Directors.

Deloitte A&A partner, Rod Smith continued, “Pleasingly, Deloitte’s research found that the vast majority of companies clearly explained the differences between underlying and statutory profit and disclosed it in the front sections of their reports.”

Key questions directors should ask when it comes to underlying profit are:

  • Is management presenting the underlying profit and the accompanying reconciliation in a balanced manner?
  • Have we adopted a transparent and consistent approach to the reporting of adjustments so that they are clear and comparable between reporting periods?
  • Are the adjustments consistent with other industry players? If not, why?
  • Is there a trend in the underlying profit adjustments across reporting periods?
  • Should the audit committee obtain assurance on underlying profit? If yes, from whom?
  • How does the growing prevalence of underlying profit impact executive remuneration measures?

Notes to editors:
*In the Audit Committee Effectiveness research Deloitte interviewed 100 audit committee chairs of the ASX 200 to obtain their views on the challenges and opportunities that Australian audit committees face. The interviews took place between April and August 2009

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Contacts

Name:
Johnny Sollitt-Davis
Company:
Deloitte Australia
Job Title:
Corporate Affairs & Communications
Phone:
Tel: +61 2 9322 7256, Mobile: 0431 134 850
Email
jsollittdavis@deloitte.com.au
Name:
Rod Smith
Company:
Deloitte Australia
Job Title:
Partner, Assurance & Advisory
Phone:
Tel : +61 2 9322 5608
Email
rodsmith@deloitte.com.au

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