Half time - will the result change?

Continuing economic uncertainty and fiscal difficulty is the environment in which Irish companies continued to operate in the first half of 2010. Challenges may differ between sectors, with certain sectors including banking and construction continuing to be particularly exposed to ill winds, but all those charged with governance of Irish companies have continued to navigate in stormy waters.

The early signs of a recovery are emerging in global markets and fiscal and economic policy-makers are striving towards a better governed economic and financial environment. How will Irish companies be placed to take best advantage of what is hoped to be a slowly rising tide?

In the next few weeks we should expect to receive a better insight with many of Ireland's listed companies publishing their half-yearly reports. The messages to be delivered are keenly awaited in the marketplace by investors and other stakeholders.

Delivering the message
What may investors and others expect to see when reading the half-yearly reports - will they provide a clear picture of performance and financial position? How companies respond to this question is key to the ability of stakeholders to understand the capacity of companies to ride the storm and emerge as entities worthy of winning the loyalty and support of stakeholders going forward.

It is important that the half-yearly reports provide the key messages in a balanced manner and if there are not so positive elements of the story that they are told for what they are rather than emerging later in an unheralded manner.

The reporting structure
For listed companies, the requirements regarding structure and content are as set out in the Transparency Regulations 2007. The Regulations require that, at a minimum, the half-yearly report should provide:

• A directors' responsibility statement
• An interim management report
• A condensed set of financial statements (drawn up in accordance with the international standard, IAS 34)

The interim management report (IMR) should include, 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 set of financial statements
• A description of the principal risk and uncertainties for the remaining six months of the financial year
• Information on related party transactions

It is fundamental that the messages delivered in the IMR are consistent with the condensed financial statements. The IMR is of key importance in providing clarity and assurance to stakeholders regarding the financial status of the company.

The condensed set of financial statements should include:

• A condensed balance sheet (statement of financial position)
• A condensed statement of comprehensive income, or a condensed statement of comprehensive income and a separate condensed income statement
• A condensed statement of changes in equity
• A condensed statement of cash flows
• Selected explanatory notes

The explanatory notes are designed to provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the last annual reporting date. IAS 34 does not require a repeat of all annual disclosures but does require note disclosure in a number of areas if the circumstances apply to the company.

Compliance with requirements
The recently released annual report for 2009 of the Irish Auditing and Accounting Supervisory Authority (IAASA) provides in chapter 4 a summary of its activity in monitoring the compliance of certain issuers' periodic financial reporting with relevant reporting requirements.

The summary indicates that areas requiring improvement were wide-ranging with the majority of them applying to both half-yearly and annual reports. This additional layer of scrutiny of financial reporting and the subsequent published highlighting of deficiencies in reporting should prove to be a major building block in moving reporting practices to an improved level of compliance.

IAASA reviewed 22 half-yearly reports in 2009, 8 of which were in respect of equity issuers. Matters specific to half-yearly reports highlighted in its report include:

• Omission of relevant explanatory notes and disclosures expected where significant movements on items presented on the balance sheet occurred during the six-month period
• Absence of reference to the fact that a significant amount of an issuer's liabilities/funding fell due to be repaid during the next 12 months
• Failure to disclose an accounting policy regarding financial instruments e.g. derivatives, hedging
• Inadequate, if any, disclosure in relation to new or changed accounting policies since the previous annual reporting period

The Financial Reporting Review Panel (FRRP) in the U.K. has also drawn attention to deficiencies in half-year reporting identified from its reviews, many of which are consistent with those of IAASA, particularly in relation to significant changes during the half year. The FRRP comments that the following disclosures were not always provided:

• The nature and amount of changes in estimates if they have a material effect on half-yearly results
• The nature and amount of items that are unusual because of their size or incidence
• Disclosure of details required by IFRS 3 'Business Combinations'

The FRRP also highlights the need for the IMR to provide a clear description of the principal risks and uncertainties for the remaining six months, which is not met by a simple cross-reference to those disclosed in the last annual report.

Measuring by halves
Our firm's report 'Measuring by Halves' is based on a survey in the U.K. of the half-yearly reports of 100 listed companies and 30 investment trusts. Overall, the survey found a high level of compliance by companies with the various reporting requirements but there were a number of significant areas identified where there is considerable scope for improvement, many of which were consistent with those of IAASA and the FRRP.

The report draws particular attention to the quality of disclosures provided to comply with the requirements of IFRS 8 'Operating Segments' which was in force for reporting periods beginning on or after 1 January 2009. The survey comments:

• 33% of companies met the increased level of segmental analysis required by IFRS 8
• The majority of companies applying IFRS 8 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

The comments are specific to IFRS 8, but perhaps they raise a question regarding the responsiveness of companies to ensuring that newly introduced or changed disclosure requirements are fully complied with when introduced.

What is new for 2010?
The main change in standards is the revised IFRS 3 on business combinations which, in addition to making several changes to the recognition and measurement aspects of business combinations, significantly increases the disclosure requirements. IAS 34 requires those disclosures to be given in full in half-yearly financial reports. With the reduction in acquisition activity during this difficult period, IFRS 3 is likely to be of less significance in practice. The report 'Measuring by Halves' includes an illustrative report and a disclosure checklist which deal with these requirements.

The guidance published by the U.K. Financial Reporting Council in October 2009, and adopted in Ireland, offers clear pointers to directors in both assessing going concern at interim reporting dates and making appropriate disclosures in half-yearly financial reports.

There are certain other amendments to standards, most notably IAS 39 and IFRIC interpretations which are also new requirements, together with presentation and disclosure amendments made under the IASB's annual improvements programme. In certain circumstances these amendments may have particular relevance but for many companies their very specific nature will mean they are of little significance.

Certain amendments have also been made to IAS 34 on foot of the IASB's annual improvements programme concerning amendments to IFRS 7 in the following areas:

• 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
• Significant transfers between levels of the fair value hierarchy in the measurement of the fair value of financial instruments
• Changes in the classification of assets as a result of a change in the purpose or use of those assets

These amendments to IAS 34 are required for periods beginning on or after 1 January 2011. With the objective being to improve the quality of information in reports, companies may wish to give full consideration to early adoption of these changes in their 2010 half-yearly reports.

The power is in the message and this is even more so in periods of uncertainty. Let us look forward in the coming weeks to reports which provide clarity as to the economic health of many of Ireland's leading companies.

First published in Finance Dublin online