Year end financial reports - improving communication
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above Discussion Paper published by the Accounting Standards Board.
It was considered at a recent meeting of the Financial Reporting Committee, at the same time as the comparable proposals in Chapter 5 of the paper from the Company Law Review, and I am writing to give you their views.
Our overall reaction to the proposals is that we are not convinced of the case for a major change to the documents comprising year end reports, but agree with a shortening of the time period for the process.
Our comments on the specific questions raised for comment by ASB are set out below.
Q1. Do you support the year-end reporting structure for listed companies proposed by the Board in Chapter 2 whereby:
(a) the preliminary announcement would retain its present role as an early communication to the markets of the company's financial performance? It might be placed on the company's website but, as at present, would not be routinely sent to private shareholders.
We agree with this, and have not therefore supported the statutory preliminaries proposal in the Company Law Review (CLR). We think it is important that the one financial report sent to all shareholders should be either the true and fair accounts or suitable extracts from them. If shareholders only received prelims for example, there would remain a possibility that there could be a post balance sheet event which could alter the numbers in the full accounts from those reported in the prelims. This change would not be reported to shareholders.
(b) all shareholders would by default be sent a set of summary financial statements?
We disagree with making the provision of summary financial statements (SFS) compulsory. Listed companies should have the option to send full accounts or SFS.
At present many listed companies, having been offered the choice of SFS, have chosen to send full accounts to all their shareholders. We consider that
- there are not good grounds for withdrawing that choice.
- It seems difficult to justify why sending to all shareholders accounts which show a true and fair view is not adequate.
Such compulsion could only be justified if true and fair accounts would be positively confusing to ordinary shareholders because of the detail included. We would not agree with that contention. The Statement of Principles for example implies that true and fair accounts assume a "reasonable knowledge of economic affairs and accounting" and also notes that "information that is relevant and reliable should not be excluded from the financial statements simply because it is too difficult for some users to understand".
(c) the full financial statements would be used for filing purposes and be available on request?
As noted above we favour retaining the option to send either SFS or full accounts to shareholders. In either case the full set of accounts would be filed. If SFS had been sent, shareholders would have the right to a copy of the full set on request at no extra cost.
(d) companies would be allowed to offer shareholders the further choice of summary financial statements or a simplified financial review
We do not agree with the proposal for shareholders just to be sent a simplified financial review (SFR). The SFR does not seem a sufficiently objective form of financial report to fulfil statutory purposes.
The proposed minimum content of the SFR would not include a complete performance report or balance sheet, but shareholders would be presented with certain specified extracted figures along with whatever narrative and other figures a company chose to add. It is for example difficult to square this selected figure approach with ASB's view of reporting financial performance. The reporting of financial performance in that context steers users away from overemphasis on a single measure of performance, and concludes that a components approach within a single performance statement is the way forward. Users must view all the elements of performance together and exercise some judgement as to the significance of the various components.
Three levels of financial report (full, SFS and SFR) might also be making the position rather involved.
Q2. Do you agree with the majority view of the Board that summary financial statements should be published concurrently with the full audited financial statements rather than at the earliest possible date following the preliminary announcement?
Yes, as noted in our response to Q1 above.
Q3. If such a reporting structure were implemented would you wish the Board to publish a statement of best practice on summary financial statements and/or simplified financial reviews?
Q4. Do you support the Board's proposals for guidance that could be included in such a statement of best practice?
ASB are envisaging the content being set by statute and expanded by a non-mandatory statement of best practice. CLR envisages the law delegating all details to ASB with just the bare outline set out in legislation.
One way or another a clear minimum information set required must be established for what might the principal financial report of a company to the majority of its shareholders. The ASB existing guidance on preliminary announcements seems essentially a very reasonable basis for the prescribed content of SFS. Presentation and further matters could then be in a statement of best practice. We support the proposals for guidance in Chapter 3.
Our views on an SFR are noted above under Q1(d).
Q5. In particular, do you believe that a Statement of best practice should encourage companies to publish their financial statements(full and summary) within 80 days of the year-end and 30 days of the preliminary announcement?
As a general principle we would encourage more up to date reporting. We think, however, that these reporting deadlines should be set by legislation. This approach would be more effective than recommendations, and would represent a better division of the responsibilities of accounting standard setters and regulators. We note that the CLR proposes a 90 day post year-end deadline for full accounts.
Q6. Do you think that companies should be required to send financial statements to shareholders who hold their shares via nominees?
ACCA will be replying separately to the CLR on this matter.
Q7. Do you support the suggestions in Chapter 4 that the companies legislation should be amended to allow companies to omit tabular financial statements from simplified financial reviews , including only financial highlights instead?
No, for the reasons given in response to Q1(d) above.
Q8. Do you agree that there is a need for reporting standards covering business reporting on the internet?
Yes. The internet almost by definition transcends national boundaries. IASC has commenced a project on this subject, and ASB should contribute to this.