The Financial Reporting Council (FRC) has issued a reminder to the boards of companies on the need to improve their reporting of additional and exceptional items and ensure consistency in their presentation.
The FRC says its Financial Reporting Review Panel (FRRP) has identified that many companies report exceptional items on the face of the income statement and provide a subtotal of profit before these ('underlying profit'). However, the FRC is concerned many companies do not present exceptional items consistently. The quality of reported exceptional items was identified by the Conduct Committee as an 'area of concern' in their Corporate Reporting Review Annual Report 2013.
Richard Fleck, chairman of the FRC's Conduct Committee and chair of the FRRP, said: 'This announcement draws attention to the importance of providing information in a way that enables users to assess the quality of a company's profitability. It is a timely reminder as directors consider their response to the Corporate Governance Code principle that the annual report and accounts as a whole should be fair, balanced and understandable.'
In order to improve reporting of exceptional items and to encourage greater consistency the FRRP believe that companies should consider a number of factors in judging what to include in additional items and underlying profit.
These include the approach taken to identify additional items that qualify for separate presentation, which should be even handed between gains and losses, clearly disclosed and applied consistently from one year to the next. It should also be clearly distinguished from alternative performance measures used by the company that are not intended to be consistent with IFRS principles.
The FRRP says gains and losses should not be netted off in arriving at the amount disclosed unless otherwise permitted, and where the same category of material items recurs each year and in similar amounts (for example, restructuring costs), companies should consider whether such amounts should be included as part of underlying profit.
Where significant items of expense are unlikely to be finalised for a number of years or may subsequently be reversed, the FRRP says the income statement effect of such changes should be similarly identified as additional items in subsequent periods and readers should be able to track movements in respect of these items between periods.
The FRRP also says the tax effect of additional items should be explained, and material cash amounts related to additional items should be presented clearly in the cash flow statement. Where underlying profit is used in determining executive remuneration or in the definition of loan covenants, companies should take care to disclose clearly the measures used. Management commentary on results should be clear on which measures of profit are being commented on and should discuss all significant items which make up the profit determined according to IFRS.