EU Transparency Directive - Transparency rules OK?

The Transparency Directive will have a major impact on financial reporting, report Kathryn Cearns and Nigel Sleigh-Johnson.

The EU Transparency Directive (TD) represents a key component of the European Commission's Financial Services Action Plan, designed to harmonise regulation across the EU's capital markets. The TD covers four main areas (see box on the scope of the TD).

This article examines the impact of the directive on periodic financial reporting, which will affect all UK companies with securities listed on the UK's regulated markets. It should, however, be appreciated that the scope of the directive is wider than this: for example, the rules on disclosure of major shareholdings also apply to the alternative investment market (AIM) and PLUS companies (PLUS Markets Group is an independent UK provider of primary and secondary equity market services).

The Financial Services Authority (FSA) is introducing the new regime through amendments to its rules, which will now encompass disclosure and transparency rules (DTRs). The rule dealing with periodic financial reporting is DTR4 and a near-final version of this and the other rules is now available on the FSA website (

Annual and half-yearly financial reports

For UK issuers, the TD requirements for periodic financial information will not substantially change existing practice in relation to annual and half-yearly reports. Both are still required, but the publication of each is subject to a shorter timescale: four months (rather than six) and two months (rather than three) respectively.

One key change is that both reports must contain a 'responsibility statement', through which the board of directors will confirm (a) that the financial statements give a true and fair view; and (b) that their management report includes a fair review of the business and describes the principal risks and uncertainties it faces. Full-year financial statements must be audited; there is no such requirement for the half-year, but (as now) any formal auditor review must be published.

In light of the new regime and the shortened deadlines, preliminary statements of annual results will no longer be mandatory. Where a company continues to publish a preliminary statement, if only to ensure the prompt release of price sensitive information, FSA guidance on its preparation and publication must still be followed.

In relation to the half-yearly report, the current flexibility over the basis of preparation of condensed accounting information is withdrawn, meaning that companies must comply with

IAS 34, Interim Financial Reporting, or (for those listed companies that prepare only single entity accounts and still apply UK GAAP) ASB pronouncements on interim financial reporting.

One controversial aspect of the new regime is the requirement for the half-yearly report to provide a 'true and fair view', regardless of whether the accounts merely provide condensed financial information. In the UK, the term 'true and fair' has been reserved to date for a complete set of general purpose financial statements. As condensed accounts do not contain the same content or follow the same format as full financial statements, the new requirement could encourage a drift towards the use of the phrase by regulators as a mere label for 'compliant with applicable standards'.

The FSA has acknowledged these concerns by providing UK directors with the option of simply stating in their responsibility statement that the interim accounts have been prepared in accordance with specified guidance, without an express reference to their 'truth and fairness'.

The directive stipulates minimum content for the management (ie, narrative) reports for both the full and half-year, including a mandatory forward-looking element. There will be some overlap with these requirements and those in the new Companies Act on narrative reporting for quoted companies.

In particular, the new Act's provision of a 'safe harbour' for forward-looking information will interact with the new statutory liability regime for information produced under the TD (discussed below).

Interim management statements

The requirements relating to interim management statements (IMSs) are completely new. They represent the much diluted outcome of the attempt to bring full quarterly reporting into the EU. Publication must take place between 10 weeks after the start and six weeks before the end of the first and second six months of the financial year. Companies that already publish quarterly accounts are exempt from this requirement, as are companies with only listed debt.

The content requirements of an IMS are very general (see box).This lack of prescription has led to some concern over the scope of IMSs, although on the plus side no responsibility statement is required. The FSA has agreed to provide some indication of what IMS need not contain, but the regulator does not wish to provide detailed guidance, which runs the risk of 'gold-plating' EU legislation.

Although some might wish for more guidance, good practice and common understandings will emerge over time, not least through the good example of innovative reporters in particular sectors, and detailed FSA guidance might stymie this evolutionary process.

Liability issues

The TD requires member states to introduce a statutory liability regime in relation to the periodic financial reports discussed above. This has been implemented in the UK by using the Companies Act 2006 to insert a new s90A into the Financial Services and Markets Act 2000. While this satisfies the requirements of the TD, it has raised various difficult issues about liability, including the interaction of the statutory regime with the current UK common law position.

The Treasury will therefore consult further on the issues, so there may be a period of uncertainty. As it stands, however, liability is placed on the issuer and so directors are not likely to face greater exposure than they do presently.


The FSA has adopted an admirably light touch approach to implementation of the new regime, 'copying out' the EC requirements with minimal embellishment and guidance. However, the FSA's offer in its consultation paper CP06/4 to remove from the Listing Rules requirements that go beyond the directive (for example, on dividend statements) was not greeted with enthusiasm by most respondents. Thus while the new financial reporting rules will be found in the Disclosure Rules Sourcebook, various 'super-equivalent' reporting requirements will be retained in the Listing Rules for UK companies.

The directive takes effect from 20 January 2007 and the FSA has interpreted this to mean that the periodic financial reporting requirements will first apply to accounting periods starting on or after 20 January 2007. Thus the first year affected for a calendar year reporter will be for the year to 31 December 2008, but 31 March year end companies will have to follow the new rules for their year beginning 1 April 2007. It also means a dual regime encompassing both the old and new rules will continue for some time.

While for some companies the impact of the directive may seem some way off, the challenges posed by the transition to the new regime should not be underestimated. Boards of listed companies not yet up to speed would be well advised to start assessing the implications, if only to ensure that they have established a new reporting timetable well in advance and taken all important decisions, such as whether the company will continue to issue a preliminary announcement.

Kathryn Cearns is consultant accountant at Herbert Smith. Dr Nigel Sleigh-Johnson is head of financial reporting at the ICAEW. The views expressed are their own.

Scope of the Transparency Directive

•    Periodic financial reporting

•    Disclosure of major shareholdings

•    Dissemination of regulated information to investors

•    Establishment of central mechanisms for access to regulated information

Minimum content of interim management statements

•    An explanation of material events and transactions during the period and their impact on the financial position

•    A general description of the financial position and performance during the period

There is no requirement to attach a 'responsibility statement'.

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