Nothing standard about reporting

THE Australian Securities and Investment Commission has expressed concern at some of the accounting practices used as part of the revised financial reporting requirements, put in place to simplify compliance issues for companies.

The new accounting standards have resulted in a wide divergence in reporting practices by Australian companies, making it difficult for investors and their advisers to understand and interpret the data.

A study released last week by accounting firm Ernst & Young into the corporate reporting practices of Australia’s top 200 companies found that the more flexible accounting rules were increasing confusion among shareholders hoping to compare the financial performance of different companies.

Focusing on the new accounting standards known as the trilogy, Ernst & Young concluded that share-holders could benefit from the changes, however these benefits were undermined by a significant variance on reporting methods, making comparisons almost impossible.

“The new rules can certainly give investors access to more information to gain a deeper understanding of the financial performance of companies, ultimately allowing them to make better informed investment decisions,” Ernst & Young national accounting and auditing standards partner Ruth Picker said.

“However, the variance of how this information is reported from company to company means that making the comparison between the financial performance of different organisations is extremely difficult for shareholders.”

Of most concern for shareholders is that gross margins and profit calculations are calculated differently, particularly within sectors such as mining, technology, utilities, health, retail and wholesale industries.

ASIC chief accountant Ian Mackintosh said results from surveillance of companies by the corporate watchdog found financial statements did not always give a clear picture of a company’s performance or operations.

“When companies are talking about a profit or loss, be careful to know which profit or loss they are talking about,” Mr Mackintosh warned.

Under the new accounting rules, companies can disclose additional revenue and expense items.

The Ernst & Young study found that 57 per cent of companies were complying with the new standards by providing additional revenue information, while 81 per cent provided additional expense items.

But the study found a wide divergence in methods used among those companies that chose to display their expenses.

The study also found a growing practice among companies where the term significant item is perceived to replace abnormal gains/losses used under previous accounting standards.

Ms Picker said that, as a result, it was left to the discretion of company managers to decide what constituted a significant item and how to name the significant item.

“It was surprising to find that 50 per cent of entities included net ‘gain’ or ‘loss’ items as significant items,” she said.

“This manner of display rather than gross ‘revenues’ and ‘expenses’ potentially indicates non-compliance with the standard.”

Of further concern to investors is that 96 per cent of Australia’s top companies disclosed additional sub-totals to those prescribed by the standard.

Of those, 52 per cent disclosed an earnings before interest, tax, depreciation and amortisation (EBITDA) line.

“However calculated, it is important that the headline number is comparable. Our studies show that this is not the case.” Ms Picker said.

“One of the stated objectives of financial reporting is comparability. Our study shows that there is a need for clarity – all stakeholders in the process need to agree on the future direction of reporting financial performance.”

Shareholder advocate and WA chairman of the Australian Shareholders Association, Anne Pryor, said her experience showed that some of the varying information provided could make it difficult for investors.

“One of the things that annoys me is that there are three different ways in which they (companies) can report debt. To the uninitiated that can be a bit confusing,” Ms Pryor said.

She said shareholders had to be wary and take care when analysing debt ratios because each debt ratio could paint a different picture.

But while seeing opportunities for improvement, Ms Pryor told Business News it would be impossible to completely standardise reporting standards.

“I think companies are so diverse that to actually get a pro-forma for everyone to use just wouldn’t work. Although it would be nice it just would not be practical,” she said.

The way explorer companies report needs to be different to that of large companies with varying revenue streams or operations in different geographical locations, such as Wesfarmers, Ms Pryor said.

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