COMPANY REPORTING - Taking a pounding

Sterling’s strength has persuaded Courtaulds and Readicut to stop translating the results of overseas operations at closing rates of exchange, and start using average rates instead. In fact, the percentage of companies using closing rates is only 11%, having been as high as 24% in 1994.

Courtaulds, the international textiles group, following the requirements of UITF 14: Disclosure of changes in accounting policies, discloses that turnover and profit before tax would have been u88m and u5m lower respectively had the change not been made. Readicut says this change of policy has not had a material effect on its results so it does not restate comparative figures.

Marks & Spencer is also worried about the effect of the rising pound on the reported results of its overseas operations. The company does not drop its use of the closing rate method but, instead, augments its segmental reporting to show the soaring pound’s impact.

In its disclosure of the percentage increases in reported turnover and operating profit for each of its overseas segments, M&S also shows what these increases would have been had exchange rates remained constant.

The additional details reveal that the respective increases in total turnover and operating profit from overseas segments of 9% and 23% would have been 14% and 28% at constant exchange rates.

A cashflow statement of note

The 1996 revision of FRS1: Cashflow statements met with little opposition and its requirements have been adopted into the accounts of UK companies with dull uniformity. This month, however, we at last uncover a cashflow statement worth writing home about.

Courtaulds welcomes the revision of FRS1 but does not do so unreservedly, complaining that the revised standard has the effect of distorting its cashflow statement with regard to its decision to finance the construction of a plant by way of a finance lease.

Courtaulds’ problem is that the finance lease liability is shown as borrowings, while the related capital expenditure is shown as a cash outflow only when the finance company is being paid. This results in an increase in the balance sheet of fixed assets and liabilities without any corresponding capital expenditure outflow in the cashflow statement. The company is of the opinion that capital expenditure and cash outflow are therefore understated and it has ‘included an additional disclosure in the cashflow statement to provide better information’.

Share option discounts

Food manufacturer and distributor Unigate may not be the first company to disclose early adoption of UITF 17: Employee share schemes, but it is the first one surveyed that discloses amounts in its financial statements as a result. UITF 17 concerns itself mainly with the treatment of discounts.

It requires the difference between the fair value and option price on the date of award to be charged to the profit & loss account in the period to which the performance criteria relate.

In the past, Unigate has granted share options at a discount to market price, but this is not being continued. Accordingly, a charge to the p&l account of u80,000 has been made. This charge has not been disclosed separately in the p&l account on the grounds of materiality. But the corresponding credit of u100,000 has been classified as ‘discount on share options’ in the reconciliation of movements in shareholders’ funds.

Unigate also discloses a prior year adjustment in its statement of total recognised gains and losses to reflect the cumulative discount on share options granted and exercised in previous years, following the UITF 17 requirement that, where applicable, corresponding amounts be restated.

Earnings per share

Sometimes companies choose to disclose additional earnings per share (eps) figures, and sometimes they are forced to. Glass manufacturer Pilkington adopts the increasingly popular policy of disclosing eps before exceptionals, a figure many feel gives a better indication of underlying performance than the standard FRS3: Reporting financial performance.

Analysis of our database shows around a quarter of UK companies do likewise, and the accounts of retailer Fine Art Developments show the difference can often be quite startling. The difference between the pre and post-exceptional items eps figures in Fine Art’s case is some 36%.

The other additional eps figure given by Pilkington is calculated on the ‘nil’ basis. This recognises only constant elements of tax. SSAP3: Earnings per share requires the disclosure of such a figure if it differs materially from that derived using the net basis, which also includes variable elements of tax such as irrecoverable ACT. In the case of Pilkington, the net basis gives an eps of 0.2p, while the nil basis gives a loss per share of 0.1p.

Such disclosures look set to become a thing of the past as FRED 16: Earnings per share, published by the Accounting Standards Board in June, proposes that this requirement be dropped.

The effects of tax legislation

BT finds itself in a dilemma when considering its situation with regard to the windfall tax – a levy which was still shrouded in mystery when its accounts were published. While wishing to disclose the possible effects of the tax, BT was hampered by its lack of knowledge concerning whether it would actually be subjected to this levy and the method to be used to calculate a company’s liability. Following SSAP 18: Accounting for contingencies, the company does not estimate the financial effect of the tax, as it is not practicable to do so.

British Airways is also facing up to changes in tax legislation. In its financial review, the company discusses new capital allowance rules reducing the balance charge on long-life assets from 25% to 6%. Though BA states it is uncertain which aircraft will be treated as long-life assets, it notes this change will narrow the gap between capital allowances and the company’s existing depreciation regime, thus bringing its tax charge nearer the standard rate of tax in future.

EMI’s post-merger accounts

EMI publishes its first set of post-merger accounts and exhibits two disclosures that add value to its financial statements. We reported last year that Thorn EMI had proposed a demerger and published pro forma net asset statements to reflect its terms. This year, the accounts confirm the demerger went ahead and the financial statements of EMI include the results of Thorn up until that date. To overcome the problem of comparisons with last year, EMI publishes pro forma accounts that assume the present structure had been in place for both years.

In addition to its disclosures, EMI gives more extensive information on its share premium account than anything we are used to seeing. Most companies analyse their share premium accounts into the previous year’s balance plus any premium arising on shares issued during the year. EMI, on the other hand, publishes a table showing the principal elements that make up its share premium account. This discloses the types of shares issued, the reasons for their issue, the years in which the issues were made and the amount of premium arising on them.

Prudent interest capitalisation

The British Airports Authority (BAA) has changed its policy on interest capitalisation and taken a u40m hit in the p&l account. The company keeps its policy of capitalising interest incurred during the period of fixed-asset production but changes its definition of when the period of production begins.

Previously, BAA took this to be the commencement of construction but it now assumes the period of production does not begin until planning permission has been obtained.

In line with this policy, interest previously capitalised is charged to the p&l account. This is in respect of work on terminal five at Heathrow before the acceptance of its planning application which is still subject to enquiry. This more prudent approach ensures interest will not be capitalised until the company is assured that the asset will be income-generating and it can begin depreciating it.

– This feature is an edited version of the review published in Company Reporting, a monthly publication monitoring financial reporting practices in the UK. Company Reporting is available on subscription at u382 per annum. A second subscription for a colleague at the same address is available at half price. Details from Andrew Anderson at Company Reporting on 0131 558 1400.

ISSUE OF THE MONTH

In our ‘issue of the month’, we examine the accounting treatment of ESOP trusts and find that practice has of late been moving closer to that prescribed by UITF Abstract 13: Accounting for ESOP trusts. Eighty per cent of companies treat their ESOP trust shareholdings as fixed asset investments of the group, though 15% still do not disclose them on the balance sheet. Three companies break with convention and classify their trusts’ shareholdings as current asset investments – which UITF 13 allows only when the shares are not being held for the continuing benefit of the company.