22 Dec 2011
ASIC drops proposed ban on "underlying profits"
by David Landy
ASIC is not totally opposed to the use of non-IFRS financials, but there's no room for them in financial statements
ASIC gives some ground on financial information that doesn't comply with accounting standards, but maintains its opposition to their use in financial statements.
Instead, it will ban the inclusion of "non-IFRS profit information" in financial statements.
For practical purposes, this is a distinction without a difference, but it is one of the amendments that ASIC has incorporated in its final Regulatory Guide on the use of financial information that isn't compliant with the IFRS accounting standards.
ASIC says that financial information which is prepared other than in accordance with the accounting standards should not be included in financial statements. It is prepared to make an exception for:
- information required by law;
- details of a breach of a lending covenant that is determined by reference to a non-IFRS financial ratio;
- an explanation of director and executive remuneration that is determined by reference to something other than IFRS profit figures.
Non-IFRS financials can also be included in the notes to the financial statements, but only in what ASIC describes as the "rare circumstances" where the non-IFRS information would be necessary to give a true and fair view of the company's financial position.
In addition, non-IFRS profit figures may not be included as line items or subtotals in the income statement, or presented in additional columns of financial statements.
Transaction documents and other documents
The Commission is slightly more relaxed about the inclusion of non-IFRS information in transaction documents (prospectuses, target's statements, bidder's statements (where it may appear as pro-forma financials) etc) and other non-statutory documents (such as market announcements, analyst briefings, etc).
Nevertheless, it warns that the non-IFRS information should not be presented in a misleading manner.
To that end, ASIC says that companies should:
- give equal or greater prominence to IFRS-compliant financial information;
- explain the non-compliant information and reconcile it to the IFRS financial information;
- calculate the information consistently from period to period; and
- not use information to remove "bad news".
There is also a specific set of guidelines for the use of non-IFRS financials in transaction documents.
When ASIC first proposed this policy, there was considerable controversy, largely because of the fact that companies regularly refer to underlying profit figures.
The final policy responds to these concerns by making it clear that ASIC is not totally opposed to the use of non-IFRS financials. However, there has been no resiling from the view that there is no room for them in financial statements. ASIC's view is that, if directors believe that IFRS-based profit figures don't tell the whole story, they can address that issue in their operating and financial review.