Print Published 27th Feb 2019, 09:44

Why does the law require a true and fair view if companies can paint a different picture?

Anyone looking for evidence of the lack of discipline applied to the presentation of financial results by public companies in the UK need look no further than the latest announcement from the AIM listed market intelligence provider Global Data.

The group’s result for 2018, prepared in accordance with the Companies Act to give a “true and fair view”, was a loss of £12.3 million.  But this rather significant piece of information was not mentioned anywhere in the first nine pages of the Stock Exchange announcement.  Instead there were several prominent mentions of the “adjusted EBITDA” of £32.2 million and of the “statutory pre-tax loss” of £7.7 million.

Only on page 10, where the statutory version of accounts was presented, could a reader arrive at the true loss of £12.3 million attributable to the company’s shareholders.

The company explained its coy approach to reporting the statutory result in the following terms:

“We define ‘adjusted EBITDA’ as EBITDA adjusted for costs associated with acquisition, restructuring of the group, share based payments, impairment, unrealised operating exchange rate movements and impact of foreign exchange contracts. We present ‘adjusted EBITDA’ as additional information because we understand that it is a measure used by certain investors and because it is used as the measure of group profit or loss. However, other companies may present adjusted EBITDA differently.”

Surely there is a difference between, on the one hand, presenting additional information as a supplement to the statutory result and, on the other hand, giving prominence to non-statutory, and frequently more favourable, figures?

By the time potential investors in Global Data reached page 10 of the preliminary announcement – always assuming they had the stamina to get that far – they would already have absorbed the rather more favourable figures that adorned the previous nine pages.  Possibly that was the intention.

Few people would complain about a company seeking to show what its results would have been if various abnormal items were to have been excluded.  Some may even prefer to see the results before “non-cash” charges for amortisation and depreciation although of course in reality the charges do relate to the absorption of earlier cash outlays or the parting with value in some other form.  In any event such adjusted figures should never take prominence over the statutory figures.

This publication always shows the “adjusted” result as a footnote to the statutory accounts, accompanied by a description of what the adjustments have been (see Global Data loses £12.3 million: funding partially reliant on advanced invoicing).  Is that too much to ask of UK listed companies?

In the United States, The Interpublic Group of Companies provided a good example in its latest quarterly filing with the Securities & Exchange Commission of how a statement of adjusted profit could be presented without contaminating the statutory results.

When will the Stock Exchange and Government bring their collective influence to bear and respond to the criticisms voiced by the current chairman of the International Accounting Standards Board, Hans Hoogervorst (see Profit disclosure requires discipline and practical common sense)?

Three years have passed since Hoogervorst claimed that a way would be found to stop companies publishing versions of their results that are at variance with those prescribed in accordance with generally accepted accounting principles (GAAP), yet still there is no evidence of progress.