Until now, the only requirements for listed companies have been very modest ones, issued by the Stock Exchange, chiefly concerning limited disclosure of the profit and loss account.
So it is not surprising that one of the recommendations of the Cadbury Report in December 1992 was that the quality and extent of interim reporting should be improved. The report called on the Accounting Standards Board, in conjunction with the Stock Exchange, to clarify the rules on interim reporting.
It was suggested that companies should give balance-sheet information, that auditors should review interim reports and that in two years the successor body should consider the need for listed companies to give cash-flow information at the interim stage.
The ASB, being preoccupied with other work, asked the Financial Reporting Committee of the Institute of Chartered Accountants in England and Wales to carry out the preliminary work on its behalf. The FRC has done so and published some proposals, as a consultative paper, on 22 September 1993. These proposals are currently out for comment.
Interim reports are not so comprehensive that they purport to give a true and fair view. Moreover, they are not enforced by the Financial Reporting Review Panel.
For both reasons, the final document from the ASB is unlikely to be an accounting standard.
The FRC proposals deal with some aspects of financial interim reporting but not others. They do not deal with the question of frequency (should interim reports be issued quarterly or half-yearly?) or with timeliness (how quickly after the interim date should the report be published?) They do propose enhancing the content of interim reports; they give some guidance on measurement; and they also suggest slightly enhanced disclosures.
The proposals on content are based to some extent on the Cadbury recommendations. These included balance sheet information, but the FRC reckoned that isolated figures would be virtually meaningless; a balance sheet was needed.
On the other hand, not all of the detail provided at the year-end is necessary. The compromise model is based closely on the limited degree of detail given in summary financial statements - those sent by some large listed companies to their shareholders as an alternative to the full accounts. In broad terms, this means that the balance sheet shows the main headings only.
The FRC thought that cash-flow information at the half-year was at least as important as balance-sheet information. It proposes that a cash-flow statement - again, main headings only - should be given at the half-year, and that this should be brought in at the same time as the other changes, rather than considered in two years' time.
A limited amount of additional detail in the profit and loss account is also recommended. This comprises interest receivable and payable, income from associates, and the exceptional items that the new reporting standard (FRS3) requires in annual accounts below operating profit. Some disclosures relating to segmental turnover and profit at the half-year stage are also proposed.
The proposals as they stand are subject to comment in the initial round of consultations. They may also be changed by the ASB.
However, the likely outcome of the project will be interim reports that are somewhat more comprehensive than is typically seen at present. On the other hand, interim reports will continue to be considerably less detailed than annual financial statements.
One of the key issues to assess in the consultation period will be whether there is in general a demand for an increased level of disclosure. An increased level of disclosure has been proposed because Cadbury recommended this rather than because there is hard empirical evidence of a demand for fuller disclosure at the interim stage.
The other imponderable is the question of enforcement. The proposals are unlikely to be the subject of an accounting standard. The Stock Exchange has a role in relation to enforcing the rather modest requirements of the Yellow Book. Whether the Stock Exchange will, in due course, enforce the more extensive disclosures remains to be seen.
Peter Holgate is a technical partner in Coopers & Lybrand, a member of the Financial Reporting Committee and chairman of the working party on interim financial reporting.
Copies of the discussion paper are available from Lisa Groves at the Institute of Chartered Accountants in England and Wales on 071-920 8493. Comments should be addressed to Robert Langford, head of financial reporting, at the ICAEW by 15 December 1993.
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