Focus: New guidance on disclosing non-IFRS financial information
22 December 2011
In brief: To promote the proper disclosure of financial information that is not prepared according to accounting standards, and to assist directors and others not to mislead investors and other users of financial information, the Australian Securities and Investments Commission has issued guidance on its use and presentation. Partner Robert Pick (view CV) and Senior Associate Jonathan Teo report on the impact of this on financial reporting.
- What is non-IFRS financial information?
- Where is non-IFRS financial information disclosed?
- Financial reports
- Documents other than financial reports and transaction documents
- Transaction documents
How does it affect you?
- Financial information that is not prepared according to accounting standards (non-IFRS financial information) that is commonly used in financial reports and other documents has the potential to mislead investors where they do not understand its preparation and how it differs from financial information prepared according to accounting standards.
- Directors, and their financial or accounting advisers, must have regard to the advice of the Australian Securities and Investments Commission (ASIC) in Regulatory Guide 230 (RG230) on the circumstances where it is appropriate to use non-IFRS financial information and on its presentation in a manner that is not likely to mislead investors. It remains to be seen whether these guidelines' practical implementation makes the disclosure of non-IFRS financial information more, or less, easily understood by the market.
- Directors may reduce the likelihood of non-IFRS financial information being misleading by following ASIC's guidance in RG230, which may have the effect of reducing the likelihood of a breach of a reporting or other statutory obligation when disclosing non-IFRS financial information.
ASIC issued RG230 in December 2011, to provide guidance on the use and presentation of non-IFRS financial information in financial reports and other documents, so as to promote its proper disclosure, and to assist directors, and their financial or accounting advisers, not to mislead investors and other users of financial information.
Non-IFRS financial information is defined under RG230 as financial information that is presented other than according to all relevant accounting standards. It includes profit information that is calculated on a basis other than IFRS, or is calculated according to IFRS but is adjusted (ie 'non-IFRS profit information'). It also includes financial information that is used to illustrate the effects of a proposed or completed transaction in transaction documents (ie 'pro forma financial information').
Non-IFRS financial information is widely used in the marketplace by companies, registered schemes and other regulated entities. Non-IFRS financial information is often disclosed in financial reports, documents other than financial reports and transaction documents (including documents accompanying financial reports (such as annual reports), market announcements, investor presentations and analyst briefings) and transaction documents (including prospectuses, product disclosure statements, scheme of arrangement documents and takeover documents). ASIC provides guidelines under RG230 for each category of documents where non-IFRS financial information is disclosed.
RG230 provides that non-IFRS financial information must not be included as additional columns in the financial statements, and that non-IFRS profits must not be presented as line items or subtotals in the statement of comprehensive income.
The limited circumstance where non-IFRS financial information may be included in financial statements is as notes to the financial statements, where disclosure is necessary to provide a true and correct view of the entity's financial position and performance. For example, this may occur where additional information is necessary to provide background in relation to a transaction or in relation to a balance in the financial statement. Where this occurs, RG230 requires the directors' report to set out the directors' reasons for forming the opinion that the inclusion of the non-IFRS financial information was necessary to form a true and fair view.
ASIC also observes that it may exercise its discretionary powers of relief under the Corporations Act 2001 (Cth) to grant relief to include pro forma or non-IFRS financial information in financial reports but only in exceptional circumstances. Where this occurs, there is an expectation from ASIC that information will be audited or reviewed to ensure consistency with the financial report.
ASIC recognises that it may be appropriate to include non-IFRS financial information in documents other than financial reports and transaction documents, and has provided guidelines to assist with the presentation and explanation of that financial information. Those guidelines include that:
- IFRS financial information should be given equal, or greater, prominence than non-IFRS financial information;
- non-IFRS financial information should be explained and reconciled to the IFRS financial information;
- non-IFRS financial information should be calculated consistently from period to period; and
- non-IFRS financial information should be unbiased and not used to hide bad news.
Companies will need to consider carefully the application of these guidelines when electing to publish non-IFRS financial information. In particular, the requirements:
- to reconcile non-IFRS financial information to the IFRS financial information – query whether this reconciliation needs to be done on each occasion the non-IFRS financial information is used, or just the first time (with appropriate cross-referencing); and
- to give no equal or greater prominence to non-IFRS financial information – if this, in practice, requires disclosure of the IFRS financial information on each occasion that non-IFRS financial information is disclosed (and reconciled on each occasion, see above) this may make disclosures that include non-IFRS financial information cumbersome and difficult to digest easily.
ASIC recognises that the inclusion of non-IFRS financial information in the form of pro forma financial information may be useful or necessary to fulfil certain disclosure obligations under the Corporations Act but that it may potentially mislead investors. This could arise where there is either no disclosure or an inadequate disclosure of the basis of preparation of the non-IFRS financial information, or where the differences between the non-IFRS financial information and IFRS financial information are not explained to investors.
RG230 contains a table of prescriptive guidelines and helpful explanations for presenting pro-forma financial information in transaction documents, which directors, and their financial or accounting advisers, should follow carefully when disclosing non-IFRS financial information in transaction documents.
Companies most commonly want to disclose non-IFRS financial information, as they believe it provides a more useful basis for the market to understand their financial performance or position.
Directors, and their financial or accounting advisers, must now have regard to RG230 in the preparation of financial reports and other documents, and should carefully consider and work through the guidelines in RG230 where a disclosure of non-IFRS financial information is involved.
While, on the whole, the guidance in RG230 reflects a commonsense approach to the disclosure of non-IFRS financial information, it remains to be seen whether the guidance's practical implementation makes the disclosure of non-IFRS financial information more, or less, easily understood by the market.
- Robert PickPartner,
Ph: +61 3 9613 8721
- Guy AlexanderPartner,
Ph: +61 2 9230 4874
- Jon WebsterPartner,
Ph: +61 3 9613 8832
- Andrew PascoePartner,
Ph: +61 8 9488 3741
- Andrew KnoxPartner,
Ph: +61 7 3334 3356