Halting the spin

The PR machine behind a Foster’s Group media release announcing its 2011 financial results must have been proud of its positive spin on what was a lacklustre year.

The headline read, “Turnaround on track in a tough market environment”. The second paragraph of the release highlighted how Foster’s had recorded a “continuing operations net profit” of $816.7 million for the year ending June 30, 2011.

The fact that the brewer had actually lost $89 million for the year wasn’t disclosed until the fourth page of the media release (despite this being the headline figure that media reported).

In recent years, Australian companies have preferred to highlight more positive underlying profit results in media announcements and analyst briefings. The use of underlying profit as a metric increased during the global financial crisis as executives tried to play down less than perfect performances.

But companies engaging in such practices in 2012 may face tough action from the regulator. In December last year, the Australian Securities and Investments Commission released new regulatory guidelines warning listed companies against cherry-picking their results. The guide doesn’t ban the use of underlying profits, also known as non-statutory or non-IFRS financial information, but aims to reduce behaviour that may be misleading.

KMPG’s Underlying profits report 2011 found that 82 per cent of S&P/ASX 100 companies presented some form of non-statutory profit and that 73 per cent showed a non-statutory profit that was higher than the reported statutory profit.

The report, now in its third year, also found that 11 per cent reported a statutory loss, but an underlying profit. And 58 per cent presented their underlying profit as the “headline” measure of performance in media releases, while 61 per cent presented it as the “headline” measure of performance in analyst presentations.

The underlying profits report follows another KPMG report last year that found nine of the 100 biggest listed companies that claimed to have made a profit in the 2010-11 financial year actually made a loss.

While they claimed in analyst briefings and media releases to have made $93 billion in “underlying profits”, their statutory profits were only $68 billion.

KPMG’s national managing partner for audit, Duncan McLennan, says ASIC now wants to make sure companies don’t place “undue prominence” on underlying earnings. He says these can be useful for highlighting one-off events such as redundancy costs and asset writedowns but should not have greater prominence than the statutory profit figure.

McLennan says that in most cases companies do point out when there’s a difference between the two measures. “Our report found that 90 per cent of companies have provided reconciliation between underlying profit and statutory profit,” he says.

But he adds that KMPG found 40 per cent don’t explain why they report underlying profit. “These companies are going to need to provide an explanation of why they’re doing it,” he says. “Companies need to reconsider the layout of their analyst presentations and media releases.”

He says S&P/ASX 100 companies will generally need to review their underlying profit disclosures to ensure they comply with the regulatory guidelines. He points to 9 per cent of companies presenting underlying profit on the face of the income statement that won’t be able to continue doing so.

He also suggests the 7 per cent of companies discussing only underlying profit in their management analysis and the 59 per cent of companies using underlying profit as their headline measure should reconsider doing this. Furthermore, the 24 per cent of companies that change their comparative underlying profit figures will have to explain why. And most importantly, 98 per cent of companies that do not explicitly state if their underlying profit has been audited or reviewed will now need to do so.

“If companies don’t comply with what’s in the regulatory guide, they should expect ASIC to contact them to discuss that,” McLennan warns. “This is something that chief financial officers can’t ignore.”

Nor can the spin doctors writing the media releases.

BRW

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