Periodic financial reporting: ringing the changes for retailers

The EU Transparency Directive was implemented in the UK on 20 January 2007 with the introduction of the Disclosure and Transparency Rules (“DTR”) by the FSA. The new rules apply only to listed companies and take effect for the accounting year beginning on or after 20 January 2007. The date at which listed companies will have to start complying with the new DTR will depend on the date of commencement of the relevant company’s financial year.

Shorter deadlines

The deadline for publishing an annual report has reduced fromsix to fourmonths. For half yearly reports, the deadline for publication has been reduced from90 days to two months. A recent survey conducted by Deloitte1 found that the fourmonth deadline for annual reports should be easilymet, but that the deadline of twomonths (rather than 90 days as at present) for a half-yearly financial report willmean that almost half of listed companies will have to bring forward their reporting deadlines.

Interimmanagement statements

A completely new requirement for UK listed companies under DTR4.3 is the requirement to issue interimmanagement statements (“IMSs”), which will relate to the period since the end of the period covered by themost recent annual or half-yearly report (the “Relevant Period”).

An IMSmust be published during both the first and second sixmonths of the company’s financial year, in a window between 10 weeks after the beginning and six weeks before the end of the six-month period.

Those companies who already produce full quarterly results should not have to produce IMSs.

Content of IMSs

An IMS should cover the following:

1 an explanation of thematerial events and transactions that have taken place during the Relevant Period

2 the impact of suchmaterial events and transactions on the financial position of the company and

3 a general description of the financial position and performance of the company.

No responsibility statement is required for an IMS and no audit or assurance is required. Beyond the above requirements, the FSA has not issued any positive guidance on the content requirements for an IMS, instead indicating that content will depend on the company’s individual circumstances. The regulator supports amarket-led approach based on discussions between preparers and users of information

Implications for the retail sector

In the absence of prescriptive requirements, listed companies in the retail sector will have some discretion regarding the nature and formof IMSs.

Retailers needing to prepare IMSs should review their current quarterly disclosure practices to determine what changes, if any, are required in order to comply with the IMS regime. For this purpose, it should be borne inmind that issuing trading data alone will not be sufficient ifmaterial events or transactions have occurred during the relevant period which are not disclosed on the face of the trading data. Also, a trading statement by definition tends to focus on sales performance, and so would be unlikely tomeet the requirement to include a general description of the financial position during the relevant period.

The timing for producing IMSsmay alsomean that some retailers will choose to publish trading statements outside of the requirements of the DTR. For example, a retailer with a July 2008 year end will have to produce its quarter 1 IMS betweenmid-October and mid-December, and its half year results by the end ofMarch,meaning that itmay choose to publish a trading statement relating to performance over Christmas in early January. However, for a retailer with aMarch year end, the quarter 3 IMS will need to be published betweenmid-December andmid-February, so a trading statement could be used as a basis for the IMS.

The FSA hasmade clear that it expects issuers to carefully think through, and to consult with IMS users regarding the formand content of IMSs. On this basis, retailers should not assume that a “one size fits all” approach will lead to optimal compliance with the IMSs regime. That said, retail companies which are required to issue IMSs should keep track of market practice for retail sector issuers in terms of the formand content of IMSs and monitor further FSA guidance thatmay be issued once IMSs have “bedded in”. The FSA has suggested that it will review the situation in 18-24months’ time and then consider the need for further guidance.