Reporting performance

UK requirements
We’ll look first at the UK requirements:

1. statement of total recognised gains and losses
2. note of historical cost profits and losses
3. reconciliation of movements in shareholders’ funds.

Statement of total recognised gains and losses
FRS 3 argues that the profit and loss account is not sufficient on its own as a report of a company’s financial performance. The statement of total recognised gains and losses (STRGL) is an attempt to present details of the other elements making up a company’s total performance.

The STRGL presents:

• profit for the financial year before dividends
• unrealised gains and losses on revaluation of assets
• currency translation differences (not relevant to Paper 1.1 students)
• prior year adjustments.

The profit for the year is, of course, the figure in the profit and loss account. This will already include any realised gains or losses arising on the disposal of assets. That leaves the unrealised gains and losses to be disclosed as the second item in the STRGL. As this article is addressed primarily to candidates taking Paper 1.1, we’ll ignore the currency translation differences.

Finally, the STRGL presents prior year adjustments (something in the current period that affects the previous period) e.g. the discovery of a fundamental error or a change in accounting policy. There are two ways we could deal with these. We could include them in the current period’s profit and loss account or we could adjust the opening balance of profit brought forward so that the correction does not affect the current year’s figures. UK standards require the latter treatment – adjustment on the opening balance of profit brought forward. This means that the adjustment does not appear in the current profit and loss account, but it does feature in the STRGL and, as we shall see, in another statement – the reconciliation of movements in shareholders’ funds.

Please refer to Figure 1 for the format of the Statement, slightly simplified from FRS 3.

Note of historical cost profits and losses (no International equivalent)
Financial statements in the UK are usually prepared on the historical cost basis, but with the proviso that fixed assets – especially land and buildings – are often revalued to keep balance sheet values more in line with reality.

FRS 3 requires this note to state what the profit would have been if the financial statements had been prepared on a strict historical cost basis, with no asset revaluations. The note is only required if the difference between the reported profit and the historical cost profit is material. There are two main possible causes of difference:

1. If assets are revalued, depreciation is based on the revalued amount. Using strict historical cost accounting, the depreciation would be based on original cost.
2. If a revalued asset is sold, the profit coming through in the profit and loss account is the difference between the proceeds of sale and the carrying amount in the records allowing for the revaluation. On strict historical cost accounting, the amount would be the difference between the proceeds and cost less depreciation, so that a larger profit (or a smaller loss) would emerge.

The note should be presented immediately following the profit and loss account or the STRGL, as illustrated in Figure 2. Note that the opening figure is profit before taxation. (1) refers to a revaluation gain recognised in an earlier year. It is added to the reported profit because under strict historical cost accounting the gain on the disposal this year would be £9m more than the gain based on the revalued amount.

Why have the note? FRS 3 cites two reasons:

1. Companies have discretion as to when to make revaluations – and to what extent – so historical cost figures may make profits and losses of different reporting entities more comparable.
2. Some users may wish to know the historical cost based profit on the sale of an asset.

Reconciliation of movements in shareholders' funds
This statement overlaps somewhat with the STRGL, because naturally everything in the STRGL affects shareholders’ funds and therefore has to appear in this reconciliation. However, it also includes issues or redemptions of shares during the year. The information in the reconciliation could be picked up from the company’s balance sheet, but it is convenient to have a separate statement summarising the movements. Refer to Figure 3.

In addition to these FRS 3 statements, the Companies Act 1985 requires the disclosure of movements on reserves. This is presented in tabular form in Figure 4. The difference between this £387m and the £405m with the reconciliation of shareholders’ funds closed is, of course, the £18m of share capital.

Examination questions in Paper 1.1 (GBR) could ask for the preparation of one or other of these statements or, in the multiple choice section, for the items that might be found in the statements.

That is the end of the coverage of the UK position, but do read the important note at the end of the article which is relevant for both UK and International candidates.

International requirements
The main supplementary statement required by IAS 1, Presentation of Financial Statements is the statement of changes in equity. This is similar to the UK reconciliation of movements in shareholders’ funds, and it also includes the statement of movements in reserves. It shows, in columnar form, the equity share capital and reserves, with details of all the movements that have taken place during the period.

IAS 1 also illustrates a statement of recognised gains and losses that may be used as an alternative to the statement of changes in equity. Figures 5 and 6 show the statements, broadly presented as in IAS 1 (slightly abridged to exclude matters outside the scope of Paper 1.1).

If this second presentation is adopted, the reconciliation of opening and closing balances of share capital, reserves and accumulated profit included in the statement of changes in equity would be shown in the notes to the financial statements. Examination questions in Paper 1.1 could ask for the presentation of one or other of these statements or, in the multiple choice section, for the items that might be found in the statements.

Important note for both UK and International candidates
The UK Accounting Standards Board and the International Accounting Standards Board are jointly developing a major revision to their financial performance reporting requirements. When their work is complete the UK and International rules will become identical.

An Exposure Draft for a new joint standard is expected at the end of 2003, but the existing rules as described in this article will be relevant for the Paper 1.1 examinations in December 2003 and June 2004.

Neil Stein is Examiner for Paper 1.1