Interim management statements

Achieving comparability in Europe?

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Contents

3 Executive summary

4 Regulatory background

5 Findings

6 Survey results

10 Survey demographics

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The Transparency Directive (TD) was one of a number of directives implemented as part of the European Union Financial Services Action Plan designed to establish a common financial disclosures regime for listed companies in the EU. How successful has the TD been? This survey assessed one aspect of the TD by analyzing the Interim Management Statements (IMS) issued by over 200 companies, predominantly issued between mid-April and mid-May 2009, that formed part of the major indices on the four largest European stock exchanges in six countries.

IMS - a new conceptPrior to the TD, quarterly financial reporting practice was very mixed. For example, Germany required companies whose shares were included in indices such as DAX or MDAX to prepare quarterly financial statements. But in the UK, there was no requirement for quarterly reporting and most companies only reported at the year-end and half-year mark. The TD did not require quarterly financial statements but introduced a new concept - IMS - which are required to be prepared by companies with equity securities traded on an EU-regulated market. However, the TD provided little guidance on what IMS should contain.

Flexibility has not led to consistencyThe TD stated that IMS could take the form of either a statement explaining material events, transactions, financial position and performance or alternatively “quarterly financial report.” All of the six countries surveyed implemented the TD, and while some countries reflected these alternatives in their local regulations, others mandated the publishing of a quarterly financial report. None of the countries provided significant additional guidance on how the requirements should be interpreted and, with the exception of Germany, what a quarterly financial report should contain.

The TD has undoubtedly improved the availability of useful and timely information for the market. However, our survey identified significant variations in IMS both between countries and between sectors. Because local regulators implemented the TD differently, it is not surprising that our survey identified differences in IMS published in different countries. Where regulators have created more specific local requirements or provided local guidance, it has resulted in consistency within the country. In time, there may be greater convergence, but providing increased pan-European guidance would achieve this more effectively.

Guidance should be sector-focusedKey financial performance indicators differ between sectors. To achieve greater consistency and comparability across Europe in a way that is helpful to users of IMS, the focus should probably be on a sector basis rather than a geographical basis. In fact, if individual regulators provide guidance or introduce additional requirements on a geographical basis that is not consistent, it may actually reduce pan-European comparability within sectors as similar companies in different countries may be required to follow differing local rules.

Time to reappraise?Significant improvement has been made to the quality of financial reporting within Europe through the adoption of International Financial Reporting Standards and the TD-related requirements for annual and semi annual accounts. But with IMS, the TD has given considerable flexibility. This made sense when introducing a new regime that was different to many of the existing practices. Perhaps it is time to reappraise.

The TD requires the European Commission to report on quarterly reporting and management statements by 20 January 2010 and on any proposed amendments to the TD. It will be interesting to see how the Commission responds.

If you want to understand how your IMS compare to that of European competitors, get in touch with your usual Ernst & Young contact or your local Ernst & Young Capital Markets contact detailed on the last page of this report.

Executive summary

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European member states were required to implement the TD by 20 January 2007. Five of the six surveyed countries met this deadline, but in all cases any company with a calendar year-end was required to comply with the TD requirements for the year commencing 1 January 2008.

The TD was primarily aimed at enhancing investor protection and market efficiency through requiring the disclosure of accurate, timely and comprehensive information. One way in which the TD sought to achieve this was by setting standards for the nature, timing and minimum contents of periodic financial reports.

Prior to the implementation of the TD, all of the six countries required equity issuers to publish annual and half yearly financial statements. The TD introduced greater consistency to the preparation of, and deadlines for publishing, those financial statements. Additionally, in Germany, companies whose shares were included in a Deutsche Börse index, such as DAX or MDAX, were required to publish International Accounting Standard (IAS) 34 compliant quarterly financial statements. French companies were required to disclose quarterly revenues and in Spain limited trading information was required to be disclosed quarterly. In other countries, some companies voluntarily published quarterly financial statements, and in some sectors there was an established practice of publishing trading statements after key trading periods.

The TD does not require quarterly financial statements, but it did introduce the concept of interim management statements (IMS). These are to be published by equity issuers not sooner than 10 weeks after the start of each half year and not later than six weeks before the end of that period.

The TD requires, without providing any further guidance, that a statement is made providing:

An explanation of material events and transactions that have taken place during ►the relevant period and their impact on the financial position of the issuer and its controlled undertakings, and

A general description of the financial position and performance of the issuer and its ►controlled undertakings during the relevant period.

However, the TD provides that a company that publishes a quarterly financial report, whether in accordance with national legislation, local market rules or voluntarily, is not required to make the statement referred to above. Some countries have a deadline for publishing a quarterly financial report that is later than the deadline for publishing this statement.

Because the TD sets minimum standards, regulators in individual member states are able to introduce additional reporting obligations.

Regulatory background

The TD does not require quarterly financial statements, but it did introduce the concept of interim management statements (IMS).

Because the TD sets minimum standards, regulators in individual member states are able to introduce additional reporting obligations.

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To date, regulators have provided little guidance on the nature and presentation of information that they would expect to see in IMS.

There are variations in the way companies approach IMS, including quarterly financial reports, and there is no clear market consensus of what IMS should include.

Findings

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Regulators have implemented the TD differently. Germany, for example, has required that certain companies, which included those surveyed, prepare IAS 34 compliant financial statements together with a management report, whereas Spain and France have required the preparation of a quarterly financial report. Belgium, the Netherlands and the UK have adopted the options set out in the TD of publishing either a statement that comments on material events and transactions, and financial position and performance, up to the date of such statement or a quarterly financial report. However, little guidance has been provided on what a quarterly financial report should contain, and it is not interpreted as a requirement to prepare quarterly financial statements.

There are variations in the way companies approach IMS, including quarterly financial reports, and there is no clear market consensus of what IMS should include.

The size and content of IMS showed significant variation, often for no identifiable ►reason. For example, UK companies showed the greatest tendency to provide shorter statements with less extensive financial information but, on average, reported more quickly.

Only the German companies reviewed were required to publish IAS 34 compliant ►quarterly financial statements.

Few companies voluntarily prepare IAS 34 compliant quarterly financial statements ►although many Spanish companies published quarterly income statements and balance sheets, but without all the additional footnotes required by IAS 34.

Although the TD does not require quarterly financial reporting, some regulators ►have mandated it — for example France and Spain — and 96% of companies prepared quarterly financial reports, but the level of disclosure within these reports varied significantly. While 30% of French companies disclosed operating profit, 97% of Spanish companies did.

A majority of IMS included forward-looking information, even though the TD does not ►require it, but there was considerable variation in the nature of these statements.

Proportionately more banks disclosed operating profits and more companies in ►extractive industries disclosed cash flow information than companies in other sectors.

There was extensive use of industry-specific nonfinancial performance measures ►and non-GAAP financial measures, most notably in the insurance, telecom and entertainment sectors. Often these were not defined, so they may not be readily understood by readers or even used consistently by companies in the same sector.

To date, regulators have provided little guidance on the nature and presentation of information that they would expect to see in IMS.

In May 2009 the UK Financial Services Authority (FSA) published a review of IMS in the UK in which it reaffirmed its view that it was preferable that each issuer determines what was appropriate in meeting its IMS obligations rather than the FSA taking a more prescriptive approach, although in April 2007 the FSA had previously given an informal indication of how companies might interpret the IMS requirements. This advice distinguished IMS from quarterly reports, saying that it was expected that IMS would be less demanding to prepare and indicated that IMS may not require financial data in certain circumstances, depending on the nature, scale and complexity of the company, provided that sufficient narrative description was given.

Survey results

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Implementation of the TD and market practice differ between countriesEight UK companies prepared IMS that met the minimum requirements of the TD (including explaining material events and general description of financial position and performance). Such statements tended to contain little, if any, financial information. The remaining companies presented their IMS as a quarterly financial report. It was not the intent of the TD to require quarterly reporting, although it does permit it. However, some regulators have required quarterly reporting. In Germany, France and Spain, all of the surveyed companies were required by local regulations to prepare quarterly financial reports, and in Germany these were required to include IAS 34 compliant financial statements. The approach taken by the surveyed UK companies may have resulted from the FSA advice in April 2007.

Setting aside the German companies, as they were all required to publish IAS 34 compliant quarterly interim financial statements, only 14% of the companies that prepared quarterly financial reports prepared IAS 34 compliant reports – and this ranged from zero in Spain to 22% in the Netherlands.

There were clear differences in the information being published in IMS. This appears to have arisen from countries implementing the TD differently and local market practice evolving differently.

Volume of information provided varies by country and by sectorEnglish language versions of IMS statements were published but the amount of information, as measured by the number pages, showed significant variations between countries and, to a lesser extent, between sectors.

Of the UK companies, 16% prepared IMS that commented on events up to the date of the IMS, and these were largely narrative in nature and shorter than those based on quarterly reporting. However, even taking account of this, brevity was the norm for the UK market with a third of IMS being no more than two pages and an overall average of 8 pages compared to other countries averaging between 12 and, in the case of Germany, 27 pages. In Germany the requirement to publish IAS 34 compliant financial statements as well as a management report clearly influenced the nature and amount of information provided. Although Spain does not have a requirement to publish IAS 34 compliant financial statements market practice does tend toward producing quarterly financial statements, resulting in a similar profile to Germany and an average of 25 pages.

Number of pages

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1-5 pages

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30+ pages26-30 pages21-25 pages16-20 pages11-15 pages6-10 pages1-5 pages

Number of pages

Banks Insurance Otherfinancialservices

Extraction,mining,

oil and gas

Utilities Industrialand

manufacturing

Retail Telecomand

entertainment

Otherservices

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On a sector basis, retail and certain financial sector companies, such as investment managers and funds, tended to have the shortest IMS with an average of 8 pages, compared to insurance and extractive sectors companies with averages of 24 and 26 pages, respectively. These results are less surprising than the country analysis because there is a correlation with the complexity of the companies involved. For example, it is likely to be easier to explain the performance of an established retailer than the performance of a major mining company that produces several minerals and has a mixture of exploration and producing assets.

Retailers are the quickest to reportEight UK companies prepared IMS that met the minimum requirements of the TD (including explaining material events and general description of financial position and performance). Such statements tended to contain little, if any, financial information. The remaining companies presented their IMS as a quarterly financial report. It was not the intent of the TD to require quarterly reporting, although it does permit it. However, some regulators have required quarterly reporting. In Germany, France and Spain, all of the surveyed companies were required by local regulations to prepare quarterly financial reports, and in Germany these were required to include IAS 34 compliant financial statements. The approach taken by the surveyed UK companies may have resulted from the FSA advice in April 2007 .

Therefore, the graphs exclude the eight UK companies that prepared IMS commenting on events up to the date of the IMS.

Unsurprisingly, there is a correlation between the number of pages and the time taken to publish. An IMS that is based on quarterly information is effectively subject to a 45-day publishing deadline and all companies met this requirement, except for one Belgian company and seven companies in the Netherlands. Two of these published IAS 34 compliant financial statements within the two-month deadline for publishing

quarterly reports in the Netherlands. The TD does not prescribe a time limit for publishing quarterly financial reports where they are prepared instead of IMS and most countries allow 45 days with some, including Germany and the Netherlands allowing 60 days which is 15 days later than the deadline for publishing IMS.

Retailers were the quickest to report. The extractive industries sector also reported relatively quickly, despite publishing the longest IMS. Retailers tended to focus on sales performance information rather than profit or balance sheet measures, which would enable them to report reasonably quickly. The financial services sectors were the slowest to report, but this is not surprising given the issues they faced and the fact that banks were the most likely to disclose operating profit.

Timing

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UtilitiesIndustrial and manufacturing

Retail

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0 5 10 15 20 25 30 35 40 45 50 55 60

Timing

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Disclosure of operating profit varies significantlyThe following four charts illustrate the extent to which companies disclosed total revenue and operating profit, broken down into those that prepared IAS 34 compliant financial statements and those that did not.

29% of companies published IAS 34 compliant financial statements (of which 18% were German companies). 52% of all companies reported revenue and 35% published operating profit. There was significant variation between countries. For example, companies in Spain and France are required to publish quarterly financial reports, although in France, the only mandatory disclosure is of revenue.

Out of the 65 companies that published IAS 34 compliant financial statements, only 10 published an independent auditor review report. These included 6 out of 40 German companies and none of the 13 Netherlands companies.

When looked at on a sector basis, the variation was less significant. Perhaps surprisingly only 71% of retailers disclosed total revenue, although other measures such as like-for-like sales or like-for-like sales growth were disclosed frequently. Almost 80% of banks disclosed operating profits.

All German companies disclosed cash flow information, but disclosure in the other countries was in the range of 44 to 56%. Voluntary disclosure of cash flow information showed greater variation when looked at on a sector basis, with over 60% of companies in the extractive and telecom and entertainment industries voluntarily disclosing cash flow information.

77% of IMS included comments on liquidity or funding position. Although this was broadly consistent across all countries and sectors, it was particularly prevalent in IMS issued by banks.

Almost 60% of IMS included reference to forward-looking statements, but the nature of these statements varied widely. The majority related only to the current year, with very few looking beyond that period. In some cases, rather than making a new statement, reference was made to statements previously included in the year-end financial statements. Although most

Non-IAS 34

IAS 34

Disclosure of total revenue

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IAS 34

Disclosure of operating profit

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Banks Insurance Otherfinancialservices

Extraction,mining,

oil and gas

Utilities Industrialand

manufacturing

Retail Telecomand

entertainment

Otherservices

Non-IAS 34

IAS 34

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statements were only narrative, some were effectively profit forecasts as they gave an indication of a profit expectation for the current year. Others were less precise, including statements giving a general indication of the level of expected revenue. In some instances, despite the inclusion of a section titled “Outlook,” it was difficult to discern any meaningful forward-looking information.

Extensive use of performance indicators but are they used consistently?Performance indicators, including nonfinancial measures, were widely used. Adjusted earnings numbers such as EBIT or EBITDA were also commonly disclosed.

Nonfinancial measures showed a degree of consistency across sectors. For example, retailers on like-for-like sales and extractive companies focused on production volumes, and these were considered relevant indicators. However, few companies described how nonfinancial measures were calculated, so it is difficult to comment on to what extent these may provide a reliable basis for comparisons between companies.

Not only were German and Spanish companies more likely to disclose performance indicators, they also disclosed more of them. In other countries, companies that disclosed performance indicators typically disclosed less than five, while German and Spanish companies commonly disclosed more than twice that number.

Use of performance indicators

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Banks Insurance Otherfinancialservices

Extraction,mining,

oil and gas

Utilities Industrialand

manufacturing

Retail Telecomand

entertainment

Otherservices

0%

20%

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100%Disclosure of operating profit

Banks Insurance Otherfinancialservices

Extraction,mining,

oil and gas

Utilities Industrialand

manufacturing

Retail Telecomand

entertainment

Otherservices

Non-IAS 34

IAS 34

Survey demographics

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The latest IMS were reviewed for 223 of the largest companies, measured by market capitalization at 31 March 2009, selected from those included in the following indices:

Belgium: BEL 20

France: CAC 40

Germany: DAX and M-DAX

Spain: IBEX 35

UK: FTSE100

Netherlands: AMX 25 and AEX 25

The companies selected were admitted to trading on one or more of the following regulated markets: Deutsche Börse, Euronext (France, Netherlands and Belgium), the London Stock Exchange and the Spanish Stock Exchange.

As the majority of companies had a December year-end, most IMS reviewed related to the quarter ended 31 March 2009 and were published between mid-April and mid-May.

Each company was classified by the country regulator that determines the application of the TD for that company and by sector.

While the UK companies are broadly spread across all sectors, companies in other countries all showed greater degrees of sector concentration.

Contacts

Our practices in Europe, Middle East, India and Africa (EMEIA) operate as a single area. EMEIA includes over 60,000 people in 87 countries. This survey has been prepared by professionals from the EMEIA Capital Markets team.

Belgium Piet Hemschoote 32 2 774 9878

France Vincent Longuet 33 1 46 93 80 06

Germany Günter Doleczik 49 711 9881 15691

Netherlands Bart van Beurden 31 10 406 8256

Spain Stefan Hakansson 34 91 572 7249

United Kingdom Steve Hextall 44 20 7951 4636

Sample

0%

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100%Telecom and entertainment

Retail

Industrial andmanufacturing

Utilities

Extraction, mining,oil and gas

Other financialservices

Insurance

Belgium France Germany Spain UK Netherlands

Other services

Banks

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