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SCMP Reporter

A MAJOR abuse in the reporting of corporate financial results by accountants and finance directors working in some companies in the United Kingdom will end under a new Financial Reporting Standard.

  Hongkong corporate reporting could also benefit from this new rule, being imposed from April in the UK, as it makes companies say where profits were generated.

   If it were applied to Hongkong companies it would help to show the impact of acquisitions and disposals on the company's financial condition.

  It demands that companies provide conduit figures showing more clearly what the relationship is between the balance sheet and the profit and loss account.

  The new rule in the UK has the catchy title of Financial Reporting Standard Number 3 (FRS3).

  (The information for this commentary is taken from the UK Accounting Standards Board [ASB], summary of FRS3 Reporting Financial Performance).

  It stops companies abusing extraordinary and exceptional item entries in their profit and loss accounts. In the UK FRS3 is going to make extraordinary items an endangered species.

  Companies won't be able to hide bad news in extraordinary item entries, which have given investors a distorted view of what is happening to company profitability.

  Some companies have been known to do the exact opposite in stretching the definition of exceptionals beyond its breaking point to boost net profit.

  Analysts in Hongkong, and anyone else who looks at company results, would benefit from the imposition of FRS3 in Hongkong as the components of net profit are separated to give a clearer picture of the source of corporate profit.

  Those covering the local banking sector will have to know what FRS3 is all about in any case because HSBC Holdings will have to produce its results for 1994 under the new regime.

  FRS3 changes the format of the profit and loss account, demanding that certain items be split between continuing activities and amounts arising from discontinued activities.

  The items to be split are turnover, exceptional items and operating profit before interest.

   Cost of sales, gross profit, operating expenses, tax and minority interests should also be split along the same lines.

  Along with exceptional and extraordinary items, material losses or profits on the sale or termination of an operation, or the costs of a fundamental reorganisation, should be shown as separate exceptional items.

  In addition to the profit and loss statement, companies will need to prepare a statement of total recognised gains, including the profit (or loss) before dividend, adjustments to the valuation of assets, differences in foreign subsidiaries' net assets arising out of exchange movements, and prior year adjustments.

  The company also needs to prepare a reconciliation of movements in shareholders' funds. ''This is an effort to tie the profit and loss account to the changes in the company's assets in a more sensible way than the current movement in reserves note,'' says the ASB.

  FRS3 also tightens up the way some companies use disclosures under notes of historic cost profits and losses.

- GARETH HEWETT 



UK reporting standard helps educate investors