FMA sets out best reporting practice

Entities who raise money from the public and use financial figures other than their bottom line profit or loss will need to explain why and ensure it is not misleading under proposed guidelines released by the Financial Markets Authority.

The investment watchdog yesterday released a consultation paper and request for feedback on a guidance note on disclosing financial information that is not generally accepted accounting practise (GAAP).

FMA head of compliance monitoring Elaine Campbell said the use of alternative performance measures such as "underlying profit" and "normalised profit" in annual reports and market announcements was becoming increasingly common in New Zealand.

"These measures can provide useful information to investors, but they also have the potential to be misleading if used to mask bad news," she said.

Campbell said the FMA began to look at the issue in November last year after there was a lot of media commentary around the use of alternative performance measures and the potential for them to be misleading.

"Whilst we didn't think there was a situation where there was currently an issue, we wanted to make sure we got our views across," Campbell said.

"What we are saying to people is, 'Here are some good practices around the use of alternative performance measures'."

Campbell said issuers of securities should be thinking about whether they were masking bad news by presenting certain figures and ensure the information they provided was consistent across different reporting periods.

"It's really all about good investor communication."

Campbell said if companies were to issue misleading information the FMA would get in touch by letter or a face-to-face interview.

"We can't remove a director's discretion around what is important information and we don't want to. We want directors to make those calls."

But she said the FMA wanted to see companies reporting the statutory measures alongside the alternative measures and explaining how it got between the two.

The guidance will apply to prospectuses, merger proposal documents and market communications including director or management commentary, market announcements, presentations to investors and briefings to analysts.

Campbell said the note not only covered listed companies but any entity which raised money from the public including charitable entities and public benefit entities.

Ernst and Young audit partner Kimberley Crook said the introduction of international financial reporting standards (IFRS) had been one driver in more companies using alternative measures as had one-off events such as the Canterbury earthquakes.

"People are wanting to isolate those figures because they hope it won't happen again."

Submissions on the document close on June 29 and the final guidance will be published by August 31.

The guidance will apply from January.