FSN: EU Transparency Directive will force listed companies in Europe to accelerate their Fast Close

EU Transparency Directive will force listed companies in Europe to accelerate their Fast Close

2nd July 2007
The new EU Transparency Directive which came into force on the 20 January 2007 will force listed companies throughout Europe to report in accelerated timescales. Under the new rules Annual Reports in the UK will have to be produced in 4 calendar months instead of 6 months and Half-Yearly Reports (currently known as interims) will have to be delivered in two months instead of 90 days. As only 54 percent of companies currently produce their interim statements within 60 days of the month end the new regulations will severely pressure companies, says Gary Simon , FSN's managing editor and author of Fast Close to the Max ®

The EU Transparency Obligations Directive (TD) took effect from 20 January 2007 and in the UK is being implemented by the Financial Services Authority (FSA) which is adding transparency rules to the Disclosure Rules (DR) which are in turn being renamed the Disclosure and Transparency Rules (DTR).

The new rules relate to three broad areas, namely; periodic financial reporting, including new requirements for quarterly reports, a new regime for disclosure of major shareholdings; and new requirements on electronic communications with shareholders and others. However, it is the changes to periodic financial reporting that take effect for accounting periods commencing after the 20 January 2007 that are likely to cause the most concern to listed companies.

Although reporting timescales, i.e. the speed of the Fast Close for companies throughout Europe have been improving steadily over the last few years, around half are going to have to take urgent steps to improve their group reporting processes if they are to meet the new reporting deadlines.

For companies with a March year end, action will need to be taken quite swiftly if they are to bed down the required improvements in time. Their first Interim Financial Statement (IMS) are due no later than 6 weeks before the end of September this year and their second IMS will be due between 10 weeks after the 1st October 2007 and 6 weeks before the end of March 2008. Companies with a 31st December year end will be spared any additional reporting burden before 2008.

Recent research by Deloitte comparing reporting timescales between 1995 and 2005 suggests that it is the interim (half yearly) reporting requirements that will cause the most strain for UK companies with only half currently managing to report within the 90 day deadline. By contrast only 7 percent of companies are expected to have difficulty in meeting the annual 4 month deadline.

According to Deloitte, 78 percent of UK listed companies currently provide some form of reporting outside of the main cycle of annual and half-yearly reports. However, only 34 percent of companies reported within the prescribed periods for an IMS. Furthermore, only 14 percent of companies would have met the content requirements for an IMS, which are to explain the material events and transactions during the period and their impact on the financial position of the group and to describe generally the financial position and performance of the group during the period under discussion.

“While the IMS is expected to be only a relatively short narrative statement, clearly the significant majority of companies will have to change their processes and deadlines to ensure that the new requirements are met,” says Deloitte.

According to David Jones, Director of Paragon Consulting Group, UK listed companies are split between those who have embraced quarterly reporting (because of secondary listing requirements in the USA and elsewhere) and those who have not. The latter are still primarily focused on systems and processes geared to internal monthly management reporting and only a full annual consolidation.

He told FSN, “It's an unreal experience talking to financial controllers in the two camps. The first camp can't see the problem. They say quarterly reporting drives the integration of management and legal reporting, drives integrated processes for consolidation and reporting by month and quarter, so processes are well rehearsed, solutions are integrated, reporting is fast, quarterly statements take marginally longer than monthly internal reports and year end statements only marginally longer than that! External electronic reporting is easily done off our integrated solution. So what's the issue? While for those in the other camp, the annual consolidation and accounts publication is a major once a year exercise, is different to and separate from the monthly internally focused consolidation and reporting process and frankly is a pain that drags on endlessly, not helped by having the auditors tanks parked on the lawn for the year end!”

Jones adds, “It is those in the later camp that will find the EU Transparency directive so demanding, for they must now publish quarterly “interim management statements” which they must regularize and establish a process for. Clearly these are not the same as the publication of full external quarterly reporting as demanded by the SEC and theoretically does not need to be so. But, if the company is to comment on its performance publicly then surely they must at least have the same quarterly information for external reporting to hand in order to make reliable comments. Think also of the investor community who will now see a full quarterly set of financial statements from company A in an industry sector (because of a secondary listing) and Company B in the same sector will simply produce a quarterly “Management Statement” which may not even contain figures. I am confident the pressure will be on the later to provide more information to compare performance with its peers. Hence the inevitable march, in my view, to full blown quarterly reporting.”

Is there any good news in this? Well, according to Paragon's Jones there is. “Talk to those who have been through the pain of implementing quarterly reporting and integrating management and legal reporting and you will generally meet contented individuals who think they have fast efficient and effective integrated processes and unified systems. Talk to those in the other camp and the year end holds only fear and loathing and many long nights of blood sweat and tears to perform a major annual process,” he told FSN.

Whichever way one looks at the problem it seems that Europe is inexorably moving towards more frequent and voluminous financial reporting. Keeping up with the imminent changes means that companies will need to invest in a smooth Fast Close process that aligns, statutory and management reporting with an efficient monthly, quarterly, half-yearly and annual close cycle. Companies which fail to rise to the challenge year could find themselves pressured when the full impact of the DTR begins to bite.

Related FSN articles:

Fast Close to the Max ®
Fast Close is back in Fashion

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