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FMA clamps down on profit spin doctoring

Friday 11th November 2011

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The days of companies highlighting profit numbers that strip out all the bad news could be numbered as the Financial Markets Authority moves along with the Australian regulator to clamp down.

The securities market regulator will issue draft guidance for public consultation in 2012 on the use of alternative performance measures by financial market issuers. These include underlying and normalised profits presented in annual reports, market announcements and transaction documents.

"These measures can provide useful information to investors, but they also have potential to be misleading if used to mask bad news," Elaine Campbell, head of compliance monitoring at the FMA said.

The FMA has commenced initial discussions with market participants.

It supports the continued application of International Financial Reporting Standards but considers that non-conforming financial information (NCFI) can lead to inaccurate comparisons of performance in different entities.

Adjustments made to information prepared in accordance with accounting standards should be unbiased and should not merely remove "bad news", the FMA said.

The draft guidance says that NCFI should not be misleading and it should not be given undue prominence, emphasis or authority when compared with financial information prepared in accordance with accounting standards.

Also, there will be restrictions on the use of NCFI on the face of the financial statements.

A reconciliation between NCFI and statutory information must be presented along with an explanation for each material adjustment.

An explanation on why such NCFI is presented should also be included along with details of its calculation.

The FMA wants a consistent approach from period to period in calculating NCFI.

The FMA will look at guidance on NCFI being finalised by the Australian Securities and Investments Commission.

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