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The new rules for financial reporting: understanding the new rules to avoid liability
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| (Thursday, 15 November 2007) Written by Kathryn Cearns |
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The impact of the Transparency Directive
Overview of the Directive
Part of the EU Financial Services Action Pl
an
Deals with the production of periodic financial information, its dissemination and its storage
Companies with securities traded on a regulated market
Accounting periods beginning on or after 20 January 2007
Requires the existence of a liability regime for issuers in relation to periodic financial information
Overview of the Disclosure and Transparency Rules
The structure of the DTRs
DTR1 and 1A are introductory
DTR2: disclosure and control of inside information by issuers
DTR3: transactions by persons discharging management responsibility and their connected persons
DTR4: periodic financial reporting
DTR5: vote holder and issuer notification rules
DTR6: continuing obligations and access to information
DTR4: periodic financial reporting
DTR4.1: annual financial report
DTR4.2: half-yearly financial report
DTR4.3: interim management statements (IMSs)
DTR4.4: exemptions
Note that some of the Listing Rules remain
DTR4.1: annual financial report
Transferable securities/UK Home Member State
Four months after the year end
Contents
Audited financial statements
Management report
Responsibility statements
Consolidated accounts under IFRS, parent accounts as required by law
Auditing must be according to the Directives
Content of management report
Fair review
Principal risks and uncertainties
It is required to be forward looking
Responsibility statements
Made by “persons responsible within the issuer”
The board of directors for UK purposes
State name and function of person making statement
Statements are:
Accounts true and fair
Fair review in management report
DTR4.2: half-yearly financial report
Shares or debt securities/UK home Member State
Two months after the period end for first six months
Contents
Condensed financial statements
Interim management report
Responsibility statements
Consolidated accounts under IAS 34
Consistency of lines reported, accounting policies, etc
No requirement for audit, but any audit/review must be disclosed (or statement that there has been no review)
Content of interim management report
Important events in first 6 months
Principal risks and uncertainties for last 6 months
Responsibility statements
Made by “persons responsible within the issuer”
The board of directors for UK purposes
State name and function of person making statement
Statements are:
Accounts true and fair (NB sufficient to say comply with IAS 34)
Fair review in management report
DTR4.3: interim management statement
Shares/UK Home Member State
In the first and second 6 month periods, made between
10 weeks after beginning of period, and
6 weeks before the end of period
Contents
Cover period from start of 6 months to date of publication
Explanation of material events and transactions
General description of financial position/performance of issuer
Exempt if company is a quarterly reporter already
The new liability regime
S 90A FSMA: Compensation for statements in certain publications: scope
Applies to
Any reports issued under Articles 4, 5 and 6, and
Voluntary prelims
Articles 4, 5 and 6 refer to the annual financial report, half-yearly financial report and IMS respectively
Securities must be
Traded on a regulated market in the UK, and
Traded on a regulated market outside the UK and UK is home MS
S 90A FSMA: Compensation for statements in certain publications: liability (also see Section 463 CA 2006)
Issuer liable to pay compensation to a person who has
Bought the securities, and
Suffered loss as a result of the untrue or misleading statement or omission of any matter required to be included in the publication
Issuer is liable if a person discharging managerial responsibilities
Knew the statement was untrue/misleading or reckless, or
Knew the omission to be dishonest concealment of a material fact
Loss is not suffered unless the investor relied on the information and it was reasonable for him to do so
S 90A FSMA: Compensation for statements in certain publications: limit on liability
There is no further liability
For issuer to any other loss suffered as a result of reliance
No person other than the issuer is liable other than to the issuer
Limitation does not affect
Powers of court/Authority to require restitution
Liability for a civil penalty
Liability for a criminal offence
“Persons discharging management responsibilities” is defined and will usually be directors
How to be compliant
Governance and procedures
Responsibility statement
Can be signed by one board member on behalf of board
Named person’s liability no greater than that of other board members
Cautionary wording over forward looking statements
Time line of new reporting deadlines, particularly in transition
Holistic approach, particularly to narrative reporting
Corporate governance issues
Systems and controls, clear reporting lines up to the board
Finance function up to strength
Right expertise on the board and audit committee
Time and attention of board members
The Davies review
Possible changes to the liability regime
Extend to cover “ad hoc” disclosures
Extend to cover AIM and PLUS markets (i.e. non-regulated)
Apply to all RIS announcements
Extend to encompass liability for dishonest delay
Extend to both buyers and sellers of shares, but exclude holders
Summary
Will anything change under the new liability regime?
Shorter timetable for reporting, more reporting
Clearer liability regime, but investors now have rights to take action
High hurdle for investors to claim compensation
Impact of derivative actions?
Possible future changes to the regime?
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