The Financial Reporting Review Panel (“the Panel”) has had under review the report and accounts of The Investment Company PLC (“the company”), for the years ended 31 March 2007 and 31 March 2006.
The Panel’s principal concern in both years was the treatment of the company’s participating preference shares (“PPS”) and the use in the March 2007 accounts of the provisions of IAS 1 “Presentation of Financial Statements” to support departure from the requirements of IAS 32 "Financial Instruments: Disclosure and Presentation".
The Panel found that the departure from paragraphs 28, 29 and 31 of IAS 32 in treating the PPS as equity instruments in the March 2007 accounts was not justified by the circumstances of the case and that a similar presentation in the March 2006 accounts did not comply with IAS 32 as it was based on a superseded version of the standard.
Treatment of the Participating Preference Shares
The PPS are non-redeemable instruments that entitle the holders to a fixed net cash dividend at the rate per annum of 7p per share. In addition, the holders are entitled to a participating dividend at the rate of 25% of any dividends paid on Ordinary shares in excess of 2p per share for any year, subject to a maximum participating dividend in respect of any year of 3p net per share.
Under IAS 32 (as revised in 2003), (“IAS 32”), which was applicable for accounting periods beginning on or after 1 January 2005, the PPS fall to be treated as compound financial instruments with both an equity and liability component. The value of the equity component is the residual amount after deducting the separately determined liability component from the fair value of the instrument as a whole.
Presentation in accordance with IAS 32 would have resulted in substantially all of the carrying value of the PPS being allocated to the liability component and the fixed net cash dividend being treated as an expense in profit and loss. The board, however, considered that this treatment would not fairly present the substance of the PPS as permanent capital in the company with participation in the future income and gains arising and would be so misleading that it would conflict with the objective of financial statements set out in the Framework for the Preparation and Presentation of Financial Statements.
The Panel found that the circumstances did not constitute an extremely rare case where compliance with a standard would be so misleading as to require departure from the requirements of paragraphs 28, 29, 31 of IAS 32. A fair presentation could have been achieved through full recognition of the liability component in compliance with the standard, supplemented by disclosures explaining the characteristics and permanent nature of the instruments.
The directors have accepted the Panel’s findings and in the accounts for the year to 31 March 2008 published today have corrected the treatment of the PPS by way of a prior period adjustment. The accounts also include disclosures explaining that the departure from the requirements of IAS 32 in the presentation of the PPS as equity did not comply with paragraph 17 of IAS 1.
The company also discloses that the PPS were incorrectly accounted for in the accounts for the year ended 31 March 2006 where they were accounted for as equity in accordance with an earlier version of IAS 32 that was not applicable to the period in question.
The disclosures explain that the PPS should also have been treated in accordance with IAS 32 (as revised in 2003) in the 2006 accounts and that the statement in the original accounts that their presentation as equity instruments was in accordance with IAS 32 was incorrect.
Compliance with IAS 32 in the accounts to 31 March 2007 would have reduced net assets and shareholders’ funds from £10,250,900 to £7,753,497 (2006: £10,456,336 to £7,958,933) and reduced net revenue after taxation of £349,201 (2006: £342,855) to a net loss after taxation of £435 (2006: £50,181).
The Panel also welcomes the revised accounting policy for the treatment of gains and losses on disposal of non-current asset investments. The original policy, adopted in both the March 2006 and 2007 accounts, of recognising the gain or loss on disposal in a capital reserve did not comply with IAS 39 “Financial Instruments: Recognition and Measurement” which requires the gain or loss on disposal to be recognised in profit or loss. The directors have corrected the treatment by way of a prior period adjustment.
The Panel welcomes the actions taken by the directors today in making the required adjustments and disclosures in the published accounts for the year to 31 March 2008, and regards its enquiry, started on 14 May 2008, as closed.
