The Transparency Directive
Author:
Daryl Byrne
The Transparency Directive is one of the major measures in the European Union’s Financial Services Action Plan and seeks to enhance transparency in EU capital markets in order to improve investor protection and market efficiency. Daryl Byrne, Head of Corporate Listing and Policy at the Irish Stock Exchange, outlines the impact that the Directive will have on listed companies preparing periodic financial reports.
BACKGROUND TO THE TRANSPARENCY DIRECTIVE
The Transparency Directive (‘Directive’) which falls due for implementation in EU Member States on 20 January 2007 establishes disclosure requirements on an ongoing basis for companies with securities admitted to trading on a regulated market situated or operating within the EU. It seeks to enhance transparency in EU capital markets through a common framework requiring:
-issuers to produce periodic financial reports;
-shareholders to disclose major shareholdings;
-issuers to disseminate regulated information; and
-the provision of central mechanisms for sharing regulated information.
The Directive is being implemented in Ireland through primary legislation (Investment Funds, Companies and Miscellaneous Provisions Act 2006) and secondary legislation (Transparency (Directive 2004/109/EC) Regulations 2007). The Financial Regulator is competent authority in Ireland for all aspects of the Directive other than monitoring compliance by issuers with the relevant financial reporting framework, for which IAASA is competent authority.
SCOPE OF THE DIRECTIVE
The Directive applies to issuers of securities admitted to trading on a regulated market situated or operating within the EU. Therefore, the Directive applies to issuers of the following securities admitted to listing and trading on the regulated market of the Irish Stock Exchange - shares, debt securities, derivative securities and closed-end investment funds.
Open-end investment funds are specifically excluded from the scope of the Directive. The Directive does not apply to shares listed on IEX, the Irish Stock Exchange’s market for small to medium-sized companies, or the Alternative Securities Market.
PERIODIC FINANCIAL REPORTS
The Directive seeks to improve the quality, quantity and timeliness of periodic financial information produced by listed companies and used by investors. It sets out requirements on the content and timing of annual and half-yearly financial reports and introduces a new requirement for ‘interim management statements’ for issuers of shares that do not produce quarterly reports.
Compared to the current Listing Rules, the Directive sets more prescriptive content requirements in certain areas, shorter deadlines for production and covers additional types of periodic reporting. Certain on-going financial information requirements currently set out in the Listing Rules of the Irish Stock Exchange will be replaced by the requirements of the Directive and the Transparency Rules of the Financial Regulator.
It is worth noting that exemptions from the periodic financial reporting requirements in the Directive exist for certain types of issuers, for example issuers of debt securities with a minimum denomination of €50,000 and Member States.
The key features of the financial reporting requirements of the Directive are set out below.
DEADLINES FOR PUBLICATION OF PERIODIC FINANCIAL INFORMATION
The Directive introduces shorter financial reporting deadlines for listed companies. The main differences between the new and current regimes are outlined in the table below:
[table omitted from online version of this article].
There is a new requirement for issuers to ensure that annual financial reports and half-yearly financial reports remain publicly available for at least five years.
EFFECTIVE DATE FOR PERIODIC FINANCIAL INFORMATION REQUIREMENTS
On the basis that the Directive is implemented into Irish law on 20 January 2007, the new periodic financial reporting requirements apply as follows:
1.an issuer whose financial year starts before 20 January 2007 must comply with the financial reporting requirements as of the beginning of its next financial year; and
2.an issuer whose financial year starts on or after 20 January 2007 must comply with the financial reporting requirements as of 20 January 2007.
The table below illustrates the above scenarios for listed companies with accounting periods starting before the Directive is implemented (e.g. 1 January 2007) and after the Directive is implemented (e.g. 1 March 2007):
[table omitted from online version of this article].
Listed companies must continue to comply with the current financial information requirements in the Listing Rules until such time as they are required to comply with the requirements of the Directive.
CONTENT OF PERIODIC FINANCIAL REPORTS
Annual Financial Report (Article 4 of Directive)
The annual financial report must include:
1.audited financial statements prepared in accordance with the applicable accounting standards;
2.a management report; and
3.a responsibility statement.
The audited financial statements must comprise consolidated accounts drawn up in line with Regulation (EC) No 1606/2002 (on the application of international accounting standards) if the issuer is required to produce consolidated accounts by the Seventh Company Law Directive. As well as consolidated accounts, the audited financial statements must also include the annual accounts of the parent company, drawn up in line with national law of the Member State where the parent company is incorporated. Where the issuer is not required to prepare consolidated accounts the audited financial statements must be prepared in accordance with the issuer’s national law.
The management report must be drawn up in line with the Fourth Company Law Directive and if the issuer is required to prepare consolidated accounts, in accordance with the Seventh Company Law Directive.
There is a new requirement for a responsibility statement to be included in an annual financial report certifying that, to the best of the knowledge of the persons making the statement, the financial statements have been prepared in accordance with the applicable accounting standards and give ‘…a true and fair view of the assets, liabilities, financial positions and profit or loss of the issuer, or the undertakings included in the consolidation’. The statement must also certify that the management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation, together with a description of the principal risks and uncertainties they face.
Half-Yearly Financial Report (Article 5 of Directive)
The half-yearly financial report (previously referred to as interim results) must include:
1.a condensed set of financial statements prepared in accordance with the applicable accounting standards;
2.an interim management report; and
3.a responsibility statement.
Where the issuer is required to produce consolidated accounts, the condensed set of financial statements must be prepared in line with Regulation No 1606/2002 (on the application of international accounting standards). Where the issuer is not required to prepare consolidated accounts, the condensed financial statements must at least include a condensed balance sheet, and a condensed profit and loss account and explanatory notes, prepared in line with the same principles applied to the annual financial accounts. This means in practice that listed companies using IFRS for their annual accounts will be required to produce half-yearly reports in accordance with IAS34 on Interim Financial Reporting.
If the half-yearly report has been audited or reviewed by an auditor then that report or review must be published as well.
The interim management report must include an indication of important events that have occurred during the first six months of the financial year, and their impact on the condensed set of financial statements, together with a description of the principal risks and uncertainties for the remaining six months of the financial year. For issuers of shares, a description of major related party transactions is also required.
A responsibility statement must also be included in the half-yearly report certifying that, to the best of the knowledge of the persons making the statement, the condensed set of financial statements have been prepared in accordance with the applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer or the undertakings included in the consolidation and that the interim management statement includes a fair review of the information required. It is expected that the legislation implementing the Directive in Ireland will clarify how this requirement is satisfied for half-yearly reports and that ‘true and fair’ for the purpose of half-yearly reports has a different meaning from when it is used in the context of annual reports.
Interim Management Statements (Article 6 of Directive)
There is a new requirement for issuers of shares listed to publish two ‘interim management statements’ during a financial year containing information on:
1.material events and transactions that have taken place during the relevant period and their impact on the financial position of the issuer and its controlled undertakings; and
2.the financial position and performance of the issuer and its controlled undertakings during the relevant period.
It should be noted that this requirement does not apply to companies that publish quarterly financial reports.
CONCLUSION
The Transparency Directive has significant implications on the continuing obligations of listed companies, particularly in relation to the timing of publication and content of periodic financial information. Companies should examine in detail the legislation implementing the Directive in Ireland in order to update their current systems and processes to meet the requirements of the Directive.