Annual reports risk leaving investors in 'state of confusion'

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New Zealand companies used 214 different measures of profit in 2010, risking leaving investors in a state of confusion about what's being stripped out or added to the bottom line to paint a better picture, according to Deloitte's annual financial reporting survey.

The survey highlights an increasing trend among companies to downplay net profit, or statutory profit as required to be filed under stock exchange rules, in favour of some underlying measure of earnings the executives believe more fairly reflect their business.

The survey, though, suggests in most cases companies post better numbers as a result of the tweaks.

It is now common practice for large New Zealand companies to use underlying profit in their annual reports.

In 25 per cent of cases, the measures were "not clearly reconciled to statutory profit, therefore running the risk of confusing investors," Deloitte said in a statement.

Instead they chose alternatives including EBITA, EBITDA, EBITDAF, distributable profit and net earnings before abnormal/unusual, it said.

The trend was exacerbated last year by the way companies had to account for the government's changes in rules for depreciation on buildings, which pushed some non-cash charges to the bottom line and provoked criticism that net profit ceased being a true representation of performance.

"It's not clear that the objective of providing user-friendly information is being adequately met when so many variations of measuring profit are being used, and there are variations in how these figures are conveyed and their prominence," said Deloitte partner Denise Hodgkins.

More disturbing in the survey, she said of those companies using an underlying profit measure in their annual report, 92 per cent showed "an improved result either by increasing a profit figure, turning a loss into a profit, or reducing a loss."

"Directors should carefully consider the purpose of the measure being provided and ensure that this is explained with a clear reconciliation back to statutory profit," Hodgkins said.

The survey was of 100 listed and other large companies in New Zealand. It showed 87 per cent referred to an alternative profit measure in their 2010 annual report.

She said non-standard measures of earnings have been under close scrutiny in Australia, where the Australian Securities and Investments Commission has issued draft guidelines for reporting underlying profit.