Be sceptical of underlying profit results
Investors looking at company annual reports should dig deeper than underlying profit results and focus on real statutory profits to get a true picture of performance, an accounting firm warned.
National chartered accounting and advisory firm, William Buck, said many companies may emphasise their underlying profit results, which could mislead shareholders into believing their performance was better than the actual reported results.
The firm's audit director, Jeffrey Luckins, said underlying profit measures were usually higher than real statutory profits in the Statement of Comprehensive Income, calculated and audited as per the Australian Accounting Standards.
"The underlying profit measure is not the legal definition of profit in Australia and generally is disclosed because it represents a more favourable higher result than the real statutory profit measure," he said.
"When companies are focusing your attention on underlying profit, they are actually saying they want you to accept they have incurred exceptional items which may be one-off large or unusual transactions that have adversely affected the real statutory profit for the year."
However, Jeffrey said the real statutory profit may not always reflect the anticipated results due to reasons like impairment of assets, movement in the fair value of assets, significant foreign exchange movements, share-based payments, climate change events, litigation issues and industrial action.
"Our advice to investors is to accept the audited real statutory profit disclosures in the Statement of Comprehensive Income and then critically consider the nature and reasons for any exceptional items identified which result in a higher underlying profit result."
AUTHOR
Malavika Santhebennur
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