View from City Road: Clearer picture of profits

ALTHOUGH not compulsory for accounts prepared until after 28 June, FRS3, the new accounting standard, is likely to loom large in the forthcoming flood of results from companies with December year-ends.

Following US practice, FRS3 will attempt to almost define out of existence extraordinary items and limit the use of exceptional items to genuinely fundamental changes in a company's operations.

During the current round of reporting this will benefit the presentation of companies that took their restructuring medicine some time ago and depress their late-cycle counterparts. The inclusion of discontinued operations as part of pre-tax profits has already elicited a few moans from analysts who claim it distorts the 'true' picture.

However, the Accounting Standards Board has found an ally in the Institute of Investment Management and Research, the analysts' trade body, which approves of FRS3. It shares the view that users of accounts and not companies should decide from the maximum information available what profits have been.

Unfortunately, in an exposure draft out today, the 'headline' earnings that the IIMR recommends to newspapers and statistical services is not exactly the same as profit before tax FRS3-style, since it excludes gains or losses on the sale of fixed assets or disposals. The Independent will stick with FRS3 figures.

Refreshingly, the IIMR insists that more sophisticated calculations of earnings for price/earnings purposes should be entirely up to the analysts. So used to being spoon- fed by finance directors, the minority of idle analysts must now learn to use their judgement efficiently or perish.