Legal Aspects of Finance Slide Set 10 Regular and Ongoing Disclosure Duties IFRS Pro Forma Information Matti Rudanko

Regular and ongoing disclosure interim and annual reports Interim and annual accounts account statement Regular disclosure obligation Information influencing the value of the security Decisions of the issuer as well as all information on the issuer and its activities that are likely to have material influence on the value of the security. Written announcements to the Exchange Ongoing disclosure obligation Legal Aspects of Finance 10

EU Regulation DIRECTIVE 2004/109/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 December 2004 (Transparency Directive) on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC DIRECTIVE 2001/34/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities Legal Aspects of Finance 10

on the application of international accounting standards: EU Regulation, cont. REGULATION (EC) No 1606/2002 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 July 2002 (IAS Regulation) on the application of international accounting standards: For each financial year starting on or after 1 January 2005, companies governed by the law of a Member State shall prepare their consolidated accounts in conformity with the international accounting standards if, at their balance sheet date, their securities are admitted to trading on a regulated market of any Member State Legal Aspects of Finance 10

EU and International Regulation COMMISSION OF THE EUROPEAN COMMUNITIES, Brussels, November 2003: Comments concerning certain Articles of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards and the Fourth Council Directive 78/660/EEC of 25 July 1978 and the Seventh Council Directive 83/349/EEC of 13 June 1983 on accounting Legal Aspects of Finance 10

CESR recommendations on IFRS CESR’s recommendations for the consistent implementation of the European Commission’s Regulation on Prospectuses nº 809/2004 Ref: CESR/05-054b European regulation on the application of IFRS in 2005: recommendation for additional guidance regarding the transition to IFRS (ref: CESR/03-323e) Legal Aspects of Finance 10

Finnish Regulation SMA ch. 6 - 7 Ministry of Finance Decree on the regular reporting requirements of securities issuers (9.2.2007/153); so far not translated FSA Standard 5.2b: Disclosure obligation of the issuer and shareholder Rules of the Stock Exchange 3: Listing procedures and disclosure and other requirements applicable to the issuers of listed securities Accounting Board (Ministry of Trade and Industry) general guideline Oct. 29, 2002 on annual accounts, account statement and interim report provided for in Ministry of Finance regulation 538/2002 (Only in Finnish) Legal Aspects of Finance 10

The interim report SMA Ch. 7 sect. 10 - 15: The interim report shall contain an explanatory statement on the activities of the issuer, the development of its result and investments as well as any changes in its financial circumstances and operational environment after the end of the previous financial period. Any exceptional factors which have influenced the activities or result during the period in question shall also be explained. The information contained in an interim report shall enable a comparison with the information of the corresponding report period of the preceding financial period. Interim report is prepared for the first three, six and nine months of each financial reporting year exceeding six months in length that covers the operations of the current financial reporting year to date (Stock Exchange Rules 3.2.15) Legal Aspects of Finance 10

IAS IFRS Legal Aspects of Finance 10 Since 2001, the new set of standards has been known as the international financial reporting standards (IFRS) and has been issued by the International Accounting Standards Board (IASB) IASB was preceded by the Board of the International Accounting Standards Committee (IASC), which was founded in June 1973 as a result of an agreement by accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States IASB has adopted the body of Standards issued by the Board of IASC. Those pronouncements continue to be designated "International Accounting Standards" (IAS). This section provides summaries of the Standards Legal Aspects of Finance 10

IAS 1.11 defines IFRSs as comprising: IFRS / IAS IAS 1.11 defines IFRSs as comprising: International Financial Reporting Standards; International Accounting Standards; and Interpretations originated by the International Financial Reporting Interpretations Committee of the IFRS Foundation (IFRIC) or the former Standing Interpretations Committee (SIC). Legal Aspects of Finance 10

"GAAP" stands for "generally accepted accounting principles“: IFRS / GAAP "GAAP" stands for "generally accepted accounting principles“: a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information the standards, as set by each particular country's accounting standards board, will influence what becomes GAAP for each particular country.  in USA, the Financial Accounting Standards Board (FASB), a private sector independent board consisting of accounting professionals makes up the rules and regulations which become GAAP and are recognized as authoritative by the Securities and Exchange Commission SEC Legal Aspects of Finance 10

Pro Forma Information (PFI) A Latin term meaning "for the sake of form". a method of calculating financial results in order to emphasize either current or projected figures. Pro forma financial statements could be designed to reflect a proposed change, such as a merger or acquisition, or to emphasize certain figures when a company issues an earnings announcement to the public. the figures may not comply with generally accepted accounting principles (GAAP). Legal Aspects of Finance 10

Pro Forma Information, cont. Presented to enhance comparability of information in cases of e.g. planned material changes in issuer’s business which the official annual account and interim reports do not reflect E.g. with respect to branch, markets, turnover and profitability, balance structure, personnel, ownership, share capital and administration On the other hand, the financial statements of some firms are designed to hide rather than reveal information. Companies with inscrutable financials and complex business structures are riskier and less valuable investments Legal Aspects of Finance 10

Norms on Pro Forma Information Commission Regulation on Prospectuses 809/2002 Annex II CESR’s recommendations for the consistent implementation of the European Commission’s Regulation on Prospectuses nº 809/2004 Ref: CESR/05-054b SEC (www.sec.gov): ”Pro Forma” Financial Information: Tips for Investors The Finnish Institute of Authorised Public Accountants: pro forma guideline Legal Aspects of Finance 10

PFI and ”non-IFRS” Information PFI is mandatory when ”needed” by the Prospectus Regulation Companies can also give additional information intended to reflect more closely their actual performance than IFRS allow This information should perhaps now be called ”non-IFRS” or ”adjusted” information to make a distinction to PFI regulated in the Prospectus Regulation Legal Aspects of Finance 10

”Non-IFRS” Information For example, net income doesn't tell the whole story when a company has one-time charges that are irrelevant to future profitability. Some companies therefore strip out certain costs that get in the way. Items often left out of ”non-IFRS” figures include the following: depreciation, goodwill, amortization, restructuring and merger costs, interest and taxes, stock-based employee pay, losses at affiliates, and one-time expenses Show and Tell: The Importance of Transparency By Ben McClure December 17, 2003 Legal Aspects of Finance 10

”Non-IFRS” Information, cont. The theory behind excluding non-cash items such as amortization is that these are not true expenses and therefore do not represent the company's actual earnings potential. But under GAAP, amortization is considered an expense because it represents the loss of value of an asset.   The company excludes these items with the intent to present its figures more clearly to investors. ”Non-IFRS” earnings describe a financial statement which has hypothetical amounts, or estimates, built into the data to give a "picture" of a company's profits if certain nonrecurring items were excluded. This kind of earnings information can be very useful to investors who want an accurate view of a company's normal earnings outlook but by omitting items that reduce reported earnings, this process can make a company appear profitable even when it is losing money. This has spawned such nicknames for ”non-IFRS” earnings as EEBS (earnings excluding bad stuff). Legal Aspects of Finance 10

”Non-IFRS” Information, cont. Giving ”non-IFRS” Information is at the discretion of the company (not mandatory) It is given in addition to the regulated IFRS information and and is allowed if it is clearly identified as not complying with IFRS and if it is also clearly stated how it differs from the mandatory requirements of IFRS Legal Aspects of Finance 10

Commission Regulation on Prospectuses, Preamble 9: When give PFI Commission Regulation on Prospectuses, Preamble 9: Pro forma financial information is needed in case of significant gross change, i. e. a variation of more than 25% relative to one or more indicators of the size of the issuer's business, in the situation of an issuer due to a particular transaction, with the exception of those situations where merger accounting is required. Legal Aspects of Finance 10

Requirements on PFI The pro forma information must include a description of the transaction, the businesses or entities involved and the period to which it refers, and must clearly state the following: a) the purpose to which it has been prepared; b) the fact that it has been prepared for illustrative purposes only; c) the fact that because of its nature, the pro forma financial information addresses a hypothetical situation and, therefore, does not represent the company’s actual financial position or results. Legal Aspects of Finance 10

Requirements on PFI, cont. a) the basis upon which it is prepared; b) the source of each item of information and adjustment. The pro forma information must be prepared in a manner consistent with the accounting policies adopted by the issuer in its last or next financial statements and shall identify the following: In addition, in respect of a pro forma profit and loss or cash flow statement, they must be clearly identified as to those expected to have a continuing impact on the issuer and those which are not a) the pro forma financial information has been properly compiled on the basis stated; b) that basis is consistent with the accounting policies of the issuer The report prepared by the independent accountants or auditors must state that in their opinion: Legal Aspects of Finance 10