Investors should look past underlying profit results in order to avoid making "costly mistakes", warns accounting and advisory firm William Buck.
William Buck audit director Jeffrey Luckins said underlying profit results are generally higher than real statutory profits calculated and audited in accordance with Australian Accounting Standards.
This in turn makes the company’s performance appear better than the actual reported results, he said.
“Investors buying equities on the ASX for their personal portfolio or their self-managed super fund (SMSF) may be misled into thinking underlying profit equals real profit,” Mr Luckins said.
“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.
“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.
“That could be entirely reasonable, but shareholders should maintain a sceptical approach to understanding annual financial reports and drill into the detailed note and other disclosures that explain the reasons for the differences between the two profit measures.”
However, Mr Luckins added that there may be genuine reasons for the real statutory profit not reflecting the anticipated results for the year.
These include impairment of assets, movement in the fair value of assets, significant foreign exchange movements, share-based payments, climate change events, litigation matters and industrial action, he said.
Mr Luckins suggested investors check the auditor’s report to see whether any qualifications or modifications have been reported, which may also affect the understanding of the real statutory profit for the year.
“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,” he said.