February 13, 2014 / 2:51 PM / 6 years ago

UK watchdog gets Rolls-Royce to restate accounts

LONDON, Feb 13 (Reuters) - Rolls-Royce had to restate its 2012 figures and adjust its results for 2013 before it reported on Thursday following advice from Britan’s accounting regulator, causing the engine maker to lop nearly 40 million pounds ($66 million) off last year’s pretax profits.

Analysts, many of whom quizzed Rolls-Royce’s management about the change in its accounting policy at its results meeting, said they thought the intervention of the Financial Reporting Council was unusual, and expressed concern that it added risk to the company’s future earnings.

“In my experience it’s exceptionally unusual for a company to have the FRC to come in and ask them to change their accounting,” said one analyst who declined to be named.

“Rolls’s comments in the meeting imply that the process may be ongoing so there may be other changes to their accounting, which is very unusual.”

The world’s second-largest aircraft engine maker said earlier on Thursday its annual pretax profits jumped 23 percent last year to 1.76 billion pounds. The restatement had minimal impact on the overall figures.

Specifically the company said it had changed its accounting policy for entry fees arising from its risk- and revenue-sharing arrangements with partner suppliers following a review by the FRC.

Entry fees are research and development costs footed by such partners and Rolls-Royce had historically recognised the fees as income rather than a contribution to its R&D investments which would then be gradually amortised.

The company said the impact for 2012 from the change was to increase underlying profit before tax by 25 million pounds and reduce net assets by 184 million pounds.

For 2013 the change cut underlying pretax profit by 39 million pounds.

“The risk is that if there are further investigations and an adverse outcome, that could cause a restatement of future earnings,” Agency Partners analyst Nick Cunningham said.

Rolls-Royce’s chief financial officer Mark Morris told analysts it was not unusual for companies to get enquiries from the FRC and declined to comment on those private discussions, which the company’s chief executive John Rishton described as “constructive and helpful”.

The FRC’s conduct division reviews about 300 sets of company accounts annually, with far fewer approached for an explanation and the number of required restatements a year in single figures.

The watchdog is not pursuing the matter any further. The company’s annual report for 2012 was audited by accounting firm KPMG which declined to comment.

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