The profit warning from Rolls-Royce last week has reopened concerns about its accounting policies.
Rolls slipped to a one-year low on Tuesday, down 2.9 per cent to 976.5p, after Citigroup cut the engine maker from its "buy" list. Among the broker's concerns was that, following talks with the Financial Reporting Council, Rolls had changed how it booked fees from its risk-sharing partnerships.
"While the financial impact was relatively modest, it raised questions over whether the FRC may require other accounting policy changes," said Citi.
In common with its defence sector peers, Rolls' opaque accounts have long drawn criticism. Investors have questioned the company's capitalisation of costs including R&D and its use of "Totalcare" contracts, where engines are sold at little or no profit but tie the customer into long-term servicing and spares purchases.
"Should the FRC recommend further accounting changes in these or other areas, it could create significant uncertainty around forecasts," said Citi. It had previously estimated that cost capitalisation and Totalcare contract accounting had improved Rolls' annual earnings by as much as 53 per cent.
A wider market rally continued into a third day, lifting the FTSE 100 by 60.43 points or 0.9 per cent to 6,796.43.
Leading the blue-chip risers, BT Group climbed 3.4 per cent to 418.1p after nearly 24m shares changed hands in two blocks at 410p apiece. Investors reinvesting the proceeds from Vodafone's sale of Verizon Wireless have helped support BT this week, along with a post-results management roadshow and a Court of Appeal victory against BSkyB over wholesale sports rights.
AstraZeneca edged 0.5 per cent higher to £40.93 after Actavis agreed to buy Forest Laboratories for $25bn. AstraZeneca was rumoured to have looked at buying Forest last year but those talks were said to have failed over price, meaning dealers saw little chance of a counterbid.
Anglo American was top performer among the miners, up 2.3 per cent to £15.87, after both UBS and Investec repeated "buy" advice. BHP Billiton added 1.9 per cent to £19.49 on slightly better than expected interim results, which bolstered hopes of a share buyback to accompany its finals.
InterContinental Hotels led the FTSE fallers, down 3.2 per cent to £19.81, after its annual figures included no update on cash returns.
Ahead of results next month, Wm Morrison lost 1.6 per cent to 232.6p after JP Morgan Cazenove slashed its earnings and dividend forecasts. "Fundamental changes" to Morrison's pricing are required, forcing a "major reduction in the gross margin and two to three very painful years of thin profits," it said.
Wood Group rose 6.7 per cent to 721.5p after an upbeat outlook accompanied results from the engineer that matched a December profit warning.
Breakup hopes lifted BWin 5.3 per cent to 119p after an activist hedge fund run by Cumberland Associates agreed to buy a 6.1 per cent stake and gain a place on the bookmaker's board.
If BWin fails to deliver from heavy investment on website upgrades and marketing, the group can either shift to a cheaper outsourcing model or put itself up for sale, said Numis Securities. Stake building by the activist "appears to us to be the firing of a starting gun" on the retrenchment, sale or splitting up of the business, Numis said.
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