The week in finance

For most people, 1 January marked the dawning of a New Year, filling them with fresh inspiration and determination. For the business world, however, the day marked the beginning of the biggest shake-up in accountancy for a generation.

The David Bowie lyric ‘Ch-ch-ch-ch changes, turn and face the strain’ – recorded in the 1970s, just as plans for the first international standard-setter translated into action – could turn out to be the anthem for 2005.

For, as finance directors and accountants around Europe prepare to present their numbers under international financial reporting standards, it is certainly time for them to face up to the enormity of the task. They will be feeling the strain.

The date is no big surprise. The 1 January 2005 deadline for publicly traded companies in the European Union to switch to IFRS has been known in accountancy circles for at least five years.

But the actual levels of preparation for this far-reaching transition in financial reporting and accounting are severely lacking, warn analysts.

Jeannot Blanchet, City analyst and IFRS expert at Morgan Stanley, says: ‘I don’t feel we’ve been overwhelmed by disclosures. What we’re seeing is the best in the class [communicating].

‘We have seen a pick-up in companies organising specific sessions on IFRS for analysts. But it’s only dozens, though, and it only just started back in mid-November last year.’

The impact won’t be seen until March, when companies with December year-ends publish restated accounts under IFRS for the past two years. But first-quarter results for this year will be the first to appear under the new regime.

Accountants are warning companies to make sure the market understands any changes, so as not to misinterpret the numbers. Analysts point to Barclays as a good example to follow in briefing analysts and investors on the IFRS impact.

The greatest concern for company executives right now is the short-term share price volatility. A recent example of what could happen came at the end of last year, in a spat between the bank Northern Rock and Credit Suisse First Boston.

CSFB said the bank’s profits would be hit by up to 10% under IFRS, causing its share price to take an immediate hit. The Newcastle-based bank responded, claiming it would see a profit change of plus or minus 5%. The share price rose accordingly.

This was the first headline example of share price volatility caused by the accounting switch-over that we have seen. But it is a movement that will characterise this year’s trading.

The effects of the transition, however, aren’t only short-term. ‘If the numbers show a very different picture from what we understood, that will affect a company’s long-term valuation,’ says Blanchet.

The majority of the financial community are in favour of the changes because they will increase disclosure and transparency, as well as improve comparability.

What the analyst and investor community wants to see is clear, transparent information about the switch and explanations for any changes.

What they don’t want to see is delays in reporting, because as Stephen Cooper, head of valuation and accounts research at UBS Warburg, puts it: ‘It’s never a good thing’.

‘The market isn’t subtle,’ warns Blanchet. ‘It’s sell now and ask questions later.’

Analysts expect to see an explosion of preparatory reports from companies in the coming weeks ahead of the first reporting deadlines in March. What is crystal clear is that however far companies are down the line in preparing for the switch, a nosurprises attitude is the key to a smooth transition. Communication is, at present, the only way forward.