Vodafone expects IFRS to have the potentially radical effect of finally ending the company’s huge losses on paper, because it will no longer have to book goodwill against its profit and loss account.
International financial reporting standards have abolished the booking of goodwill and instead introduce a regime of annual impairment testing that need not lead to massive hits against the bottom line. Vodafone will today reveal to the markets the effects of IFRS on its accounts, ahead of reporting in March this year.
For the last two years, Vodafone has booked huge goodwill charges that have resulted in record losses of £9.8bn for 2003, and £9bn in 2004. The goodwill charge for 2003, mostly in relation to the acquisition of Mannesman, stood at £14bn, while the charge in 2004 amounted to £15.2bn. Last year’s loss came despite revenues rising to £33.5bn.
A statement in Vodafone’s 2004 annual report made it clear that the goodwill charge will affect the company’s core business activities. It said: ‘Goodwill amortisation represents a non-cash charge therefore does not affect the group’s cash flows and ability to pay dividends.’
Total dividend payout for 2004 was £1.3bn or 2.03p per ordinary share.
While some of the effects of IFRS will amount to no more than minor changes, the end of goodwill will be a revolution on paper.
The change came about as a result of IFRS1, which removes the goodwill regime in favour of impairment testing. Though the charge is likely to reduce losses in Vodafone’s case, the new rules will mean much greater transparency for many companies with many more intangible assets revealed to the full glare of shareholder scrutiny. Each new intangible asset will need to go through the same impairment testing on an annual basis.
Some analysts expect Vodafone results to be hit by IFRS in other areas including new rules on the consolidation of overseas assets.
Other large companies have already revealed the impact of IFRS including AstraZeneca whose finance director, Jon Symonds, revealed that the new standards would reduce operating profits on the 2003 results by £56m.
Vodafone has already spoken to shareholders and analysts regarding the effects it expects IFRS to have on results. The telecoms company will provide IFRS results for the year ending 31 March 2006 and will provide one year of comparative data.
However, it does expect other areas to be particularly affected by the switch in addition to the goodwill issue. These include scope of consolidation, business combinations, intangible assets, financial instruments, share based payments, pensions and deferred taxes.
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