Equity analysts are unprepared, poorly informed and unready for changes to international accounting standards, a new report has concluded.
The research, conducted by communications consultancy Citigate Dewe Rogerson in conjunction with Fallon Stewart Limited, suggests that many are not yet trained in the international financial reporting standards, which were introduced this year. The question is, does a lack of preparation among analysts really matter?
Suggestions that analysts might not exactly be up to speed on IFRS are not new. But the research provides fresh evidence of this. Only two investment banks have provided a ‘house view’ for their analysts on the treatment of IFRS in forecast models, the report claims, although it does not name them.
Three quarters of investment banks surveyed have not offered their analysts any formal training. Half have not made any changes to their forecast models for companies, while a further 23% have only made partial changes.
The new standards came in on 1 January with their real impact to be felt shortly, when companies restate their accounts for previous years.
National Grid Transco provided an example of the changes it might experience last week. The company said that, if IFRS had been in force last year, profits at the UK gas and electricity network owner would have been £1.935bn – 39% higher than those it recorded under UK GAAP reporting rules.
The changes came about as a result of the way the company capitalised maintenance spending on its gas network and then depreciated it, rather than charging the expenditure to its profit and loss account.
The company’s shares rose by 1.5% as a result of the changes.
Northern Rock, by contrast, saw its share price drop off by 23p after it announced in January that the new standards would cut its 2004 earnings per share by 10 to 12%.
Changes to share prices suggest the company’s valuations have changed. But surely these are simply just two ways of looking at the same company?
Angelos Anastasiou, an analyst with Williams de Broe, perhaps put it best when commenting on National Grid’s results. ‘The new accounting measures do not change the fundamentals of the business, but it’s good for sentiment.’
Is there anything more to such shocks than sentiment? Does it fundamentally affect assessment of company value? Citigate thinks there might be something to doomsayers’ arguments.
There is potential for large variations in earnings forecasts, as some analysts work to updated models and others use older formats, it says, and the lack of preparedness may also affect macro data offered by investment banks.
But will these issues not disappear once analysts get used to the new accounting methods?
Kate Delahunty, co-author of the report, says many analysts take a laid-back attitude to the standards. ‘Many take the view that the changes will not have much affect on the overall performance of the business.’
The problems may also be more long-term, in that AIM companies do not come into line until 2007.
‘A twin-track approach to valuation could emerge until smaller company accounting policies have caught p with their larger cap counterparts,’ says Delahunty.
Allister Wilson, partner at Ernst & Young in charge of reporting changes, thinks analysts will have to get up to speed in the future, ‘Otherwise I am not sure how they can make sensible investment decisions,’ he says.
Nor, he says, are the IFRS changes a short-term problem for analysts. Changes to the way things like pension liabilities are accounted for will also provide headaches down the line.
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