Casino’s gamble on IAS39 pays off

Hundreds of column inches have been dedicated to the new international accounting standard for derivatives and hedges, which is not surprising given the ongoing battle between Charlie McCreevy and Paul Volcker. Companies, too, have expressed their apprehension and uncertainty about the impact of IAS39.

So it came as something of a surprise for market watchers when French food retailer Casino decided to voluntarily adopt the topical new standard a year earlier than planned.

But why did Casino, which saw its net profit for 2004 increase from e488m (£331m) to e537m after restating under IFRS, decide to move so assertively to include the impacts of IAS32 and 39, when several of its peers have approached the same standard with such caution?

According to a Morgan Stanley equity research team, it is simply a case of keeping investors informed and avoiding any shocks. ‘The fact that Casino adopted IAS32/39 one year ahead of plan may highlight that the company is aware that its off-balance-sheet options are seen as complex by investors,’ argued the Morgan Stanley team members in a research note. According to the team, the market was expecting IFRS to impact negatively on Casino.

But, by disclosing the impacts of the standards ahead of schedule, the business was able to quell any negative speculation about the accounting change. It is a practice that analysts have encouraged companies to follow, particularly when it comes to financial instruments.

‘IAS39 increases disclosures but the rules are complex and the outputs are not always easy to understand,’ Cazenove’s Peter Elwin says. ‘Unless companies explain the impact and the disclosures carefully, sentiment could be negatively affected. Companies need to get on with it and step up the level of explanation rather than putting off the evil day.’

But while analysts will welcome Casino’s proactive approach to the standards, they will also note that the company helped to offset the negative impacts of the IFRS switch by making other financial changes.

Described by the Morgan Stanley analysts as ‘tactical financial choices’ that ‘enabled the company to neutralise the negative IFRS impacts’, Casino increased the depreciation period for its buildings from 20 years to 40 years and revalued its land.

The depreciation change, which is not an IFRS requirement, added e24m to net profit for 2004 and cut depreciation costs by e32m. Casino is also the first retailer to date to have revalued its land, which has increased equity by e279m since the IFRS came into force.

The changes, along with the IFRS restatements, had no effect on the Morgan Stanley investment view on Casino. But the restated IFRS figures, combined with the changes to depreciation dates and land values, have illustrated the value of early disclosures as well as the importance of watching other changes that companies make to neutralise any negative swings in their figures.

Will others follow suit?

Related reading

PwC office 2