Business is not a place for those that like to stand still. Just as mid-cap companies get to grips with IFRS convergence a whole new set of challenges are snapping at their heels. In the next few months the initial impact of IFRS on FTSE250 companies will be revealed as December year-end businesses begin to report their interim results.
Analysts are predicting a mixed picture, with both positive and negative impacts, but their advice remains firm; warm up the market with clear, quantitative communication. Companies have a huge degree of flexibility about how, when and in what detail they communicate with the markets, around, of course, their regulated interim and year end accounts.
There are a number of options available to mid caps, depending on their type of business, their approach and of course their preparedness. The basic approach is to publish 2004 financial statements highlighting the changes expected under IFRS.
Following that, companies can provide more quantifiable information highlighting, for example, changes in profit and to share based compensation schemes, even estimating what those changes are likely to be.
Companies can also choose to reveal the overall impact, detailing how IFRS will affect the various elements of a business. Companies can use two or even three of the options available, phasing in the changes and potential impact on the market over time.
The major FTSE100 companies have issued overall impact statements, and most have been received favourably by the market.
Mid caps taking a more cautious approach, or those still struggling with IFRS internally, should be aware that scant statements are not sitting well with a market still inexperienced in the ways of the new standards. Lack of information and poor communication will do little for share prices or investors. ‘Companies that come out with bland statements will not convince markets,’ warns Carolyn Clarke, senior manager of PwC’s IFRS convergence group.
In fact, the Financial Services Authority recently issued guidance encouraging businesses to disclose ‘as soon as the impact on their 2004 financial statements can be quantified’. It urges that such disclosures should be full and should not include attempts to ‘mislead’ on any negative impacts.
It also warns that quantitative information on 2004 performance should be released no later than the publication of 2005 interim results.
The timetable is undeniably tight for year-end December businesses, but for those still behind schedule all is not lost. ‘There is still time. But companies need to be aware that if they don’t make communication sooner rather than later, share prices could well be hit because the market is still unaware of the impact if IFRS,’ warns Hazel Powling, head of IFRS at the ICAEW.
Companies should now be concentrating on planning their communication and how it will be released. They must give as much detail as possible and be clear that cashflows are not necessarily changing but accounting procedures are.
They must chart how they got from UK GAAP to IFRS and what the future path will be under new accounting standards. This includes market sensitive information, which should be disclosed as soon as it comes to light.
‘Companies should go out of their way to explain the impact so there are no misunderstandings,’ says John Pierce, chief executive of the Quoted Companies Alliance.
Crucially, mid caps should also be concentrating on making certain their information is correct and robust, as having to readjust later could also have a negative impact on a company’s standing.
‘Our advice is that companies need to be confident that information is accurate when they put it out to the markets. The message is – don’t communicate information that could be wrong. However, if companies have got the numbers together then they should be putting them out as soon as possible,’ says PwC’s Clarke.
Mid caps should also be aware that as soon as more IFRS disclosures hit the market, analysts and investors will become sophisticated very quickly and will be less forgiving to those who lag behind or communicate poorly.
‘When significant numbers start to report, the spotlight will turn to those who haven’t, so there is no advantage in being a laggard,’ advises Richard Martin, head of financial reporting at ACCA.
Communication isn’t the only challenge facing mid caps in the coming months; embedding IFRS and continuing to train staff is an ongoing process.
The breadth of IFRS will undoubtedly impact on business decisions, from performance criteria for remuneration schemes to share-based payment schemes for employees.
Companies should have IFRS compliant systems and processes to be able to produce reliable and accurate information to the market on an ongoing basis.
Knowledge of IFRS should also be fed through organisations and should no longer be the preserve of the finance director alone.
Every aspect of an organisation, from non-executive directors, executives, human resources, managers of business units, even employees, all need some knowledge and understanding of IFRS. ‘If companies don’t have a proper understanding throughout the business there may be gaps,’ says Clarke.
There is undoubtedly a steep learning curve with IFRS. Those that seize the opportunity and help set the pace will benefit in this new and fast moving world of accounting standards.
EMBEDDING IFRS INTO YOUR COMPANY
Here, IFRS could prove to be a useful ‘wake-up call’, Carolyn Clarke of PwC says. Along with ensuring systems are IFRS compliant, mid caps could also use this as an opportunity to review their effectiveness and perhaps automate them more effectively.
Companies will also need to develop a wide-ranging and continuous training strategy. Mid caps should now begin to expand IFRS expertise out of traditional areas of convergence into all levels of the organisation. The message from the top should be clear: IFRS affects business decisions and must be fed into all systems at all levels.
Senior executives and non-executive directors will need to develop a clear understanding of current reporting standards, but this must not stand still.
New standards are constantly being issued and knowledge must be updated. Senior managers also need to be aware that IFRS does not affect just performance figures, they impact on bonus schemes, debt and tax liabilities.
While finance directors and senior executives must be suitably trained, don’t leave IFRS expertise with the lone finance officer – the entire organisation needs to take ownership of it.
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