The seminal date in this year's accountancy calendar - 1 January 2005 - came and went without great fanfare or ceremony. There were no company announcements predicting dire losses before or since the deadline to switch to international financial reporting standards.
Link: Detailed Weekly Analysis of IFRS
And yet the general mood is of anticipation laced with trepidation ahead of the publication in March of the first round of restated company accounts under IFRS.
Perhaps this is the key to the sense of worry that many analysts and investors are feeling – the lack of disclosure on IFRS. The largest British listed companies are prepared and ready to apply the new accounting rules, agree most observers.
Yet the companies that have released IFRS figures into the public domain are noticeable for their relatively small number.
Stephen Cooper, head of valuation and accounts research at UBS Warburg, says: ‘Most of the large companies are well prepared. Some companies such as Barclays have given briefings but the vast majority haven’t said anything yet.’
Jeannot Blanchet, IFRS expert at Morgan Stanley, backs this up. ‘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.’
Although Blanchet is confident that the number of companies disclosing information on IFRS is picking up pace, he points out how late in the day it is; and that information is ‘mostly qualitative and not quantitative’.
For companies, however, the switch-over has been something of a double-edged sword. They were working to a moving target as the rules were still being finalised right up until the last minute.
Despite the current lack of fanfare, no one expects the transition to pass off without a hitch. Confusion is expected, not just in the coming months but for the next two to three years, as analysts, investors and companies grapple with what the new figures mean.
‘What we’re expecting to see is some confusion. We will see different things that aren’t going to be a model of clarity,’ predicts Blanchet.
Arguably, none of the affected parties – investors, analysts or companies – is wholly ready for the biggest change in accounting for a generation.
Ian Dilks, partner responsible for IFRS conversion services at PricewaterhouseCoopers in the UK, attributes some of this nonchalance in the UK ‘to the perception that IFRS wasn’t that different from UK GAAP’.
‘That’s correct’ says Dilks. ‘But the differences are greater than anticipated. We’ve yet to meet a client who said it’s easier than they thought.’
Now the scramble to communicate is on. ‘We’re bracing ourselves for tough times,’ confides Blanchet.
Indeed, the latest research into how well prepared the analyst community is for the changes reveals that only 11% of investment analysts polled had been briefed by most of the companies they track.
A significant 47% of analysts have not had any briefings on how IFRS will affect the financial information companies report, according to a study by accountants KPMG in November.
In their defence, companies have been caught up in a vicious circle, with analysts’ knowledge dependent on companies making the information available.’There’s been some discussion about a lack of preparedness among analysts, but lots of companies haven’t been forthcoming with their figures,’ says Cooper.
Ultimately it’s the companies that will pay the highest price for inconsistencies in reporting under IFRS. Failure to present clear, transparent explanations about the changes will result in short-term price volatility, warn analysts. ‘We want to know what changes will have a recurring impact or just a transitional one. There will be negative surprises and investors won’t understand why,’ says Blanchet.
Dilks adds: ‘The biggest risk for companies has got to be harming the investing community’s confidence in management.’
Analysts are also expecting delays in reporting. ‘If it happens then people will sell first and ask questions later,’ says Cooper.
But it isn’t just short-term volatility that companies have to worry about. If they get the figures wrong or delay reporting, then Blanchet says it might not just be in the short-term that their share price is affected.
‘If the numbers show a very different picture from what we understand, that will affect a company’s long-term valuation. This will greatly affect their cost of capital in the long-term,’ he warns.
But the benefits, says Dilks, are broad and far-reaching. IFRS will provide improved comparability and consistency, and arguably better quality standards.
As convergence between IFRS and US GAAP gathers pace, there will be less need to reconcile accounts in foreign listings and therefore a reduced need to invest time, effort and resources in routine accounts production.
Despite the huge learning curve, struggle for more disclosure and general anxiety, analysts are positive about the changes that IFRS will bring in the future.
Nevertheless for the time being they are sitting tight and waiting to be inundated with disclosures.
Best in class: British companies that have held analyst/investor briefings
AstraZeneca led the way on IFRS back in October, becoming the first UK listed company to provide details of its impact. The drugs giant restated its 2003 results under IFRS, resulting in a $104m (pounds 56m) reduction in operating profit. Jonathan Symonds, chief financial officer of AstraZeneca, stuck his head above the parapet and released the figures ‘to enable shareholders and the financial community to make comparisons when the new IAS/IFRS guidance is fully introduced from 1 January 2005’.
Barclays became the first UK commercial bank in December to brief analysts and investors on how IFRS would impact on its numbers. The bank said its balance sheet and equity would suffer the biggest impact from the switch, but said there would be ‘minimal impact’ on profits. Under IFRS Barclays’ profit before tax would be reduced by pounds 125m. Profit before tax for 2003 was pounds 3.85bn.
In November, Vodafone used the announcement of the mobile phone operator’s interim results to give analysts and investors an update on its IFRS approach although it failed to provide any great detail. The company said it was committed to using the full version of the controversial standard IAS39, despite the Europe Commission’s decision to back only a carved-up version. IFRS will apply for the first time in the group’s accounts for the year ended 31 March 2006.
Lloyds TSB group told investors and analysts in December that the overall impact of applying IFRS would reduce group earnings by less than 5%, in line with its peers. But the forecast was made ‘excluding the effects of derivative and equity valuations introduced with IAS39’, because ‘we can’t predict market volatility’, the bank said.
Link: PwC’s IFRS Resource Centre