IFRS update summer 2006 – buried treasure

ifrs special

In association with PwC

In a recent survey published by the prestigious McKinsey Quarterly, 3,000
executives in global corporations were asked what were the biggest
drivers of

Link: Access IFRS –
PwC’s IFRS resource centre

After innovation in products and services, the main motors for the changing
world of business were cited as; the ease of obtaining information, plentiful
supply of mobile capital and the reduction of trade barriers. Those last three
motors are all very much aided and abetted by the recent compulsory
establishment of IFRS.

Whatever over-worked finance directors say or feel, fund managers are
extremely supportive of IFRS with the extra information, transparency and
comparability it provides.

But it has not been an easy process. Many man hours, lost lunches and dinners
have gone into resetting listed companies accounts in a way which will hopefully
level the playing field, ease the flow and cost of capital and generally reduce
the size of the world market place. It is an accepted view that all the hard
work and the suspense of the transition period have been worth it because of
this ‘new improved’ bigger picture. Only time will tell.

But have there been other benefits? Does the establishment of new codes,
practices and ways of seeing things mean that internally the companies have
benefited from a better and more efficient way of seeing themselves?

The conventional wisdom says maybe. Ken Wild, global leader of IFRS at
Deloitte, says: ‘In the end the real benefit of moving over to an international
standard comes from making all local investment markets part of a consistent
global picture. This will bring down the cost of capital. But it is debatable
whether presenting accounts in a different way and highlighting features such as
hedging and pension liabilities make any difference.

‘By and large companies are well run. Many may appreciate some of their
financial details more because they look at them in a different light but at
best that advantage will be minor.

‘The way a company does its figures does not really add to either the flow or
the understanding of management information. That was as true under the old
system which was pretty good, as it is under IFRS,’ says Wild.

Given such meagre benefits no wonder so many financial directors have
resented the whole onerous process.

Even the biggest fans of IFRS admit that no benefit gets near the real bottom
line. The bottom line being that with more understandable information,
understood by more investors in more markets the cost of capital will decline.

If investors are able to put more money into foreign markets without the fear
of the unknown, then the flow of capital will be more efficient and cheaper.
From which, the argument runs, will come better businesses, more wealth and the

Nevertheless Andrew Vials, head of KPMG’s technical accounting group, says
‘many companies belong to larger groups and the fact that those individual
companies will now all have to submit their financial details in one way rather
than in a whole range of general accounting principles means that group accounts
will be easier and cheaper to draw up.’

It is also felt that the whole process of changing accounting methods and
standards has been beneficial in an almost philosophical sense. Looking at many
parts of the financial architecture in a different way, it is argued,could help
companies refresh and renew their disciplines. The whole process could allow
financial departments an opportunity to start looking at their accounting
process with a new vigour.

Change always provides an opportunity to improve but so far only a minority
of financial directors have felt the IFRS exercise has been worthwhile from that
point of view. It may be that they are just putting a brave face on a situation
from which there is no escape.

Typically having financial instruments and share options visible on the
income statement means that they can no longer be hidden. Now IFRS has a more
rigorous, if more painful, method of impairment testing, the whole rough and
ready black art of assessing good will has at last been cleared up.

However, not everyone agrees that the basic benefits of IFRS are guaranteed.
If they aren’t then there will be many red faces in the world accountancy
Patrick Wright, national technical director for the Tenon Group, says: ‘IFRS
will not necessarily be the great panacea for financial accounting
irregularities and inconsistencies. Even the new system allows a degree of
confusing flexibility.

‘Also when it comes to fair value accounting there is a great deal of
judgment and a wide range of different assumptions involved. I don’t believe
these differences will be radical but I don’t believe there will be
international homogeneity either.’

Ironically even a dissenter like Wright feels that over and above the major
prize of cheaper capital there will be benefits from the shift to IFRS.

‘Anything that makes finance directors look at accounting methods with a
fresh eye is worthwhile. Putting value on financial instruments is a case in
point. I think the change has generated better accounting practice. There is
also the problem with the fact that most private companies won’t bother to
comply with IFRS. They will just pick and choose,’ he says.

Tim Harris, partner at PwC’s global capital market group, feels that the
benefits come in two stages. First there is the hard work involved in just
getting the basics done to comply on time, which will enable companies to enter
what he believes will be a better financial world.

But above that, there are three clear benefits. Companies’ finance
departments are finding out whether they have processes which can handle the
extra demands.

Whether they have the systems which can capture and present the extra data in
a clear and robust fashion and most importantly do they have the people who
understand the requirements not just now, but in the future? And that’s not just
in the finance department but in bank lending, treasury and human recourses.
It’s a very different world and it’s challenging.

‘Of course there are mixed views about whether its all been worthwhile but
just remember that many investors were not well served by the old system,’ says
However a recent survey in the magazine Financial Director showed that whatever
brave face accountants are putting on IFRS, FDs are seeing it rather
differently. 65% thought that their accounts were worse under IFRS and only 13%
thought they were better.

According to Ernst &Young the advantages of reporting under IFRS
are simply put.

The adoption of IFRS will bring more transparency and a higher degree of
comparability, both of which benefit investors and are essential to achieving
the goal of an integrated pan-European financial and capital market.

On a macro economic level, the gains to be derived from such a market are
considerable. European companies will have greater access to a deep and liquid
market at lower costs of capital. European consumers will enjoy wider investment
choice and increasing net returns on their investments.

The latter are crucial elements for the development of new businesses in
Also on a lower level, the move to IFRS is beneficial. It presents company
executives with opportunities to challenge the way in which their company is
viewed and evaluated by investors, other key stakeholders, and competitors.

A conversion to IFRS allows companies to:
Re-shape internal management reporting systems to effectively manage financial
accounting and financial statement generation within the new regime, and to
provide essential management information required internally.

Improve the metrics that evaluate company and executive performance,
particularly in terms of increasing shareholder value.

Enhance the communication of the company’s financial results and position –
together with other performance indicators – to analysts, investors, and other
key stakeholders.

Benchmark the company against its global peer group, gaining a broader and
deeper understanding of the company’s relative standing by looking beyond
country and regional benchmarks.

Reduce its cost of capital.

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Fiona Westwood of Smith and Williamson.