IFRS update summer 2006 - prepare to launch

In association with PwC

If ever there was a good time to
pursue an IPO,
this year is it. Markets are buoyant and investors are eager to invest in new
companies. Research shows that, last year, the number of IPOs in Europe grew by
39% from 433 to 603 and raised €51bn (£34.7bn).

Link: Access IFRS –
PwC’s IFRS resource centre

Businesses should be aware, however, that as good as conditions for an IPO
are at the moment, floating a company is never an easy task and the introduction
of IFRS has made the task that little bit more complex.

The new accounting standards currently apply to listed companies only. A
private company that is pursuing a listing and has not applied the new
standards, therefore, will need to make the change to IFRS reporting ahead of a
market flotation.

Richard Metcalfe, corporate finance partner at Mazars, said companies
preparing for market will not only have to prepare their latest set of accounts
in IFRS, but will also have to go back and restate the accounts of prior years
in order to provide a comparative set of figures for investors from earlier
trading periods.

Companies have the option of presenting some of the earlier sets of accounts
in UK GAAP, but Metcalfe said that, generally, companies would be better off
preparing all accounts from prior years in IFRS.

‘Companies need to gear themselves up to meet the needs of institutional
investors. Presenting some accounts in UK GAAP and others in IFRS creates a
disjointed trading record and is not good for marketing purposes,’ said
Metcalfe.

Restatements, however, are not the only documents that will need to be
prepared under IFRS. Financial valuations, forecasts, budgets and other related
data all have to be calculated using the international standards.

According to a research paper compiled by PwC and the European Venture
Capital Association, ‘investors require IFRS for their reporting purposes’.
Companies need to be prepared for these information needs and have all the
relevant data available in an IFRS format.

This, of course, poses its own challenges for private company executives who
are used to working with UK GAAP figures. The fair value model of IFRS means
that boards will have to grow accustomed to using new valuation models.

In many cases, companies that are already listed are still coming to grips
with what valuation models to use, as no standardised methods have been
finalised. It is a tricky area that needs to be managed carefully.

Charles Silcock, partner in transaction services at PwC, said FDs who were
used to working in UK GAAP needed to be aware of the challenges posed by this
reporting shift.

‘IFRS information is complicated, requires a lot of hard work and involves a
lot of detail. For an FD who has been working for a private company for a number
of years the shift is not always a comfortable one, because it is a move into
the unknown,’ said Silcock.

According to Silcock, implementing this accounting overhaul needs to flow
right through finance function. Everything from internal controls to reporting
structures will need to be adjusted to handle the new numbers that will emerge
in IFRS accounts.

‘FDs need to be aware of the how the changing accounting framework affects
their numbers. When their company is trading publicly they will have to look at
the IFRS profit figures and know whether everything is on track or whether they
need to do something like issue a profit warning,’ Silcock said.

Handling this level of detail and implementing such a wide range of changes
to reporting structures inevitably affects the time scale of preparing for a
float.
‘An FD needs to communicate clearly what the time scale for implementing IFRS
is. Advisers and management might want to move into a float quickly, but IFRS
does have an impact on the timetable and needs to be managed realistically,’ s
aid Silcock.

Managing this process will be particularly challenging for smaller companies
that typically favour a listing on the highly flourishing AIM market instead of
the London Stock Exchange’s more tightly regulated main market.

Last year, AIM was so successful that it accounted for more than half (52%)
of the new listings in Europe. The junior market admitted 519 new companies and
raised more than £6.4bn of new capital as young, high-growth companies rushed to
its boards to take advantage of the markets’ flexible regulatory model.

Unlike their peers on the main board, AIM companies were able to avoid the
regulatory burden of IFRS. This benefit was available again in 2006, but from
next year all companies listed or floating on AIM will have to report under
IFRS.

Companies planning a 2007 float on AIM will need to provide IFRS accounts and
restate numbers from prior trading periods.

Silcock said the issues for smaller companies would be the same as those
facing large corporates, but warned that adopting IFRS could place an extra
strain on the limited pool of resources available at young companies.

‘The exercise of transitioning to IFRS for a small company can place a strain
on resources as there is not the same number of staff available to share the
burden. But the other issues are the same,’ said Silcock.

Adapting to life under IFRS for a private company does not end, however, when
valuation data has been calculated and accounts restated. The implications of
the standards are far reaching and one of the most important areas newly-listed
companies need to be aware of is the impact on banking covenants.

The introduction of IFRS can have serious implications for lending rules, as
reported income and debts change when presented under the new standards. In some
cases, these changes can cause a mistaken breach of covenant rules, an issue
that private companies have not had to address when reporting on a UK GAAP
basis.

The issue cannot be avoided if a company is coming to market, and businesses
in this position will need to be aware of how IFRS impacts their banking
covenants. Until now, listed companies have managed the issue by calculating
their covenants on a frozen UK GAAP basis, but this method will not be
sustainable going forward.

Ian Fleming, the treasurer of recently floated department store Debenhams,
said all companies reporting under IFRS needed to sit down with their banks and
talk through what their covenant rules would be under IFRS.

‘It is a tricky issue that needs to be handled carefully. Companies need to
sit down with their banks and carefully work through what the impacts are,’
Fleming said.

Silcock advised companies preparing to float to arrange a degree of
flexibility in their covenants when making the leap to IFRS, so that they would
not be forced into an unnecessary covenant breach.

Link: For the latest news and analysis on IFRS, updated
every week, register for Access IFRS –
PwC’s IFRS resource
centre.