While the accountancy profession has got itself into something of Y2K-type lather over IFRS, those they serve and who run companies are far more sanguine. They like the idea that there is going to be one standard for all, and feel that whatever burdens there may be in providing extra information are a one-off hit.
They do not see analysts being too bothered either way, and in most cases they do not see the changes as being particularly dramatic. One compared the hyped-up panic to 30 years ago when it was suggested that on joining the EU anyone who couldn’t speak French would be at a disadvantage.
However, where there are changes, they feel that in marking for market there will be times with foreign exchange exposures, and stock options that involve many companies, where they may well have to change the way they do business. The idea that an accounting standard should change and dominate the way someone runs their business feels intuitively wrong.
Mark Silver, CEO of AIM-quoted Inspicio, an inspection and testing company, who has previously run a quoted company in Germany, says: ‘I don’t see a great deal of difference in the new regime, but I am used to it. This may be something of a big deal for accountants and financial institutions, but for most companies I think we take what we read (on IFRS) as a lot of hype.
‘However, I am worried about how my hedging strategy will have to be rewritten under the new rules and don’t think the way I run and plan my business should be dictated by accountancy standards. Nevertheless, the fact that we are internationally all moving onto common standards has got to be a big positive.’
Gary Downey is the FD of AIM-listed Augean, a burgeoning conglomerate in the hazardous waste business. He too feels that when he goes on the full market, implementing the new standards may mean having to change some of the ways he does business. But on the vexed subject of whether the analysts will understand his new numbers, he has few fears.
‘Analysts are very bright people, they look at accounts in extraordinary depth,’ he says. ‘However, they are not nearly as interested in the method of accounting as what the underlying trends of the business are. They are interested in cash and assets, the rest they ignore.
‘They are much more interested in what is going to happen than the history. There may be some confusion and surprise in the new way of presenting the figures, but if there is a problem it’s very much up to the companies to explain to the market. It’s up to me.’
Downey points out that while the accountancy profession has for years been excited about the issue of the amortising of goodwill, it’s not something that worries analysts. And as for any new rules changing his strategic plan of acquisitions to enhance shareholder value, he says: ‘I don’t see the new rules changing my basic moves one way or another.’
Of course, different companies in different phases of their development will view any regime differently. Robert Boardman is the FD of fully-quoted intellectual property company Stenelco. He sees his problem with IFRS as being related to the fact that since the company is only just producing revenue streams, his high research and development expenditure could lead to a distortion of his accounts.
He says: ‘At our stage, stock options are the only way we can attract people, and the new rules will not help. Nevertheless, in the long run I am a fan of these changes. I think having standard accounts will mean there is more money coming into investment. But in our case our profits will be more lumpy – we will not be able to smooth major events over several years.’
As for confusion and a degree of anarchy among analysts, Boardman feels that an analyst’s job will always be to get behind the numbers and it’s up to FDs to explain what the figures mean.
Ian Dilks, IFRS conversion group leader with PwC, says: ‘There has been an element of scaremongering, which we don’t subscribe to. Nevertheless, among the companies that have reported under IFRS there have been some significant share movements both up and down, which suggest the market was not always prepared for the new disclosures and transparencies.
‘It is early days, but less than half the FTSE100 companies have presented the market with quantified information and among the smaller caps it’s as low as 10%. We would have expected more response.’
WHAT THE ANALYSTS SAY
Research by PwC into European insurance analysts’ view of IFRS showed that:
- 80% felt the changes would improve financial reporting, if only marginally
- 90% felt the new disclosures would be helpful
- 70% felt it would be at least 2009 before a solution to the practicality of European Embedded Value was agreed
- 15% felt such a solution would never happen
In a previous survey in 2004, 60% of insurance analysts felt the existing reporting standards were poor. Elsewhere, in a survey of 12 leading investment banks, it was found that the majority of analysts are being left to themselves to decide how IFRS should affect their approach to company valuation. The research, undertaken by Citigate Dewe Rogerson and Fallon Stewart, pointed out that this piecemeal approach could lead to market volatility.
Three-quarters of those surveyed have offered their analysts no formal training on the adoption of IFRS, half have not made changes to their forecast models, while 23% have only made partial changes. A third of analysts have received no communication from companies on the implications of IFRS and less than one in five analysts stated that companies had provided sufficient data.
All agreed that the balance sheet and profit and loss account would be the area most affected by IFRS. Half stated that they would not be changing their valuation methods even though many responses highlighted potential impact on EV ratios, sum of the parts analysis and dividend payments.
In the absence of widespread guidance there is a potential for large variations in earnings forecasts. Analysts have only partly reconciled their models to IFRS, so investment banks’ macro models could be affected detrimentally in their forecasts of overall growth rates.
New treatments of pension fund positions and finance leases could create problems for companies valued using enterprise value ratios.
Phased adoption for small cap companies will lead to a twin-track approach to valuation, which could lead to a lack of small cap consensus estimates.
IFRS is likely to increase the emphasis on cashflow. Analysts’ cashflow forecasts have a wider range than those for P&L or balance sheet models. This could widen consensus ranges.
In terms of which companies have communicated what their new figures will mean to the market, PwC research shows that by 19 April among FTSE100 companies:
- Full quantitative financial reconciliations: 20 (six audited, 14 unaudited)
- Quantitative information in the form of analyst presentations: 23 (or other reports)
- No quantification but info on expected impact areas: 47 (37 with comms schedule, 10 without comms schedule)
- No analysis of impact or quantification: 10*
*Of these 10 companies, seven have given positive assurances of compliance, the date on which they expect to publish their first IFRS accounts, or a communications schedule.
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