It is still early days, the bank said, but it told investors to take comfort that ‘these first disclosers are on top of their game, and should continue to manage the transition smoothly’.
And it added: ‘We expect many more companies to come out with substantive communications in the first three months of 2005.
‘Investors should not get lulled into a false sense of security by these ‘best in class’ disclosures; they highlight that the real probing work can now begin and that most companies are still silent.’
Before Christmas, the analysts had reminded companies and investors to stay alery throughout the transition and it highlighted the ten most important areas for investors to consider when getting to grips with the new standards.
1 Companies will be late, investors are not ready, and auditors are nervous. Of course, we are not talking about all companies and all investors. But we think there are enough in both categories that have not prepared well for 2005 to cause concern. The key is to find out what a company’s communication plan and timetable is – and whether it is sticking to it.
2 Price volatility anyone? As with any big change, it is likely to be chaotic, some companies will surprise us negatively, and others will confuse us with numbers and metrics looking very different from historical ones. Investors are likely to struggle for a while deciphering what is pure accounting noise versus new information relevant for valuation purposes.
3 Jump onto the earnings rollercoaster ride. There is one thing we are absolutely sure about IFRS: reported earnings will be more volatile than what we have been accustomed to in Europe. This is due to a combination of more current value measures in IFRS financial statements and fewer tools to ‘manage’ earnings, for example, less possibility to use provisions to smooth earnings over a number of periods. Sectors that we think are particularly at risk are financial institutions, telecoms and utilities.
4 It’s accounting, yes, but also behavioural science. We have been saying for over a year that IFRS 2005 is not only about accounting numbers changing. If the rules change, companies will change their behaviour to manage under the new rules. AstraZeneca CFO Jonathan Symonds has already discussed the impact of IFRS, and mentioned that it will force the company to reconsider the use of stock options and the way it hedges foreign currency exposure. We believe many others will make similar comments.
5 The smallest are the riskiest. Mid and small caps will be relatively more affected by the switch than large caps. This will be true in terms of sheer size of differences in key financial performance indicators, but also the amount of additional disclosures IFRS will bring. Also, the mid and small cap population offers a much higher potential for unsettling investors with delays in transition and announcement surprises.
6 Mind the GAAP. Companies from different countries are starting from a different reporting basis and this should have two short-term consequences. Firstly the difference between current reported and IFRS numbers will be more or less pronounced, and secondly they will not all get to the same comparable IFRS starting point, because where you come from will affect the choices companies make in applying general IFRS principles.
7 Don’t worry about dividends. Maybe. IFRS will not have an immediate impact on the distributable reserves of individual companies, which are the ones that matter for purposes of dividend distributions and share buybacks. However, sooner or later IFRS will also be applied at the individual company level and will therefore affect distributable reserves.
8 Welcome to a festival of definitions. In trying to guide us through what will inevitably be a messy transition period, companies will use a wide variety of headline numbers and metrics, some familiar and some more original: operating income, operating income pre-goodwill, operating income pre-goodwill and pre-intangibles etc. The number of possible permutations in pro forma amounts is likely to be impressive.
9 Please do adjust your screens. When your analytical techniques depend to a great extent on a long time series of consistent, historical data, any significant and abrupt change to the basis in which the numbers are set can be disturbing. There is no easy solution here. It means using more ratios and metrics for a while to spot anomalies and get better insights.
10 Pack a lunch, we’re in this for at least three years. We believe it will take at least three years before we see the benefits of IFRS emerging – more information, more transparency, and better comparability between companies, sectors and countries. In our view, it will take at least that much time before consistent application of the new rules becomes a given, and for investors to be fully fluent with IFRS.
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