IFRS update October 2005 – The next generation

It seems the bigger
the AIM company, the
more likely it is to switch to IFRS ahead of the January 2007 deadline. But
while some are planning to adopt IFRS in the next few months, others are waiting
until the last possible moment – possibly due to varying year ends. Also, the
larger the company, the more likely it is to see the benefits of the new rules.

Link: Access
IFRS – PwC’s IFRS resource centre

With this is mind, smaller AIM companies are more likely not only to see the
whole thing as a waste of time and money, but are also more inclined to let
others make mistakes. Unlike their larger siblings on the main markets, AIM
companies do not have the comfort of large financial management teams and huge
auditing budgets.

For this reason alone it seems that many are negative about the whole
Martin Andrews, finance director of Accident Express, the £200m credit car
rental business, says: ‘This is a hugely complicated change which should be
attempted sooner rather than later. It is also important that you train people
in-house to make the changes so that the expertise and knowledge stays in the
firm and doesn’t leave with the consultant at the end of the exercise.

‘Like many, we have listed competitors who are already making the IFRS
changes. Unless investors and analysts are well educated and understand what the
changes are going to mean in terms of goodwill, depreciation and gearing levels,
then there are going to be shocks. There will be difficulties in working out all
important cashflow and the share price will also be affected,’ says Andrews.

‘Those that wait until next year are setting themselves up for disaster. We
have already started when in fact because of year end we could wait until 2008.
Nevertheless, those who go early are bound to make mistakes, so any judgements
are subjective and it’s very easy for FDs like myself to be glib about how IFRS
will affect their profits,’ he adds.

Similarly, David Swan, FD of £60m mining company Oriel Resources, says he
feels that there is ‘no point’ in waiting and views IFRS as ‘the way forward’,
especially as his company is quoted in Toronto in Canada, as well as on AIM.
Interestingly, Swan is going against the advice of his auditor, who said the
changes should be delayed.

‘I also felt that next year we would be a lot busier, so getting on with it
while we had spare capacity was part of my decision,’ he says.

This is clear evidence that the personality of an FD as well as the nature of
his or her company also has a place in the IFRS decision making process. Alan
Collins, FD of £12m acquisitive marketing services group Adventis, says: ‘I
didn’t see the point of waiting and with our business strategy it seemed silly
not to take advantage of the preferable way goodwill and intangibles are
recorded with IFRS.

‘I think most AIM companies will wait until the last moment which is going to
make it very difficult to compare like with like. I also went early because I
like to keep up-to-date. The real cost has been time because for months we
haven’t been able to do anything else.’

Robert Stroud, director in assurance at PwC, says that AIM companies have
been showing a greater deal of interest in IFRS as the year has progressed.
However, he advises those companies that want to be seen as listed to adopt as
soon as they can.

‘I don’t think many will go for the December 2005 date but many are looking
at adopting and will do before 2007. But as a lot of analysts may have placed
their models on an IFRS basis, AIM companies that want to achieve greater
comparability with fully-listed companies should consider adopting early.

‘Investors will be becoming increasingly IFRS literate. All AIM companies
should by now have begun to analyse the impact of IFRS as part of progressive
corporate governance,’ adds Stroud.

However, in many ways the early adopters are the exception rather than the
rule. Size, international exposure and growth by acquisition do not figure in
the description of most AIM companies. AIM businesses such as £25m cap software
company Pixology are a good example.

FD Edward Gower-Isaacs says: ‘IFRS is a waste of time for most AIM companies.
While it may well be a good idea for international investors to be able to look
at the accounts of Greek, French, Australian and US companies in the same way,
we, like most AIM companies, do not have international investors and our UK
investors understand the accounting standards we use only too well.

‘Not only is IFRS irrelevant but the standards are fiendishly complicated.
It’s not just trained chartered accountants like me who find it difficult to
make headway through the hundreds of pages but also highly specialised technical
accountants who find it difficult to understand what IFRS is all about. This
adds to the costs of accounting and we are already spending far more for what
will be no discernable benefit.

‘We’re not gong to duck our responsibilities, but we are certainly not going
to go into this early. I’m going to wait and see how other software companies
handle IFRS before I make any substantial move which will be in 2007,’adds

Isaacs’ criticism does not stop there. He also believes that the very
transparency which IFRS sets out to achieve may not be as universal as many
believe. He feels that profits can be smoothed and other accounting tricks can
also be executed under the supposedly new and improved standards. In Issacs’
view this makes the exercise seem even more of a ‘waste of time, money and

Andy Hall, FD of high street slot machine company Talarius, says: ‘Having
just left a quoted company (Blacks) I am delighted to be able to sit back and
see what is going to happen when the fully listed companies go over to the new

‘Having just floated on AIM I have other priorities, though I’ll be looking
to see what effect IFRS would have had on this year’s accounts and I shall
decide when to jump – either in 2006 or 2007.There are pros and cons of going
early and also in waiting. My feeling is it will be good to first digest the
problems and see how changes have affected other companies.

‘Our business is pretty straightforward compared to some of the listed
companies who have had to produce pages of complexities because of IFRS. The
problem of share options, which does affect us, is that they will have a bigger
impact on us internally than on the outside world and how we are viewed. There
will be an issue in having to rewrite banking covenants.’

It seems a view held by many FDs of smaller AIM companies is that IFRS is an
accounting mallet to smash very little.

The future timetable
Ben Thomson is chief executive of Edinburgh-based finance house Noble & Co,
which acts as a broker and sponsor of AIM companies.

Over the last year it has been involved in the flotation of 14 companies on
this market. He argues that the time for discussion on the pros and cons is over
and since everyone is heading in the same direction, the best policy is to get
on with moving over to IFRS.

He says that although companies like his may well strip out some of the
effects in their research, investors will worry that companies who have not made
the switch have something to hide.

He sees three main areas of particular interest and concern:

  • The fact that goodwill can no longer automatically be displaced from the
    balance sheet means that those companies who have and are growing through
    acquisition will be at an advantage.
  • There is a major issue with share options and warrants. While the rules on
    goodwill may enhance a balance sheet, those on options will not. Since the value
    of these will have to accounted for, this will affect the profit and loss
    account. There could well be a scenario where a company does well, tells the
    market, the shares go up and because of that the value of the options rises and
    all the profits are wiped out.
  • Those established companies with pension fund deficits will possibly want to
    delay moving onto IFRS for that reason.

Related article: AIM
companies facing the final countdown! Register for Access IFRS – PwC’s IFRS
resource centre

Related reading

Fiona Westwood of Smith and Williamson.