Link: Communicating IFRS
While companies have been grappling with their IFRS conversion processes for some time, the communications stage of the task has only more recently become an area of activity. Many companies still have much work to do in this area.
A recent PricewaterhouseCoopers research report, IFRS – Ready for take-off?, found that of 266 European companies surveyed, 96% had not communicated with the markets about the likely impact of IFRS on their business. Only 4% had released any ‘broad picture’ IFRS communications to the markets, while the disclosures that had been made were often of very limited scope.
The largest companies were typically ahead of the mid-sized and smaller businesses. While the survey covered companies across Europe, the results were broadly reflective of the position in the UK.
The latest snapshot from an ongoing PwC exercise to consider the nature and extent of IFRS communications by the FTSE100 found that, by the end of the year, one-third of the companies had yet to provide an analysis as to the nature or quantification of the differences between their UK GAAP accounts and their IFRS equivalents (see below).
While the remaining two-thirds had published information on the key areas of IFRS that impact their accounting policies, just three had released full quantitative financial reconciliations.
This may suggest that communication is not a high priority for companies, but this is far from the case. Effective communication of the impact of IFRS, and even of the expected timetable for future IFRS announcements, is essential for maintaining the good opinion of investors and other stakeholders.
Uncertainty still remains in the capital markets and analyst community as to the impact that IFRS adoption will have on reported figures. Companies must take control of the process of informing interested parties about what the accounting change will mean to them.
Adept handling of the IFRS conversion process will boost investor confidence. Conversely, where companies mismanage the process, the capital markets could take an unfavourable view.
Jeannot Blanchet, equity analyst at Morgan Stanley, recently warned: ‘If mid and small caps are not focused on IFRS, they’re going to have a problem. Reporting delays will often lead to a negative market reaction.’
It is vital that companies meet the communications commitments they make. For example, recognising the challenges that companies may face when producing their first IFRS-based interim accounts, the Financial Services Authority has allowed companies an extra month?s reporting grace.
Companies that announce now that they plan to take advantage of this extension should expect minimal or no adverse effects. However, the markets are likely to be more concerned about a company that indicates it will not use the extra time, but then finds that it needs to.
Effective communication is not just about what and when you make information available, but about being able to evaluate your company’s capability to release reliable information at predicted dates.
Such internal clarity and external reliability is perhaps more important than the precise timing and content of what is said. However, the internal evaluation of the impact of IFRS and the development of the communications strategy cannot be conducted in isolation, but should take into account the actions of other companies.
The development of the communication plan also needs to take into account the three potential levels at which IFRS information will typically be released. First, most companies will aim to give some form of IFRS information after they have published their final 2004 accounts, but before getting to their 2005 interims.
For many, this will take the form of some restatement of the prior year profit and loss account and balance sheet. The precise detail of what companies release and how they release information is up to them.
At the second level, information released in the interim accounts will need to meet deadline and content requirements. Though interims are unaudited, they must be prepared with the utmost care.
In particular, companies that have not yet embedded IFRS into their core systems are at greater risk of financial reporting difficulties. Companies need to establish how they will manage this risk, as well as the associated risks of communicating interim figures to the market.
Third, the final year-end release and audited accounts will complete the communications process for the first year under IFRS. Here there are new issues to be considered.
The final accounts will typically include greater disclosures than were previously required under UK GAAP, for example, in terms of derivatives and segmental analyses. The communications plan must take into account the impact of such disclosures on all those potentially affected.
While the timing of interim and year-end accounts is governed by regulation, the timing of other IFRS announcements is up to each company. As PricewaterhouseCoopers research has shown, many companies have been taking a cautious approach.
But is it better to lead the field in terms of making early announcements, or to follow, and benefit from the hindsight of what others have done? There is no right or wrong answer, particularly given that there are some IFRS areas where consensus has not yet been reached on exactly how they should be implemented.
Moving early may give the chance to influence accepted practice, but it could also increase the risk of having to revise the approach later. Each company must consider its own position, based on a realistic analysis of its ability to report accurate information.
Given the potential upsides from good communication and potential downsides from getting it wrong, analysts and investors are perhaps top of the stakeholder priority list in terms of planning the communications strategy.
However, the needs of other interested parties should not be overlooked. Where companies have issued debt or bank loans, talks will need to be held with those banks and others lenders about the IFRS impact and as to whether new terms need to be agreed.
Any regulated business will need to consider any impact that IFRS may have on the regulatory scrutiny it is subject to. Companies regulated by the FSA are an obvious group, but regulated industries, such as telecoms and utilities, should consider any potential IFRS affects.
Internally, employees in companies where compensation is earnings-related will want to know how their interests could be affected. All these matters deserve careful consideration when determining the complete IFRS communications plan.
Ian Dilks is partner responsible for IFRS conversion services at PricewaterhouseCoopers.
FTSE100 companies’ market communication
Companies that have already released:
- full quantitative financial reconciliations – 3
- quantitative information in the form of analyst presentations or other reports – 5
No quantification, but info on expected impact areas:
- communications schedule – 21
- no communications schedule – 38
- no analysis of nature of IFRS impact or quantification – 33*
*Of these 33 companies, 18 have given positive assurances of IFRS compliance in 2005 or indicated when their first IFRS accounts will be published and seven have given an IFRS communications schedule.
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