The week in finance

Banking giant HSBC has joined the backlash by listed companies against controversial standards IAS32 and IAS39, by announcing its intention to use the exemption in IFRS1 on ‘first-time adoption of IFRS’ to avoid presenting comparative information.

The get-out clause will be used by a number of banks when the new standards are introduced on 1 January 2005. However, HSBC’s decision to join those dissatisfied with the implications of IAS39 will be a further blow to International Accounting Standards Board chairman Sir David Tweedie, who coordinated the standard’s creation.

HSBC refused to supply detailed figures of how IFRS would affect the whole business, but a spokesman said the bank would be announcing a complete restatement in May 2005 in line with the new standards.

Douglas Flint, finance director of HSBC, said he expected there to be a ‘negligible’ impact on the bank’s balance sheet and reported earnings, but added that the elimination of goodwill would be a ‘large number’.

In a comprehensive statement, the bank said the biggest impact of the rules would relate to bad-debt provisions. This is where changes in goodwill amortisation mean it would have to take larger impairment charges than under current accounting rules in the event of a default.

HSBC also highlighted a number of other IFRS rules as potentially having a ‘medium impact’ on the business. These included changes in the accounting for pension schemes and employee share options, and changes to finance leases – where earnings would be allocated to later years owing to the impact of tax allowances.

HSBC said it had enjoyed a ‘solid’ third quarter, but that the global outlook for 2005 remained ‘challenging’.

At the time of the announcement, HSBC’s shares fell 0.5p to 872p.

COMPANY REPORTS

Uncertain standards start to affect January 2005 IFRS implementation.

FTSE100
Royal Bank of Scotland has said that it is still ‘uncertain’ of the precise effects of IFRS on its 2004 results, blaming the confusion and delay surrounding IAS39. It also plans to adopt FRS17 ‘retirement benefits’, which will reduce shareholder funds but not affect the group’s regulatory capital. Despite the uncertainty, it said the group’s conversion project had ‘progressed well’. The annual and interim accounts for 2005 will be prepared in accordance with IFRS. Its 2004 results will be restated in the second quarter of 2005, maintaining RBS’ position as an early adopter of international standards.

Meanwhile, Lloyds TSB has reassured investors that IFRS will have a minimal impact on business. Analysts had feared a greater impact due to Lloyds owning Scottish Widows, which will be accounted for differently under the new rules.

FTSE250
Technology, engineering and manufacturing company GKN has said the application of FRS17 is expected to result in a reduction of around £23m in the charge to pre-tax profit for pensions and post-retirement liabilities in its 2004 accounts.

GKN took the decision to follow exposure draft guidelines issued in April, despite a final version of IAS19 on ’employee benefits’ still being awaited. The £23m hit is considerably lower than the estimated 2003 figure.

A statement from the company read: ‘As shown in note 26 to the 2003 report and accounts, the application of FRS17 would have reduced shareholders’ funds by £563m at 31 December 2003.’ The group also said its IFRS strategy would ‘continue’ to hedge foreign exchange transactions and a percentage of its overseas net assets, but as a general rule it would ‘not seek to use hedge accounting for transactional hedges’. Instead, it will provide detailed explanations of the consequent charges or credits and indicate the likely economic consequences. IFRS will be used to report the group’s results for the year ending 31 December 2005 and its interim results to 30 June 2005.