IFRS changes treatment of investments disclosures for construction company and makes analysts nervous
Analysts’ concerns over Balfour Beatty’s treatment of investments disclosure
under international financial reporting standards have significantly diminished,
after the company published its interim results.
The switch from the old accounting regulations, UK GAAP, to IFRS created
uneasiness among many analysts monitoring the accounts for the group’s
investment portfolio, especially its private finance initiative (PFI) stakes.
Balfour Beatty has addressed the issue by increasing disclosure relating to
investments. This allows analysts to assess the total profitability of the PFI
portfolio at the after-tax level.
Paul Roger, an analyst at Deutsche Bank, said: ‘The group’s improved
disclosure and clear accounting policies in the most recent results have
improved the visibility of earnings.
‘Over time, this is likely to support positive momentum in the stock,
especially as profits are also backed by cash flow – something that cannot be
said for all of the contracting stocks.’
Previously, income was reported above the operating profit line. Post-IFRS, a
significant proportion was re-classified as investment or financing income and
reported below the line. As a result, operating profit and margins fell.
Although this had no affect on net income or profit before tax, all the
valuation measures that looked at operating profit made the stock look
Balfour Beatty has performed well this year, with a significant increase in
its earnings. The company showed a 25% boost in annual profits, with pre-tax
profits rising to £134m last year. The group’s share price has climbed 22% from
316p to 386.25p.
It said the driving force behind its performance was down to big contract
wins and record performance in the US interests. The company’s order book rose
by 12% to £7.6bn, helped by major contract wins in the gas and water sector.
A company spokesman said: ‘We have record order books and a number of
preferred bidder positions. Our major markets are healthy and continue to offer
substantial opportunity. We are clear about our priorities for the development
of the business, and have the proven management capability to deliver,’ he said.
One of the largest independent insurers in the UK, Amlin plc,
has recorded one of its biggest annual profits in its first accounts under IFRS.
The firm’s preliminary results revealed a record profit before tax of £182.7m,
after absorbing last year’s hurricane losses of over £130m. The non-life
insurance giant says the impact of the changes introduced under IFRS included
translation of earned premiumat historic rates, when the transactions arose
rather than the average rate for the period that is Recognised in the income
statement. Compared with the previous accounting
treatment, this change increased profit by £26m.
Cobham plc’s preliminary results have revealed an error in
its IFRS conversion project, relating to the acquisition of subsidiary National
Jet Systems Pty Ltd (NJS) and dates back to accounting entries on its
acquisition in 2000. Cobham said that, under IFRS1, these fundamental prior-year
errors had been corrected, with the effect that provisions,as at 1 January 2004,
have been increased by £9.7m, a deferred tax asset of £2.9m has been recognised
and opening reserves have been reduced by a net £6.8m.