International financial reporting standards have caused a significant swing
in the reported profitability of large companies, a survey by KPMG has found.
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The Big Four firm found that the 2004 financial results of 45 European blue
chip companies restated under IFRS resulted in an average profit swing of 43%.
The largest positive swing was 407%, while the largest negative change was
30%. The average effect varied greatly from company to company, and also from
country to country. In France the average swing was over 60%, while in the UK it
was 36% and in the Netherlands 27%.
The figures represent the impact on reported profit or loss. The firm said
that one significant impact for many companies was the non-amortisation of
goodwill under IFRS – a change that increases reported profit or loss if
goodwill was previously amortised. Excluding the impact of this change, the
average profit swing was found to be 24%.
The study also suggested that many companies have taken advantage of the
available exemptions by not applying IFRSs to old transactions. For example, 58%
of companies chose not to expense old share-based payments, only 4% chose to
restate their previous business combinations (acquisitions), while 58% have
chosen not to apply IFRS on financial instruments (including IAS32 and IAS39) to
their restated comparative for 2004.
The financial instruments standards also illustrated surprising differences
between countries. Some 86% of UK companies surveyed chose not to apply the
financial instruments standards to their restated comparatives compared with
only 29% of French and 40% of Dutch companies.
Mark Vaessen, head of KPMG’s international financial reporting group, said:
‘The widespread application of IFRSs will deliver significant improvements in
cross-border comparability and consistency. However, the choices available on
transition and in accounting treatments going forward will mean that analysts
must look beyond headline figures when making comparisons, particularly
‘Understanding the impact of the transition to IFRSs will be key to
identifying which impacts are accounting-related and which may provide
additional information about the business. The effect of the accounting choices
available on transition to IFRS means that comparability between periods will
increase further over time.’
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