Utility share prices to be hit by IFRS

Link: IAS special report

A new report by PricewaterhouseCoopers has forecasted bigger swings in reported profits for the sector when international accounting standards are applied in 2005. It said that such companies would face increased volatility in their profit and loss accounts as a result of the new rules.

Manfred Wiegand, global utilities leader for PwC, said: ‘The change to IFRS is expected to trigger larger swings in reported profits, reflecting fluctuations in derivatives values. Lack of awareness and understanding could create shareholder concern and share price volatility.’

Utility companies currently use derivatives to hedge the risk of their long-term contracts with large customers and suppliers.

The International Accounting Standards Board has already come under pressure from the European Union to make concessions on its plans for derivatives, with particular opposition from the banking sector.

But the IASB wants to make accounts correlate more with actual year values. PwC has also forecast that the new international standards will have a significant impact on reporting oil and gas exploration costs. Under IFRS, the cost of decommissioning, or plugging and abandoning wells, must be recognised when the asset is first constructed, rather than spread over the longer term.

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