Utilities, oil and gas suffer IFRS burden

Utility and oil and gas companies, already struggling to cope with
geopolitical uncertainty and a heavy regulatory load, have had a traumatic
transition to IFRS according to a new report compiled by PricewaterhouseCoopers.

In both sectors, businesses are required to make substantial up-front
investments in industries characterised by complex stakeholder relationships,
state pressure and supply constraints. As a result, the additional burden of
IFRS has been difficult for these companies to take on board.

Mark King, a PwC partner and IFRS oil and gas specialist, said oil and
utility companies were still grappling with how to embed IFRS into their
day-to-day financial systems and manage the instability caused by the new

‘Contracts for energy sales and purchases usually use embedded derivatives,
which causes volatility in accounts that these companies have had to present and
explain,’ King said.

Leading business figures in oil and utilities, including BP chief executive
Lord Browne, have been highly critical of the international standards, saying
that they fail to hold management accountable and make accounts unnecessarily

King said one area of continuing uncertainty, for oil companies in
particular, was how they would have to account for reserves in the future – an
issue the IASB is currently looking into.

‘Reserves are currently only included as a disclosure item and the IASB is
looking into whether reserves should be included on balance sheets, and if so,
how they should be included,’ King said.

The standards, however, have helped UK-based utility companies by placing
them on an equal footing with European rivals, which were able to use more
favourable accounting treatments before IFRS.

Andrew Wright, a utilities analyst at investment bank UBS, said the UK
utility sector had been ‘systematically disadvantaged relative to its peers on
accounting treatment’ under UK GAAP. Under IFRS, it would be ‘systematically

‘In our view, adopting IFRS could remove a psychological obstacle to higher
ratings in the market and provide some protection on the downside,’ Wright said.

The introduction of new pensions accounting under IFRS, however, has not been
as beneficial for utility companies. The large pension deficits disclosed under
IFRS have affected all businesses, but utilities have been hit hard.

A report compiled by KPMG found that half of the 66 FTSE 100 companies it
surveyed would be able to pay off deficits within a year using existing
cashflows. Utility companies, the report concluded, would be among the
businesses that would battle to match this time frame.

Simon Collins, chief executive of KPMG corporate finance, said: ‘These
companies tend to be long-established and have that tail of retirees and defined
benefits schemes. They are also slightly caught. They’ve got the pension
regulator legitimately saying: “Sort out these deficits and look after your
pensioners.” They’ve also got regulators in their industries saying: “You must
make significant capital investment to regenerate infrastructure in your sector


FTSE 100

Two of PartyGaming’s founders, Anurag Dikshit and Vikrant Bhargava, have
stepped down from the online gaming giant’s board to improve compliance with the
combined code. PartyGaming said the decision by the two would re-establish ‘the
balance between independent and non-independent directors in compliance with the
combined code’. The company founders are among the largest shareholders in
PartyGaming, with stakes of 31% and 8.5% respectively.

Mobile phone giant Vodafone has selected John Buchananas its new deputy
chairman to replace Paul Hazen, who has decided to retire from the board.
Buchanan, who has been a member of the Vodafone board since April 2003 and is a
member of its audit committee, retired as chief finance officer of BP in 2002.
His other senior roles include being chairman of Smith & Nephew and
non-executive director of AstraZeneca PLC and BHP Billiton.

BAA has again rejected a revised offer from Ferrovial, though the Spanish
infrastructure group said it would go public with its offer to shareholders.
Ferrovial will increase its cash offer, through its Airport Development and
Investment bid vehicle, to 900p per share valuing BAA at about £9.73bn.

FTSE 250

Paul Inglett, finance director at brewer Wolverhampton & Dudley, has said
the company will continue to make payments into its pension fund even though it
has reduced its deficit to just £30m. ‘Looking at where we are today on that
deficit, it is around about £30m after tax. Although we haven’t made any public
commitment to eliminate that deficit, I think what we will see over the next six
or seven years is some top-up payments to eliminate that deficit over time,’
Inglett said.

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Fiona Westwood of Smith and Williamson.