PracticeAuditThe week in finance

The week in finance

Northern Rock's FD is downplaying the IFRS impact on its earnings per share, but some analysts remain sceptical.

Northern Rock has estimated that its earnings per share could fall by as much 10-12% as a result of international financial reporting standards.

The news came as the mortgage lender issued its final results for 2004, posting record pre-tax profits of £431.2m and earnings per share up from 66.6p to 74.1p.

The bank’s FD Bob Bennett moved quickly to play down the estimates for EPS under IFRS, saying it was ‘not material’ in the long term for Northern Rock, because anything adjusted today ‘comes back tomorrow’.

He added there were downgrades in much of the banking sector following the release of Council of Mortgage Lender figures that revealed the extent of lending arrears. The CML figures showed the number of properties to be repossessed in the second half of 2004 was the lowest since 1982 with no increase in long-term arrears.

‘IFRS does not change cash accounting – it changes the phasing. Fee income gets deferred under IFRS. Income lost today in the P&L account comes back in the year after,’ Bennett said.

Analysts saw the IFRS effect on EPS as more significant. Bruce Packard, bank analyst at ING Financial Markets, said that ‘people do look at the reported earnings using a ratio – it caught a few people out because they were not expecting the 10-12% figure’.

Another analyst said that the 74p EPS this time around could be 65p under IFRS. ‘That is a material difference, and a shareholder should be worried if they have the perception that the company was not generating as much profit as they thought it was.’

Bank analyst Richard Staite at Societe Generale said that Northern Rock had only used figures for pre-tax profits in previous statements.

‘Now they have given a guide to both sets of numbers and there is clearer information.’

Northern Rock intends to provide IFRS comparable figures when it produces 2005 interim results in July.

COMPANY REPORTS

FTSE250
ARM Holdings, the microprocessor manufacturer, has posted profits of £32m under UK GAAP while the figure under US GAAP is substantially lower at £28m. ARM explained last week when it revealed results for year ending 31 December that the difference came because of research and development costs that had to be written off under US GAAP, but not under UK accounting rules. Revenues are up to £152.8m from £128.1m.

SMALL CAP
XP Power has said it accounted for the acquisition of XP and Forx using the merger method of accounting and other subsidiaries using acquisition method as stated under FRS6. The electronic company posted full-year results to 31 December 2004 revealing earnings up 12% to £66.8m and pre-tax profits up to £5.1m from £2.5m.

Wireless communication infrastructure providers Filtronic saw the increase in interim sales slip as the effects of a new accounting policy came into effect. From June 2004, Filtronic changed its policy for translating profit and loss accounts and cash flow statements for overseas subsidiaries. Filtronic improved sales for the six months ending November 2004 from £123.6m over the previous period to £130.1m.

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