Impact of IAS39 still cannot be measured

Analysts have warned that markets are still struggling to interpret the
effects of IAS39 on company accounts, claiming that it is way too early to
assess the full impacts of the new standard.

A year of reporting under IFRS has passed and a number of companies have
produced final results and annual reports using the standards, prompting
commentators to proclaim ‘a soft landing’ for IFRS.

Speakers at a recent Association of Corporate Treasurers conference, however,
said it was premature to suggest that the implementation of the standards had
settled down.

‘It is still early days,’ said Peter Elwin, head of accounting and valuation
at JP Morgan Cazenove.

‘Only a few annual reports have been produced. That is where much of the
detail is, and analysts are still taking a detailed look. It is going to take an
event to drive people to dig into the annual report.’

Elwin added that although hedging and derivative details had been disclosed
in notes previously, the effect of these instruments on equity prices would only
be felt once analysts began to come to grips with IAS39.

‘Notes disclosure does not drive information into the share price. We saw
that with pensions,’ he said.

But Trevor Pijper, from credit rating agency Moody’s, cautioned that analysts
were still trying to understand IAS39 and work it into their valuations.

‘We are struggling to get our heads around IAS39. There is a gap between cash
flow and the income statement. We need help to explain the disconnect. There are
huge differences between the income statement and cash flow,’ Pijper said.

David Marshall, the head of treasury at PFI company John Laing, said the
implementation of IAS39 had been so onerous that it could even cause companies
to shy away from public listings.

‘The implementation of IAS 39 is a painful, time consuming and costly
exercise. It produces a complex set of results that are of little use to
shareholders. In my view the long term effects of this could be less publicly
quoted entities and more growth in private equity,’ Marshall said.

A recent report compiled by KPMG, however, took a far more optimistic view on
the bedding down of the standards. In the report, ‘IFRS: views on a financial
reporting revolution’, IASB chairman Sir David Tweedie said the process had gone
‘gone surprisingly well’ and that the changes people now wanted were ‘small’.

AstraZeneca CFO Jon Symonds said the implementation of IFRS had ‘gone pretty

‘If you are well prepared it shouldn’t be a difficult project,’ Symonds said.
Tweedie and Symonds both conceded however, that IAS39 had been a problem.

Symonds said AstraZeneca had decided to avoid the demands of IAS39 altogether
by not using hedges and derivatives at all. Tweedie admitted that the
implementation of IAS39, which was passed on to the IASB by the IASC, could have
been smoother.

‘When we opened up IAS39 for discussion we did it to try and make
implementation easier,’ Tweedie said. ‘With hindsight we would have saved
ourselves a lot of trouble by not going back to revisit it. But we did help a
lot of companies handle the issues by doing so.’


FTSE 100
Tesco has introduced a new profit measure in its accounts to provide
investors with a better understanding of its numbers now that it is reporting
under IFRS. The new underlying profit measure strips out the impacts of IAS32
and IAS39. The group’s underlying profit was 16.9% up at £2.2bn on the previous
financial year.

Margaret Ewing, the finance director of BAA, and her fellow board members are
set to unveil a defence against the bid for BAA by Spanish rival Ferrovial. The
Spanish infrastructure company has offered £8.7bn for BAA. BAA is expected to
emphasise that the bid does not take into account BAA’s growth prospects and
undervalues the company.

Martin Ackroyd, the former FD of Wm Morrison, received a payment of £505,796
plus 12 months’ pension funding when he left the company, its full-year report
has revealed. Chief executive Bob Stott is also in line for a £1.42m payoff when
he steps down later this year.

Tobacco company Imperial has had to restructure its factory in Lahr Germany
as a result of a tax change. The group used to produce a product at the factory
called ‘Singles’, which was taxed at a lower rate than standard cigarettes. The
EU has ruled that these products should not be taxed at a lower rate which has
prompted Imperial Tobacco to cease production all together and restructure.

FTSE 250
iSoft, the software provider, issued a profit warning last week as doubts
continued to cloud the level of revenues the group was receiving for a key NHS
contract. Analysts have expressed deep concerns about the accounting methods
used by the group, claiming that the business is taking revenues on long-term
contracts too early and could be using an off-balance sheet credit facility.
iSoft’s share price fell 10% on the news.

Related reading

PwC office 2