As FD of a London-listed pharmaceutical company and member of the Accounting Standards Board, you would expect Jonathan Symonds to publish AstraZeneca’s results using UK GAAP. And with half the revenue, most of his competitors and a lot of investor interest coming from America, he also reconciles to US GAAP. But as the group was formed out of a merger between ex-ICI drugs unit Zeneca and Swedish group Astra, Symonds must also satisfy Swedish Stock Exchange requirements and calculate group profits using international accounting standards (IASs). “The whole thing is becoming messy,” Symonds says. There’s a difference between the US and UK GAAP net income line, for example, of more than half a billion dollars. “It’s incredible,” he says. “That’s why I think it’s important to have a single set of global standards.”
Yet even though all these different sets of numbers are ostensibly to satisfy investors, Symonds argues that “It doesn’t provide global shareholders with any helpful input to, say, ‘take your pick’.” Hardly surprising, perhaps, but very ironic: after all, the IAS numbers don’t even make it into the company’s annual report because the Swedish exchange only requires the company to publish net profits and shareholders’ funds using IASs if they differ materially from the UK GAAP numbers. At present, they don’t (though AstraZeneca still has to perform the calculations to make sure), but the picture will change in the run-up to 2005 with the arrival of new international standards on such things as intangibles, options and derivatives.
As for the US GAAP data, Symonds insists, “It is just ignored.” The Americans ban merger accounting so there is no permissible way for the US numbers to properly reflect the reality of the 1999 coming together of the British and Swedish groups, which is treated as a merger of equals under UK GAAP.
Instead, it has to be dealt with under US GAAP as an acquisition of Astra by Zeneca.
Nobody seems to care very much, even though – apart from GlaxoSmithKline – most of AstraZeneca’s industry peer group is American. Symonds says he’s had only a handful of questions about the US GAAP financials in the last few years. But in other respects, AstraZeneca’s financial reporting reflects US practice: the annual figures are audited within 30 days of year-end, the group voluntarily reports quarterly within 20 days and the reporting currency is US dollars. “That’s the recognised language,” he says. Moreover, if on a particular point the UK accounting rules are silent but the US standards have something to say, then AstraZeneca will follow the US position to try to minimise the “communication distortion” with the rest of its peers.
As Symonds puts it, he sees “the totality” of financial reporting issues because his business is grappling with the edicts from all three major accounting standard setters. And, as you might expect, he has a few strong views of his own. Hence, Symonds became a member of the Accounting Standards Board in September for a three-year term (he had previously served on the Urgent Issues Task Force). “I’m not what you call a technical accountant,” says Symonds. “I’m not somebody who’s going to give you para this and para that of FRS17, but I do feel it’s important that the generators of financial information have a strong say in the way accounting standards are going.”
Symonds is worried that the process of getting IASs in place for 2005 seems to be taking longer than it should and turning into a more complicated business. Like many others, he’s critical of IAS39, governing the valuation of financial instruments and the mark-to-market approach that will result in much greater volatility in company profit & loss accounts. Put bluntly, he says IAS39 has “gone too far” and has “lost the plot”. “There’s a real debate as to whether it will be in the (2005) package or not. It’s clearly the most difficult of all the international accounting standards and, frankly, I’m not sure which way it’s going to go.”
So doesn’t it seem a strange time for Symonds to be joining the UK standard-setter if all the action is in the international arena at the IASB? “Clearly the focus of standard-setting will shift from the UK to the IASB,” he replies. “What I think the UK and the ASB, in particular, have is a strong track record of translating good accounting thought into pragmatic application.
The UK principles-over-form, I think, has served the global accounting profession; it’s been an important part of the debate. And I think the ASB needs to preserve its position as an engine of thought and influence, even if the standards are determined outside. The ASB still has a valid and strong position in that, and I’m sure that’s one of the roles it will take. It will be different from what it has been over the last five years.”
In November, Symonds also ascends to the chairmanship of the Hundred Group of Finance Directors, the low-profile talking shop and lobby group for the biggest beancounters in the country. Again, IASs feature high on the agenda. The problem for an organisation whose members come from the whole range of industries that make up the FTSE-100 is that not all the Hundred Group members agree on what should be done about particular accounting issues.
But Symonds makes clear that it’s not the role of the Hundred Group “to reconcile all the different constituencies” but to take a view at “a more macro level”. The strength of the Hundred Group, he says, lies in its ability to get access at the highest levels, especially in government.
“Quite often, that effectiveness is increased through having a dialogue with government regulators early,” he emphasises, “trying to get in at an earlier stage when thought processes are still forming rather than wait until you read it in the newspaper and say, ‘Oh God, I hate this!'”
Beyond accounting standards, the Hundred Group is also concerned about issues such as auditor liability and the question of “how small can the Big Four become before it becomes dysfunctional”. Add to that agenda the still-emerging corporate governance and regulatory framework. Some good things have come out of that process, he says, such as a better understanding and communication of risk, “but does it have to be a process that has 10,000 tick-boxes in it and is being driven by US lawyers? No, I don’t think it does.”
One problem for the Hundred Group – as, indeed, for the ASB – is that even though its members have “a set of global activities”, it is in essence a British voice in an arena where the key issues are international in nature. “There is no comparable organisation (in Europe),” Symonds points out, but don’t hold your breath for an uber group of European FDs. “I don’t have the energy to say, ‘Let’s create a European version of the Hundred Group’. But I am concerned about fragmentation. In the last three days I’ve had calls from the CFOs of Nestle and Philips, saying, ‘How can we co-ordinate our concerns about specific issues in international accounting standards?’ I think we are going to have to find ways of linking up. Fragmentation is a big issue now.”
Symonds has been involved in tax issues with the Hundred Group for a few years and so yet another of his concerns is “the competitiveness of the UK as a home for companies and as a recipient of investment”. And there is a serious, unresolved issue concerning IASs: “What are you going to pay taxes on? On the UK GAAP basis or international accounting basis? And if the differences are significant, what is the Inland Revenue doing?”
Symonds has his own unique vantage point on this issue as he is also a co-chairman of the Business Tax Forum, an organisation that is allied with the Hundred Group and CBI, and works with the Inland Revenue on “improving the consultation process and the administration of the tax system,” Symonds explains. (He shares the chair with David Hartnett, head of revenue policy at the Inland Revenue). “AstraZeneca is an international tax payer so the effectiveness by which the UK tax authorities operate is important to us.”
Intriguingly, without having even been asked the question, Symonds jumps in to explain how he manages to play a part at the ASB, head up the Hundred Group and chair the Business Tax Forum, all while looking after the finances at AstraZeneca – and we haven’t even mentioned his non-executive directorship at Qinetiq, the defence research agency spin-off. “The day job here is obviously the most important thing I do. It’s a complex company, but I’ve tried to build a portfolio of things alongside that are wholly complementary to improving the quality of what I do here at AstraZeneca. So the Hundred Group is a logical extension because it’s a better forum for dealing with issues that affect finance in the UK. I’ve joined the Accounting Standards Board for much the same reason,” he says. “I’m probably at the limits of my portfolio, but it’s all rooted around helping me do the job here at AstraZeneca more effectively.”
Apart from all the work involving financial reporting and communicating with investors, the value-creating part of the job involves trying to improve the operating performance of the business. This is no easy task given the nature of the pharmaceuticals industry. Science and finance don’t often make easy bedfellows, and the lead times in terms of drug development are long and risky. At any stage in the process, from initial testing of a new compound to – and even beyond – the launch of a commercial product, the efficacy and the side-effects may turn out to be unacceptable.
The later such problems emerge, the greater the financial damage. But, at the same time, without spending enormous amounts on research and development, such problems won’t be spotted in time, nor will alternative compounds be found.
That’s why, says Symonds, “All our systems – clinical, regulatory and financial – are geared toward killing projects as quickly as possible, which is a bizarre concept. But if you let it get too far, you’re spending hundreds of millions of dollars, which gives you no return.”
In practical terms, it’s a process that involves three skills – scientific, commercial and financial – and three time horizons – long, medium and short term. Applying “the best scientific minds to test scientific concepts”, checked by multiple peer reviews, the longer term prospects for a new molecule are evaluated to determine that it meets the necessary criteria, it’s safe, they can design a clinical trial to prove it and can take it to the next stage. “We never commit resource and say, ‘You can take it all the way.’ You fund it just to the next milestone.”
Next come the commercial brains who work out if the compound is competitive against what’s already in the market and what is coming through competitors’ drug development pipelines. Finally, the finance organisation says whether it’s viable in financial terms using a variety of techniques that go from cash flow to probability-adjust to net present values to surrogates of real options.
“It’s quite sophisticated now. The judgements are a balance of all three. The short-term time horizons are largely all financial measures. The mid-term horizons are largely about market share. The last ones are all about R&D productivity, so normal financial parameters don’t count. Our performance measures are geared toward answering the question, are we getting more out of the technology, such that we can increase the percentage of products that come through to the end?”
Symonds emphasises that there has to be some slack in the system from a financial perspective: “The financial case will not always win. There’s always some blue sky.”
Name: Jonathan Symonds
Qualifications: FCA (1984)
1997-: Chief financial officer, AstraZeneca
1980-1997: KPMG (Thomson McLintock)
Other: Chairman of Hundred Group of FDs, member of the ASB, co-chairman of the Business Tax Forum, non-exec director of Qinetiq (formerly DERA)
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