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You can’t do IFRS by halves

Companies with December year-ends have now reported their last full-year figures under UK GAAP and have started to give an indication of what the numbers would have looked like under the emerging international standards. Such a process – watched carefully by market regulators and standard setters – has been a comfort blanket for both the companies and stockmarket analysts. But that sense of comfort won’t last long.

Towards the end of April and during May, those companies which report on a quarterly basis will be announcing their results for the first three months of 2005. And while companies may refer to UK GAAP in explaining the comparative figures, there will be no such reference point for the 2005 actuals. It is these Q1 announcements which mark the start of real, honest-to-goodness reporting under IFRS.

The market appears to be taking the switch rather calmly. Whether they will remain calm when IFRS-only figures start being produced remains to be seen. These figures are important to study closely. Listing Rule 12.47a requires an issuer to present its interim results in accordance with the accounting policies and presentation to be followed in the subsequent annual financial statements. And that means the figures released are based on the accounting policies which the companies will be using on an ongoing basis, and which will be used in the production of the full 2005 year-end accounts.

While preparers and users are familiar with interim reporting requirements, they will not have given much attention to the fact that the quarterly and interim reporting process is changing. The IFRS framework includes the little-discussed IAS 34 Interim financial reporting. This standard – which covers interims and quarterlies – is not mandatory, but companies are only permitted to describe an interim financial report as complying with IFRS if it complies with IAS 34. The standard is more onerous than FDs are used to: for instance, a company is required to disclose segmental revenue and results. It will be interesting to see how many adopt IAS 34 early. Whether companies adopt IAS 34 or stick to applying IFRS policies to the disclosures required by the current listing rules, FDs need to be prepared to offer a coherent explanation of the accounting policies in use. v At the moment, everyone concerned – FDs, auditors, standard setters – is saying the transition to international standards is going well. Recognising that listed groups have a significant workload on them during the transition, the UK’s Financial Services Authority, in a ‘Dear CEO letter’ of October 2004, gave permission for interim results under IFRS in 2005 to be produced within 120 days from period-end rather than the normal 90 days. This allows companies to meet the European requirement to report within four months, rather than the FSA’s three-month deadline. (The FSA briefly considered allowing companies to report interims under UK GAAP, partly because of the burden on auditors, but rejected the idea.)

There are two issues in particular which should make FDs nervous and analysts particularly confused: goodwill and pensions. Intangibles are now accounted for under IAS 38 and goodwill under IFRS 3. Goodwill will be held at cost or occasionally at fair value and be subject to impairment testing instead of amortisation. The way that companies choose to deal with impairment is what some financial reporting experts believe may cause unexpected and unnerving volatility in the numbers.

Quarterly reporting could also unearth problems with accounting for retirement benefits. Pension accounting has attracted much attention in the UK as part of a wider angst over how we pay each other when we retire. Since 1 January this year, UK firms operating defined benefit pension schemes have had to comply with the full provision of FRS 17. Under IAS 19 they have a choice of following the FRS 17 approach or spreading part of the surplus or deficit. With equities and interest rates climbing, FDs may decide to stick with the FRS 17 approach. The net result will be the balance sheet is weaker but the profit and loss account looks better.

It is problems like these that show how IFRS will be a radically altered approach to financial reporting. Analysts appear to have learned a lot about IFRS in the past three months. The next month will test how much they really understand. When the first pure IFRS results are released, who would bet against share price volatility?

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