Letter from... Brussels

If preliminary results from proforma reporting under IFRS are anything to go by, the new accounting rules could see some old firms suffering from heavy exposure to pensions liabilities. The changeover occurs by transposing notes on the annual report, under UK GAAP, to having the liability incorporated in the final figures.

New, expanding, companies could benefit from not having to amortise goodwill bought in via acquisitions. The IFRS rules came into effect for all 7,000 EU based listed companies on 1 January.

The most striking change from three examples chosen is that Vodafone Group Plc would have seen transition from UK GAAP transforming an operating loss of £1,615 million to an operating profit of £4,759m. That rise, which applies to the six-month period, to 30 September 2004, represents a boost of over £6bn.

This is a whopping figure by any standard, even if set against a market cap of around £90bn, which does make it one of the UK's largest companies. Ken Hydon, financial director, states that the most significant change with the transition is through the relief of amortising goodwill.

The goodwill came on to the books via the takeovers of Mannesmann and other companies. Perhaps not surprisingly, Ken Hydon commends IFRS as resulting in a clearer presentation of underlying business performance. Vodafone is preparing for the adoption of IFRS as its primary accounting basis for the year ending 31 March 2006.

Second of the triumvirate of examples of firms that have been testing the temperature of the IFRS water is the Anglo-Swedish pharmaceutical group AstraZeneca. It has sales in 2004 totalling $21.4bn (45% in the US, 36% in Europe), and an operating profit of $4.8bn. It is the one company in the three test cases not to see a significant move on its operating profits under IFRS.

Its IFRS figures can be taken back to 2003, but for 2004 its operating profit is $4.8bn under UK GAAP rules, compared with the very similar $4.5bn under IFRS. EPS for the years is $2.28, with a slight setback to $2.18 under IFRS. This is a factor that could be typical as IFRS tends to book slightly higher charges. For any change in net assets, one has to look to the fifth decimal place to find any difference, in the round-figure, of $14.5bn. Most companies in the EU are likely to fall into the same general category as AstraZeneca, of little overall change.

For ICI Group, the chemical and paint manufacturer, having a turnover in the order of £5.6bn, IFRS does give it higher profit. However, this chemical giant is not quite so much of a giant as it used to be. One result of this is that its pensions liabilities for large numbers of former workers have become comparatively large.

For the good news, profit under IFRS for 2004 - under unaudited figures - shows a happy rise to £474m compared with £210m under UK GAAP. Earnings per £1 ordinary share also rise, to 25.9p, compared with 21.9p. Net cash-flow remains unchanged.

As to the pensions aspect, under IFRS, ICI recognises a post-retirement benefit liability of nearly £1.2bn. The net effect on transition to IFRS is an adjustment in shareholder funds by a negative £1.05bn. This brings the consolidated group balance of the operating companies into negative equity. However, in the case of ICI, ICI Plc, the parent company, as opposed to the consolidated group, has considerable reserves and can therefore continue to pay dividends. At the time of writing, PE in the mid-teens indicates market confidence.

However, there may be other listed companies across the EU where a similar exposure to pension liabilities could not be dealt with the same nonchalance.

Overall, the lesson from the three examples is to expect more favourable results under the IFRS regime if the company has made recent acquisitions involving goodwill. Correspondingly, expect less favourable results if the company could have heavy pension liabilities, especially if they are 'defined' benefits, as in the UK they could well be. Otherwise, for most companies, the step over to IFRS may not see much change.

Jeremy Woolfe is a journalist based in Brussels.