Lost in transition

Detailed and audited reconciliations of restated financial statements, IFRS accounting policy information, and additional transition disclosures are still to be provided by most smaller listed companies according to Standard & Poor's.

Most smaller listed companies have yet to provide transitional disclosures to investors on the effects on their financial statements of international financial reporting standards, according to analysis conducted by credit rating agency Standard & Poor's (S&P).

'In most cases, detailed and audited reconciliations of restated financial statements, IFRS accounting policy information, and additional transition disclosures are still to come,' reported S&P. 'We had expected companies to provide the reconciliations before starting to report interims under IFRS, but some have opted to skip the required reconciliations for the time being.'

Where the impacts of IFRS have been disclosed, these have not produced major surprises. 'IFRS has not revealed anything shocking so far, but it remains possible that a few stunners may yet emerge,' said S&P. 'In most cases, however, the effects are expected to be more subtle and may only be discovered in the process of analysing the full disclosures in the first annual reports.'

While there have been no direct re-ratings as a result of IFRS transitions, S&P reports that is was 'a contributing factor in the discussion of Rémy Cointreau SA's stretched financial profile', which led to an outlook downgrade from stable to negative. In a consultation exercise, companies advised S&P that the key impacts of accounting changes were in the non-amortisation of goodwill, the treatment of employee benefits, and the reporting of derivatives and hedging. These were most likely to affect companies in the media, hotels, consumer goods, and capital goods sectors.

In the UK, listed companies have been warned by the Financial Services Authority (FSA) that they must communicate clearly to the market the effects of transition to IFRS and to be ready to report under IFRS in 2005. In accordance with guidance from the Committee of European Securities Regulators (CESR), the FSA points out that listed companies should provide quantified and reliable information on the impact of IFRS on their 2004 financial statements and this should not be biased towards either the positive or negative aspects. Where this information is price sensitive, it should be disclosed without delay and should not be delayed until publication of the 2004 results.

As more companies begin to report under IFRS, so a clearer general impact is emerging. Orange, part of France Telecom, said IFRS could have a 'significant' effect on its results. Earlier, Vodafone had announced that IFRS would have led to a massive £7bn increase in half-year profits arising from the revised treatment of goodwill. Pre-tax profits at British American Tobacco rose by 8% as a result of the use of IFRS, through the inclusion in group results of associate companies.

But the far-reaching consequences of international standards were best illustrated by their use for the first time by BAE Systems (formerly British Aerospace). The requirement to show pension fund deficits on the balance sheet has encouraged BAE to take radical action in co-operation with unions to cut its pension fund liabilities from £2.8bn to £1.7bn, through a deal which will see both staff and employers increasing contributions.

BAE is also asking shareholders not to use IFRS in determining whether it is meeting its own company rules in assessing its borrowing limit. The company believes that using IFRS and the consequent inclusion of pension fund liabilities in the company's debt levels would reduce its borrowing capacity excessively.