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There is widespread uncertainty about whether and how IFRS will impact the value of companies. This is probably because the introduction of IFRS is still considered by many to be simply an accounting change. However, the accounting rule changes will have an impact far beyond the finance division including on areas that impact on a company's share price.

Greater income and balance sheet volatility

Following IFRS transition management will need to be able to identify, understand and explain the factors that might lead to volatility in financial results. It is therefore important to establish systems, including IFRS compliant management information, to monitor the key causes of volatility between now and 2005. This should include setting budgets, strategies and business plans under IFRS in the lead up to 2005.

The most significant impact is expected to arise from the need for nearly all financial instruments (except originated or held-to-maturity loans) to be recognised on balance sheet and measured at fair value.

Impact on values and remuneration schemes

Return on equity is a key metric used by analysts and investors to assess corporate performance. IFRS will change both the earnings and the equity base of a company. It is therefore inevitable that returns on equity ('RoE') and earnings per share ('EPS') will look different under IFRS. As a result simple top-down, multiple-based values that are typically used as a crosscheck to cash flow techniques will be impacted.

This also has implications for remuneration schemes, many of which are based on accounting measures like RoE and EPS. Shareholders will expect remuneration to be based on the same set of measures as those used for external reporting.

Dividend payments - potential restrictions?

The changes to reported returns are likely to have an effect on dividend policy. Achieving a growth trend in dividend payments will become more difficult with volatility in results, depending on the level of retained earnings held. As a result, payout ratios are likely to become much more difficult to predict - a significant issue for investors and analysts.

Changes to the returns achieved under IFRS may also impact the amount of dividends that companies will be able to pay out under company law. Specifically, there is a risk that reduced profits or losses resulting from the transition to IFRS will restrict dividend payment prospects either at a holding company or at an intermediary company level. This is an area which has not received much focus to date but which could have a fundamental impact on value.

Increased transparency

Another critical aspect of the conversion to IFRS, in terms of an enhanced understanding of the results, is the extensive disclosure that will be required. The disclosure of information about inputs and assumptions, particularly in respect of financial instruments and impairment, will be critical in allowing meaningful year-on-year performance analysis and comparison between companies.

IFRS will give much more information on market risk exposures and asset quality. It will also provide details of performance by business segments and returns on risk-adjusted capital, which are critical measures for the market.

In theory, disclosures like these should allow the market to understand, to a greater extent than before, the financial results and risk profile of the company. However, at the same time, the increased volatility may actually make it much more difficult to assess the underlying profitability and future prospects of the company.

It is also likely that the additional disclosures and greater comparability of financial information under IFRS will lead to more probing questions from analysts and investors because the differences between companies will become more obvious. Management will need well-considered explanations for significant variations between their company's results and those of their industry peers. Structured investor-relation programmes will help the company to maintain its ratings and gain support from investors and analysts. Insufficient or confusing disclosures or mis-managed communications initiatives will inevitably have a negative effect.

Impact on future and past acquisitions

Goodwill amortisation will become a thing of the past. In its place regular impairment reviews will be required to establish whether the value of acquired goodwill and other intangibles can be sustained.

Although many would argue that both impairment and amortisation charges, as non-cash items, are routinely excluded or adjusted for by analysts, the tougher requirement for an impairment review will reveal a lot about management's decision-making skill on acquisitions.

Under IFRS 1, the recently issued standard on 'First-time adoption', companies did not need to, but had the option to, restate all acquisitions made before 2004. Given the imminent introduction of the new standards, targets should now be assessed under IFRS accounting rules. This will assist management in understanding how the acquisition will be reviewed and reported in future accounting periods and the likely impact on the combined entity's share price.

Early communication is critical

Early communication to the market of the expected financial impact of IFRS is essential. This will allow analysts and investors to understand significance of the impact effect on current performance, future prospects and corporate value.

Some listed companies are already preparing to clarify to shareholders and analysts the impact of IFRS conversion on matters such as:

• any changes required to the structuring of products
• possible changes to hedging strategies
• the risk profile of the company
• the impact on key performance measures and potential future volatility
• the impact on existing remuneration schemes
• the impact on dividend policy; and · the impact on capital requirements

Time to take action

Companies should start to review how changes under IFRS may impact their financial results and hence their share price under IFRS. Management should act now to provide detailed information on their IFRS transition plans in order to help the market to gain a better understanding of the company's future performance prospects and value.

Clear and early communication of the impact on financial results can provide a competitive advantage and will, at the very least, minimise the potential downside to the share price. Most importantly this will signify that management is firmly in control of the IFRS conversion process. This is likely to be welcomed and rewarded by analysts and shareholders alike.

The implication of IFRS conversion for senior executives is that they will be under much greater scrutiny during the initial IFRS transition programme and then on an ongoing basis under the new IFRS regime. The market will expect management to respond positively to the key questions set out in Table 2.