International Financial Reporting Standards
How aware are market analysts and others of the change to IFRS and the effect that it could have?
At present there are only a limited number of companies that report using IFRS. Thus the level of awareness of the detailed IFRS accounting requirements is somewhat restricted. However, many analysts have a detailed working knowledge of US GAAP or UK GAAP and most are familiar with accounting principles that are designed for communicating with the capital markets, so the effects should not be too much of a surprise.
To what extent will IFRS implementation change relationships with investors and financial analysts?
Companies will need to minimise the effects where possible. This can be achieved by early communication of conversion plans together with providing an impact assessment well in advance of 2005. In general, the greater comparability of financial information under IFRS is likely to lead to more probing questions from analysts and other investors, because the differences between companies will be more obvious. Management will need to make sure that they have well-considered explanations for significant variations between their information and their industry peers if they want to maintain good relationships with investors and financial analysts.
Management may be "punished or rewarded" more quickly for its decisions when reporting under IFRS because in many cases investors and other stakeholders will be able to analyse their effectiveness more quickly than before. For example, under IFRS investors and analysts will tend to have information on segment performance, so under-performing segments will not be hidden by the good results of other sectors. This will put pressure on management to allocate resources to the most profitable segments or improve the less profitable ones quickly.
This improved transparency should provide key benefits. It should reduce the cost of raising capital for companies because it will improve investor confidence in their reported information, thereby reducing the risk premium. It will help companies to access capital markets worldwide without going to the trouble and expense of producing separate sets of financial data.
Will the share price of individual companies be affected by IFRS?
Hopefully, share prices should improve. A company's value is in the market estimate of the future cash flows that it is capable of generating and should not depend on the accounting principles on which its financial statements are prepared. Changes in the measurement and reporting basis should have no impact. However, adoption of IFRS should lead to more detailed and transparent reporting, and so should result in analysts having more confidence in their ability to predict the company's future performance and cash flows.
For assistance in assessing the impact that IFRS conversion will have on your business, or help in developing a conversion plan please contact John McDonnell by telephone on 01 7048559 or by Email
