Newspaper article The Journal (Newcastle, England)

Companies Face Challenging Times in Bid for Integrated Capital Market

Newspaper article The Journal (Newcastle, England)

Companies Face Challenging Times in Bid for Integrated Capital Market

Article excerpt

Byline: By Debbie O'hanlon

Debbie O'Hanlon examines the issues for the region's companies surrounding the introduction of International Financial Reporting Standards (IFRS) next year.

To facilitate the creation of an integrated capital market, listed EU companies will be required to prepare their consolidated financial statements in accordance with a single set of accounting standards (IFRS) from 2005.

The key principles underlying the standards include:

* Fair values are more relevant than historical costs.

* Prudence and matching principles are considered profit smoothing.

* Relevance carries greater weight than reliability.

For many companies, the impact of IFRS will be considerable.

The adoption of the fair value financial reporting regime will inevitably introduce significant volatility in the balance sheet and, more importantly, in earnings.

Not only will this challenge a company's existing business model, but management will also have to rethink how they measure and reward performance and communicate with the markets.

The issue is further complicated by the fact that IFRS remains somewhat of a moving target.

The International Accounting Standards Board (IASB) published a number of improvement standards in December 2003, which now form part of the so-called "stable platform" for the implementation of IFRS in 2005. However, there remain a number of significant issues still in the melting pot, including pensions, leases and, significantly, performance reporting.

The format for reporting financial performance under IFRS is currently under review and a standard is expected in 2006.

The traditional "profit or loss" for the year may no longer exist in the future, replaced by a single statement of financial performance which portrays "comprehensive income".

Thus, this turns the income statement into a by-product of the balance sheet.

It gives no indication of underlying performance or maintainable earnings and does not assist users in the prediction of future cash flows.

Such an approach could well result in increased use of non-GAAP (Generally Accepted Accounting Principles) measures and pro forma reporting. …

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