CARVING SOMETHING OUT OF THE IAS 39 CONUNDRUM
It is strange that no sooner has IAS 39 been endorsed by the European Union (EU), that there have been calls to take it back to the drawing board. The EU’s formal adoption of a carved-out version of IAS 39 last month was accompanied by the announcement that, within the next year, the carve-outs will be eliminated. Indeed, the EU, now wants the IASB to devise a ‘watered-down’ version of the current Fair Value Option and revise provisions on hedge accounting, with the view to introducing them before the end of 2005.
This news followed a major assault on the sheer principles of IAS 39 by Sir Andrew Large, Deputy Governor of the Bank of England, who called for a complete examination of its basics, followed by a reengineering of the standard to create a less complex, prescriptive one. But in the light of the twists and turns in the fortunes of IAS 39, what should corporates and their treasurers, who now face legal requirements to comply with a carved-out version of IAS 39 in yearend accounts as of January 2005, be doing?
Regardless of future amendments, now is the time to ensure that you are fully prepared to adopt IAS 39 and that any possible negative implications of the new accounting standard are minimised.
In a recent survey of 100 buy and sell-side investment analysts, 53% said they expected the introduction of IFRS to have a major impact on the valuation of companies’ shares. Moreover, while more than 50% anticipated market turmoil as a result of the change in reporting requirements, 35% said they would mark down the shares of a company that showed unexplained volatility in earnings.
An alarming 46% of the analysts surveyed doubted their ability to distinguish between reporting changes resulting from underlying business performance – and those resulting from accounting changes. Indeed, 40% rated their knowledge of IFRS as poor.
With this in mind, corporates must remain aware that, while IFRS will not change the underlying performance of their businesses or cashflows – the markets just might not see it that way.
Every effort must be taken to brief market analysts and other observers of the implications that IAS 39 compliance will have on your financial results. At the same time, you must prepare your stakeholders for any unanticipated volatility in earnings. One way to soften the impact may be the inclusion of statements within your consolidated accounts, explaining to investors that, as use of certain derivatives does not qualify for hedge accounting, they are being being recorded at fair value – a route already favoured by major companies such as Nestlé and Siemens (see Keeping an eye on interest rates, page 12).
This issue of The Treasurer places a special focus on the forthcoming implementation of the new accounting standards, with an update on IAS 39 as it currently stands (see On your marks for IAS 39, page 27), and a checklist of all the things your company will need to consider in the transition to IFRS (see Is the UK ready for IFRS? page 30). Next year is clearly going to be a busy one for all of us.
LIZ SALECKA
Editor