Equities
A majority of equity analysts believe that the switch to the new International Financial Reporting Standards (IFRS) on January 1 2005, which affect all EU-listed companies, could result in market turmoil. The share price of any company with significant treasury activities could be affected because of poor understanding of the new rules and inadequate communication about them.
According to a survey of 100 buy-side and sell-side analysts by Mori for KPMG, 53% of equity analysts believe that IFRS will have an impact on the valuations of company shares, but that this has not yet been reflected in market prices.
Turmoil
Many companies, however, have yet to explain how their results will be affected. Nearly half of all analysts have not been briefed by the companies they track and 69% of analysts have received no training from employers on the changes. As a result, nearly half the analysts surveyed doubt that they will be able to distinguish between changes that result from underlying business performance and those that are purely the result of the new accounting rules.
Over half of the respondents said that some market turmoil could result because of the confusion, with 35% saying that they would mark down companies that showed unexplained volatility in earnings.
?What is clear from this survey is that companies that do not do a good job of explaining how IFRS will affect them could see their share prices suffer,? says Mark Vaessen, head of KPMG’s global IFRS team. ?It’s important to make clear any changes that come simply as a result of the rules.?
IFRS particularly affects companies that use financial instruments extensively, so any firm with significant treasury activities could be affected. Financial services firms could be most at risk because of their extensive use of derivatives. Companies in the energy sector could face similar problems because of their use of embedded derivatives. Some 58% of analysts, however, said that they did not know much about how financial instruments will be treated.
Poor understanding of the rules by analysts and inadequate communication of their effects by companies are at fault, rather than the rules themselves. As many as 64% of analysts believe the new rules will give them more insight into the financial performance of the companies they follow and 52% said they would help better investment decision-making, by improving disclosure and making information comparable across Europe.
Companies and their analysts both have more work to do.
