Dont forget the audience

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Dont forget the audience

by Ian Dilks and Tim Harris 11 Feb 2006 Topic: Business, IAS

Ian Dilks and Tim Harris explain why investors views matter to the IFRS There is one obvious and simple answer to the question why investors views of IFRS matter: they are the ultimate audience and the most important users of the financial information that companies provide. The more subtle response to the question arises from the background to some of the negative views from companies and preparers that have accompanied the introduction of IFRS as the practical impacts and the costs of converting from UK GAAP have been felt. Despite the misgivings of some about costs and resources, UK listed companies have (or, in the case of AIM, will shortly have) no choice but to comply with the requirements of the new standards. IFRS is a mandatory, legal requirement, with appropriate penalties attached to any failure to complete the conversion in time and to acceptable standards. However, the nature of IFRS means there are some choices that companies still have about the way that they use and interpret the new standards. Take, for example, the formats for presenting accounts. IFRS still largely retains a principles-based approach - companies are not required to complete rigorous compliance with detailed rules. There is still room for interpretation. This means that companies and preparers will need to decide about some significant aspects of the way they present their accounts in IFRS including what, if any, additional commentary is required in the financial section of the Business Review. In making their choices, they need to ensure that they understand what investors want and how they are reacting to the information that they have seen to date. To try and identify what investors regard as important in the new standards, PwC conducted a survey of fund managers who between them represent more than half of the UK market, with more than 50% having funds under management of more than 50bn. Unlike other surveys, the PwC approach was to ensure that it was those who make the investment decisions, not their advisers or analysts, who formed the survey group. And even though it is still very early days, the results of the survey, IFRS - The Investors View, show that the overwhelming majority of the fund managers covered believe that IFRS represents both a significant change and is also something that is influencing their investment decisions. Investors positive Negative commentary from some quarters may have given rise to the impression, at least in the UK, that despite the cost and effort of conversion little change has taken place in the numbers that companies present. The view of some is that significant pain has been felt for

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Dont forget the audience

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very little discernible gain. The survey refutes that perception. Though still at an early stage in proceedings, the conversion to IFRS is having a real influence on investors and the way that they perceive the companies about which they make investment decisions. A significant number of respondents to the survey (24%) said that IFRS is already having an impact on their perception of company values, and an even higher proportion (47%) say that IFRS has already influenced their investment decisions. US GAAP versus IFRS One of the key issues in the convergence debate has been the prospect of a further coming together of US and international accounting standards (i.e. US GAAP and IFRS). For some companies (for example, those listed in both Europe and the US) there are some obvious benefits to a mutually agreed set of reporting standards between the US and Europe. For others, the benefits are less clear. However, what is evident from the survey is that UK investors, to date, express a preference for IFRS over US GAAP. Twice as many found IFRS more helpful than US GAAP. (The preliminary findings of the similar European survey conducted by PwC also suggest that there is a marked preference for IFRS over US GAAP in continental Europe). What these results show is that investors seem to be backing the changes. An additional point in this context is the extent to which the adoption of IFRS in jurisdictions outside Europe, notably in Asia, may also fuel the development of the European capital markets and increase their competitive position with regards to the US, which has traditionally offered a deeper pool of liquidity to companies. There are other positive indications from the survey that investors like what they see so far. For example, many of those surveyed were positive about the clarity of risk disclosure - both operational and financial - that the new standards presented, and the overwhelming majority (80%) believed that the financial statements that they have seen to date were either very or fairly useful. Learning early lessons Of course, it is still early days. The change to accounting standards that the market has grown up with over decades is profound and will therefore take time to bed in. There are more twists and turns in the IFRS - and the wider convergence - story yet to come. But companies can, on the whole, be heartened by the confidence that investors express in their understanding of the new standards and the generally positive reaction with which they have greeted them. Though some companies may still have very legitimate concerns about the future direction that IFRS will take, they need to make sure that the efforts that they have committed to achieving successful conversion continue. Some commentators have suggested that the investment community would not understand the changes. This perception appears to be at odds with the view directly reported from the market. Some 84% of investors questioned regard themselves as at least reasonably wellinformed, with a quarter saying that they know a great deal about the impact of IFRS on the companies in which they invest in the UK. The next few months will show how sound this knowledge is. How should companies respond?

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Though the cost of conversion has been high for many companies, and their consequently negative reaction to IFRS understandable, the results of the survey should provide them with the basis for a more optimistic view of the road ahead. The biggest single issue that investors say they have faced in connection with the changes has been the time required to assimilate and understand them. This finding suggests that the absorption phase is far from over, and companies will need to support their investors as they further develop their understanding of IFRS and its impacts. Fund managers readily admit to gaps in their knowledge. As these are filled, and the ability of investors to make genuinely European-wide comparisons between companies increases, it is important that the positive early perceptions companies have achieved are enhanced and developed. Companies can take heart from the largely positive views that investors have expressed at this early stage. Their next challenge is to build from that platform and ensure that they continue to engage actively with their investors, understand their needs and manage their reporting under the new standards appropriately. The convergence debate remains a live and active one. Investors views are an essential voice to ensure that the debates outcome produces a positive result for all concerned. Ian Dilks is head of IFRS conversions, and Tim Harris is partner of the global capital markets group, PwC.

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