7/30/2019 Accounting Busin

1/3

Dont forget the audience

by Ian Dilks and Tim Harris11 Feb 2006

Topic: Bus iness, 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 thatcompanies provide.

The more subtle response to the question arises from the background to some of the negativeviews 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, inthe case of AIM, will shortly have) no choice but to comply with the requirements of the newstandards. IFRS is a mandatory, legal requirement, with appropriate penalties attached to anyfailure to complete the conversion in time and to acceptable standards. However, the natureof IFRS means there are some choices that companies still have about the way that they useand interpret the new standards. Take, for example, the formats for presenting accounts.IFRS still largely retains a principles-based approach - companies are not required tocomplete rigorous compliance with detailed rules. There is still room for interpretation. Thismeans 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 isrequired in the financial section of the Business Review. In making their choices, they need toensure that they understand what investors want and how they are reacting to the informationthat they have seen to date.

To try and identify what investors regard as important in the newstandards, PwC conducted asurvey of fund managers who between them represent more than half of the UK market, withmore 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, nottheir advisers or analysts, who formed the survey group.

And even though it is still very early days, the results of the survey, IFRS - The InvestorsView, show that the overwhelming majority of the fund managers covered believe that IFRSrepresents both a significant change and is also something that is influencing their investmentdecisions.

Investors positive

Negative commentary from some quarters may have given rise to the impression, at least inthe UK, that despite the cost and effort of conversion little change has taken place in thenumbers that companies present. The view of some is that significant pain has been felt for

Page 1 of 3Dont forget the audience

11/01/2006http://www.accaglobal.com/members/publications/accounting_business/archive/2006/feb...

7/30/2019 Accounting Busin

2/3

very little discernible gain. The survey refutes that perception. Though still at an early stage inproceedings, the conversion to IFRS is having a real influence on investors and the way thatthey perceive the companies about which they make investment decisions. A significantnumber of respondents to the survey (24%) said that IFRS is already having an impact ontheir perception of company values, and an even higher proportion (47%) say that IFRS hasalready influenced their investment decisions.

US GAAP versus IFRS

One of the key issues in the convergence debate has been the prospect of a further comingtogether of US and international accounting standards (i.e. US GAAP and IFRS). For somecompanies (for example, those listed in both Europe and the US) there are some obviousbenefits to a mutually agreed set of reporting standards between the US and Europe. Forothers, the benefits are less clear. However, what is evident from the survey is that UKinvestors, to date, express a preference for IFRS over US GAAP. Twice as many found IFRSmore helpful than US GAAP. (The preliminary findings of the similar European surveyconducted 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 thechanges. An additional point in this context is the extent to which the adoption of IFRS injurisdictions outside Europe, notably in Asia, may also fuel the development of the Europeancapital markets and increase their competitive position with regards to the US, which hastraditionally 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 - bothoperational 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 orfairly useful.

Learning early lessons

Of course, it is still early days. The change to accounting standards that the market has grownup with over decades is profound and will therefore take time to bed in. There are more twistsand turns in the IFRS - and the wider convergence - story yet to come. But companies can, onthe whole, be heartened by the confidence that investors express in their understanding of thenew standards and the generally positive reaction with which they have greeted them.

Though some companies may still have very legitimate concerns about the future directionthat IFRS will take, they need to make sure that the efforts that they have committed toachieving successful conversion continue.

Some commentators have suggested that the investment community would not understandthe changes. This perception appears to be at odds with the view directly reported from themarket. Some 84% of investors questioned regard themselves as at least reasonably well-informed, with a quarter saying that they know a great deal about the impact of IFRS on thecompanies in which they invest in the UK. The next few months will show how sound thisknowledge is.

How should companies respond?

Page 2 of 3Dont forget the audience

11/01/2006http://www.accaglobal.com/members/publications/accounting_business/archive/2006/feb...

7/30/2019 Accounting Busin

3/3

Though the cost of conversion has been high for many companies, and their consequentlynegative reaction to IFRS understandable, the results of the survey should provide them withthe basis for a more optimistic view of the road ahead.

The biggest single issue that investors say they have faced in connection with the changeshas been the time required to assimilate and understand them. This finding suggests that theabsorption phase is far from over, and companies will need to support their investors as theyfurther develop their understanding of IFRS and its impacts. Fund managers readily admit togaps in their knowledge. As these are filled, and the ability of investors to make genuinelyEuropean-wide comparisons between companies increases, it is important that the positiveearly perceptions companies have achieved are enhanced and developed.

Companies can take heart from the largely positive views that investors have expressed atthis early stage. Their next challenge is to build from that platform and ensure that theycontinue to engage actively with their investors, understand their needs and manage theirreporting 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 marketsgroup, PwC.

Page 3 of 3Dont forget the audience

11/01/2006http://www accaglobal com/members/publications/accounting business/archive/2006/feb