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Last Updated: Monday, 15 November, 2004, 18:14 GMT
UK firms 'face accounts trouble'
New accounting standards could impact on share prices
Listed UK firms which are slow to adopt new accounting standards could see their share prices in turmoil, a leading firm of accountants has warned.

The IFRS (International Financial Reporting Standard) is designed to give investors more transparency about a company's finances.

From January 2005 it will replace the nearly 30 different accounting systems across Europe.

Ernst & Young said up to 500 UK firms may face problems completing the work.

As a result both investors and City analysts would find it difficult to understand their accounts and probably "sell [their shares] now and ask questions later", Ernst & Young senior partner Allister Wilson said.

Share price volatility

If the reasons for changes in the look of accounts were not communicated clearly, it could result in "extreme share price volatility", he added.

The situation was made more difficult by the fact that many analysts themselves were quite hazy on the details of the meaning of the accounting changes.

That, in turn, would make it even more important for companies to communicate clearly how the changes would be affecting them, Mr Wilson said.

The new accounting standard forces companies, among other things, to change the way they count key numbers like cash flow and fixed assets.

It will also throw a company's real debt situation into much sharper relief, and - especially for firms in continental Europe - make pensions obligations more visible.

Leases will show up on the balance books, while hedges against certain kinds of risk may disappear.

Concepts like "fair value" are replacing traditional benchmarks like "historical cost".

Managing expectations

IFRS may even have an impact on the tax burden faced by companies.

And stock options granted to top executives - a hotly debated issue both in Europe and the US - will also show up in the books for the first time.

The new rules apply to all listed companies and in some countries even to unlisted firms.

That means that even small firms listed on the stock market will have to change the way they do their accounts.

Alison Duncan, head of the IFRS conversion group at Ernst & Young, said many firms had not even done an impact study of the changes required, even though the first set of accounts written for the new standards will have to be submitted to shareholders as early as March next year.

Ernst & Young itself is not an uninterested party in the subject. The company makes money from helping customers get ready for the changeover.

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