Companies must work hard to understand the new IFRS

Mention accounting treatments to almost anyone but an accountant, and you're likely to see their expression glaze over. But new International Financial Reporting Standards (IFRS), which apply to all EU listed companies from January 2005, have been sparking debate across the financial community because of the profound effect they will have in changing the numbers that many of these enterprises report.
Because IFRS will change the complexion of financial results, the outputs of the valuation metrics that analysts and investors most commonly use to measure company performance will also change. As IFRS evolves, its widespread use should help investors to better understand and compare the relative performance of companies across geographies and industry sectors, and thereby influence how they make valuation decisions. But until that time, there's plenty of scope for misunderstandings and market volatility.
KPMG recently commissioned Mori to interview 100 buy-side and sell-side analysts. When asked whether they felt confident enough that they would be able to distinguish between changes that are the result of underlying business performance and those due to accounting changes, many expressed doubts. The majority believed that the introduction of IFRS would have an impact on the valuations of company shares, but that these have not yet been factored into pricing. The message here is clear: investor communication is going to be key if companies want to avoid shocks come the first IFRS-based interim results.
The biggest knowledge gaps appear to be around the most crucial reporting areas. When asked how well they understood the possible impact of IFRS on different
aspects of financial information, nearly two-thirds of analysts said they knew little about the effect the new standards would have on the way mergers and acquisitions are accounted for, and a similar proportion knew little about the treatment of financial instruments. More than half said they were uncertain about the way share options would need to be valued and the impact on the accounts.
There is clearly much for companies to do -in helping demystify IFRS for the investment community and without this help there is a significant risk that some analysts will be insufficiently prepared.