Financial Strategy, Second Edition

CASE STUDY 12

Learn by Numbers

Keith Boyfield

As a topic, international accounting standards are not necessarily guaranteed to send a shiver of excitement down people's spines. But this indifference may soon change because UK public companies have been required – as from 1 January 2005 – to comply with International Financial Reporting Standards (IFRS).

The new accounting standards are likely to have a profound effect on the way in which utilities state their financial results. As this involves money along with a potential volatility in share prices, investors are likely to give it their rapt attention. Yet it is important to highlight the fact that the implications of IFRS will vary between utilities depending on their business activities.

Why introduce IFRS? In part, like Sarbanes-Oxley, it is a reaction to the succession of corporate scandals that have surfaced in recent years. Regulators believe that the more rigorous rules established under IFRS will curb potential fraudsters, limit any damage that might be associated with maverick management methods and allow companies less flexibility to manage how they present their financing activities.

Experience suggests, nonetheless, that fraudsters will always be with us and IFRS may simply encourage some managers to cut corners in new and innovative ways. But overall, the utilities sector across Europe has a good record when it comes to observing accounting standards.

Another of the key goals linked to IFRS is the desire to enable ...