Vodafone is poised to turn years of relentless red ink on its pre-tax results line into a bumper £9bn plus profit thanks to new international accounting rules which take affect this year.
All companies must adopt international financial reporting standards (IFRS) in an effort to make UK, European and American accounting practices comparable. The aim is to allow investors across the world to better understand companies' accounts on a clear and equivalent basis.
Vodafone has spent £2m to £3m reviewing and restating its accounts so they comply with IFRS although Ken Hydon, the company's outgoing finance director, admitted that most of the changes were "purely presentational". However, the single biggest change under IFRS allows companies to drop the practice of amortising, or writing down, goodwill. For Vodafone this has huge significance because it carries £94.5bn of goodwill - otherwise known as intangible assets - on its balance sheet; a legacy of its acquisition spree during the 1990s boom that included the £100m bid for German operator, Mannesmann.
The company has been forced to amortise this at a rate equivalent to £15.2bn to a year, plunging it into an annual pre-tax loss. At its last annual results, for the year to end-March 31, this meant that Vodafone reported a loss of £5.3bn. However, adding back the amortisation of goodwill, minus one or two small charges, would have produced a pre-tax profit of £9bn for the company.
That said, Mr Hydon was at pains yesterday, at a presentation to explain the impact on Vodafone of IFRS, that the accounting changes would have no affect on the company's dividend policy or its ability to pay dividends.
The company will now start reporting positive earnings per share figures. For the most recent six-month period to September 30, the company said earnings per share would go from minus 4.77p to a positive 5.4p. Although the practice of amortising goodwill will cease, companies will still have to review the value of their intangible assets every year.
If the assets no longer support the goodwill value on balance sheets, then companies will have to take an impairment charge and write down their goodwill; a move that would hit profits.
Analysts agree that IFRS should not change fundamental valuations in European equity markets. About 7,000 of Europe's largest companies will be restating their figures to take account of the new standard, and there may be room for surprises. For its part, Vodafone, which has spent nearly £3m on revamping its accounts, is relieved at the change, if only because the company will no longer have to live with ignorantly inspired headlines about vast losses.Reuse content