Analysts are 'distorting' markets over accounting standards

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The Independent Online

Stock markets are being distorted by financial analysts trying to second guess the impact of new international accounting standards, according to Jon Symonds, the chief financial officer of AstraZeneca and chairman of the Hundred Group of FTSE 100 finance directors.

Stock markets are being distorted by financial analysts trying to second guess the impact of new international accounting standards, according to Jon Symonds, the chief financial officer of AstraZeneca and chairman of the Hundred Group of FTSE 100 finance directors.

Mr Symonds has hit out at investment analysts' attempts to predict the winners and losers of the accounting changes being imposed across the European Union.

Investors fear a big rise in the volatility of corporate profits as a result of the harmonisation of international standards, which include new rules on accounting for mergers and acquisitions, employee share options, pension fund deficits and the use of complex derivatives.

Even the UK's biggest companies are still several months away from communicating the financial impact of changes, Mr Symonds said: "There are already a number of analysts' reports out there trying to assess the impact on various industry groups, but there is simply not enough information available yet in the published accounts."

The changes involve dozens of new rules. They will mean hundreds of UK companies, and thousands more across the EU, restating previous accounts and attempting to set out for investors how future results will differ. The Hundred Group is advising its members on how best to communicate with the City, but Mr Symonds admits that "there is going to be such a deluge of information, the propensity for confusion is high".

Earlier this month, the Institute of Chartered Accountants issued dire warnings of a "shockwave" hitting financial markets if the changes are not adequately explained.

The EU is backing adoption of global accounting standards as a means of encouraging a cross-border financial market, while the UK is keen to ensure convergence with the US. The process has been mired in controversy, however, as the banking sector, particularly in France, has fought for an exemption to rules requiring "fair value" accounting for derivatives used to hedge financial positions. The EU is likely to propose a compromise standard, with a final decision due in the autumn, but the issue could still derail the whole project.

As to the impact of the changes, companies will find it more difficult to massage earnings figures after a merger or acquisition, through asset write-downs, and some commentators believe the expensing of employee share options could mean the end to share-based incentives. There are also fears that greater volatility of earnings could constrain the ability to pay dividends.

Andrew Pitt, the head of European stock research at Citigroup Smith Barney, said: "The analytical community, especially at the big investment houses, has done an immense amount of work to prepare. We certainly have. In fact, we are offering our clients training on these issues."

Mr Pitt predicts that the new standards will have little impact on consumer stocks such as retailers, but that the biggest restatements to previous profits will be felt by banks, insurers and media groups. "But you can't pick stocks on this basis, because you could be positively or negatively surprised," he said.

Those supporting the new standards hope they will introduce the greater transparency that, over the long term, will reduce the gap between equity valuations in the US and Europe.

There are also fears that the new accounting standards could add to the bureaucracy that smaller firms already have to contend with.

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