Financials to feel brunt of new rules

While new international accounting standards due to come into force from January will have a significant effect on financial stocks, they should have little overall impact on most other stocks on the Irish market..

According to a report from Goodbody Stockbrokers, the non-financial companies most exposed to IFRS-related volatility from 2005 onwards are Independent News & Media, Trinity Biotech, DCC and IAWS.

Those with least exposure are Paddy Power, cold storage group Norish, Ryanair and Kingspan.

In a study of the likely impact of the accounting changes on 35 quoted companies, the broker found no obvious sector bias to IFRS exposure outside of the banking area, while size-related trends were not in evidence either. Instead, it found that the likely impact of the changes was highly company specific.

European companies will have to use the new international financial reporting standards (IFRS) for accounting periods beginning on or after January 1st, 2005. More than 7,000 listed companies will be affected by the changes which are designed to improve transparency by allowing companies in different EU markets to be more easily compared.

The main areas that will be affected by the new accounting methods are the use of options, accounting for pension deficits, accounting for the use of financial derivatives and the definition and impairment of goodwill.

Goodbody believes the pharmaceutical and healthcare sector are most exposed to the changes in option expensing although the precise impact of theses changes has not yet been quantified by most firms.

However, it believes companies like Trinity Biotech, Icon and Elan are set to take the greatest hit. It estimates that the changes would have knocked as much as 29 per cent off Trinity's 2003 reported earnings while they would have hit Elan's by 16 per cent and Icon's by 9 per cent.

Also exposed in this regard are Irish Continental Group, whose 2003 earnings would have taken a 7.5 per cent hit, and Readymix, where earnings would have fallen by 6.5 per cent.

Changes to accounting for pension deficits will only impact a few companies, the Goodbody report says. Eircom, Glanbia and IAWS are likely to be among those most affected but for the other non-financial companies on the Irish stock market, it should not present an issue.

The four companies with the greatest exposure to goodwill fluctuation are C&C, Horizon, Greencore and Eircom. Kerry in the food sector and UTV in the media sector also feature as having high relative levels of goodwill. Companies with no goodwill on the balance sheet include Tullow Oil and Glanbia.

Goodbody says the derivative exposure is more difficult to quantify while changes in the definition of associates is a further area of uncertainty.

Overall, while Goodbody believes that earnings may be affected, it believes that in percentage terms, the impact will not differ significantly between Irish companies in similar sectors. However, it believes that it is important for companies to "manage the message to the market".

"The stocks most likely to make relative gains over a period of what may be reduced visibility will be those who keep the market fully informed of developments," the broker said.