In This Issue: IFRS After Transition: What's In Store For Standard & Poor's Credit Analysis?: The transition to IFRS has been remarkably smooth for European companies, as year-end 2005 accounts were issued during 2006 without significant delay. Furthermore, none of the accounting changes resulting from the IFRS transition single-handedly caused a change in ratings, as Standard & Poor's assessment of underlying credit risk has not been significantly affected. Nevertheless, IFRS presents many ongoing issues for credit analysis.IFRS: An Added Twist To The Globalization Of Canada's Capital Markets: Despite the long-held assumption by many in Canada that Canadian accounting principles would inevitably morph into U.S.-style accounting rules, the accounting standards board of Canada has chosen to adopt international guidelines instead, specifically IFRS. Based on Standard & Poor's recent survey of company management, investors, and the analytic community, the capital markets appear to hold divergent views on IFRS' significance and potential effects. How IFRS Transition Affected The Financial Disclosure Of Major Western European Banks: All listed European groups were required to implement IFRS as the basis of accounting in their financial reporting for years beginning Jan. 1, 2005. While in some cases reported amounts changed materially, the transition did not result in changes to the ratings on the financial institutions rated by Standard & Poor's, as our assessment of underlying credit risk did not alter. IFRS For Insurance: Opportunity Revived As The CFO Forum Steps Up Its Involvement: As predicted by Standard & Poor's, IFRS adoption among European insurers has gone off with more of a whimper than a bang. The benefits of greater consistency and enhanced disclosure, particularly for the key risks faced by insurers, have been partly offset by a reduction in the relevance of life insurers' primary financial statements as a consequence of the mixed-attribute approach adopted by the IASB as a short-term fix. More Clarity Needed In IFRS Accounts Of European Corporates: IFRS adoption in Europe has resulted in significant benefits to users of financial information, mostly because of improved disclosures. The increased transparency from IFRS has led to a substantial reduction to information risk arising from relying on companies to voluntarily disclose key data that were not expressly required in their financial statements under legacy GAAP or local regulations. IFRS Figures Require Significant Adjustments To Deduce True Performance Of Corporate Issuers: The ability to deduce a company's true performance and financial position from its reported figures is crucial to assessing its ability to pay back debt obligations on time. For corporate issuers, the introduction of IFRS has allowed Standard & Poor's to more easily compare financial statements, but has not abolished the need for careful analysis of reported financial information and adjustments to address cases when the accounting, now under IFRS, does not correspond with our own analytical views. Accounting For Defined-Benefit Pension Obligations: Past Promises Return To Haunt Western European Banks: The transition to IFRS has had a pronounced impact on the financial statements of Western European banks through the emergence of considerable unfunded obligations related to postretirement benefit pension plans. The key findings show, among other things, that the combined impact at the date of transition amounted to €19 billion (before tax), representing 2% of reported shareholders' equity for the 38 banks that transitioned to IFRS. This amount was charged directly to the retained earnings of these banks, and will therefore never be reflected as a charge to reported earnings. The transition impact was largest for U.K., Dutch, and Spanish banks. EBITDAs Are Not Equal: European High-Grade Telecoms Operators Reveal An Inflated And Inconsistent View Of EBITDA: With no GAAP recognition of EBITDA, the values communicated to the market can vary significantly between companies, mainly due to individual company interpretation of what items of income and expenditure are included (or excluded) in its calculation. This variation is confirmed by the results of a benchmarking survey of investment-grade telecoms issuers undertaken recently by Standard & Poor's. Our findings reveal that company-reported EBITDA has been potentially boosted by 9%-a staggering €900 million-on average, with a range of 2% to 15% for individual companies. About CreditWeek:
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