VideoThere's no turning back now. This month, some 7,000 listed European companies are scheduled to start using a single set of international financial-reporting standards — whether they are ready or not. The new IFRS rules must be adopted by year-end, including those related to hedge accounting and fair value that met fierce opposition.
Sir David Tweedie, chairman of the International Accounting Standards Board, believes the time is right for the European Union to have one accounting language. As he told CFO last year, a single language will mean much more than financial transparency. "What we are really talking about is inward investment, growth, employment, and world trade," he said. "It is not about arcane bookkeeping matters."
Those bookkeeping matters, however, have not been easy to decipher. It is estimated that at least 500 companies in the United Kingdom, for example, are not ready for the rules introduction. Even more worrisome is that investors and analysts are not prepared. A November KPMG survey revealed that 40 percent of the 100 analysts surveyed said that their knowledge of the new standards was "poor."
How the standards will affect financials won't be known until the first interim reports are issued later in the year. But there will be a mixed bag. German chemical giant BASF AG has already revealed that the new rules on goodwill could add about €200 million to its net profit, while L'Oreal SA's net worth could be reduced by €1.8 billion.
What the European experience will mean for the convergence of U.S. and international standards — slated to be in place between 2007 and 2008 — is also unclear. It may be the "handwriting on the wall" for what the future holds for U.S. companies, says Paul Bahnson, a professor of accountancy at Boise State University. But one main difference, says April Mackenzie, director of international financial reporting at Grant Thornton LLP, is that Europe is experiencing "a big bang," whereas U.S. convergence will be "more like a creep."
Still, observers strongly recommend that U.S. companies pay close attention to the European transition — a task that might prove difficult, says Dennis Beresford, former chairman of the Financial Accounting Standards Board. With all that U.S. CFOs have to do — Section 404 of Sarbanes-Oxley, accelerated reporting, expensing stock options — addressing future convergence is too overwhelming. "It may be intellectually interesting," says Beresford, now an accounting professor at the University of Georgia, "but [finance executives] don't have time right now to think about something so long term." —Lori Calabro
Grounded to a Halt?
More executives may consider flying coach this year or even taking the train, thanks to a provision of the new tax bill, the American Jobs Creation Act of 2004.
That provision will change the way companies account for employees' personal use of corporate aircraft. In the past, personal use of a company plane was considered a taxable source of compensation to the executive, and corporations were entitled to deduct the full cost of operating the aircraft on that flight. In the new law, however, the corporation's deduction is limited to the amount the employee includes in income.
Hank Gutman, a principal at KPMG, notes that the new tax will increase the cost of operating a corporate air fleet. But he doesn't believe it will totally discourage executives from using planes for personal reasons — only that cost implications will be examined.
But Louis M. Meiners Jr., president of Advocate Aircraft Taxation Co., contends the provision is already curtailing such travel. And, he says, the rule conflicts with federal aviation regulations that "prohibit employees from reimbursing employers" for air travel.
The government estimates the provision will add an extra $2.3 million in taxes in the next decade.
Give It Back!
State regulators are becoming significantly more aggressive in their attempts to rein in "obscene" executive-severance packages — so-called golden parachutes. But are their actions justifiable or simply political?
California insurance commissioner John Garamendi recently negotiated $265 million in givebacks from Anthem Inc., the fifth-largest publicly traded health-insurance company in the country, as a condition of his approval of its merger with WellPoint Health Networks Inc. The total "undertakings," as the givebacks are called, are on top of financial commitments already agreed to by Anthem, and will equal the amount that WellPoint executives were due to receive as part of the deal, including more than $70 million for WellPoint CEO Leonard Shaeffer.
Garamendi initially blocked the deal in July because it was "very bad for the policyholders of California." The projected $4 billion in acquisition costs for the $16.4 billion stock-plus-cash deal, he explains, could be paid off only by raising premiums in California — a move he opposed. He also vociferously objected to the golden parachutes due to senior WellPoint executives. "The executive compensation is gross and obnoxious," says Garamendi. "Seventy million is excessive. That's insurance policies for 50,000 children. Are you saying Shaeffer is worth 50,000 children? Not in the world that I live in."
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