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While the effect on earnings at the drug company ended up being scant, the accounting alterations have caused changes in behavior.
Stephen Taub, CFO.com | US
October 27, 2004
Call AstraZeneca the guinea pig.
The Anglo-Swedish pharmaceutical giant on Monday paved the way for other European companies when it became the first big corporation to restate its financials from 2003 using international standards, according to the Financial Times.
Altogether, about 7,000 companies in the European Union are required to adopt International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), according to the Wall Street Journal.
The standards state how particular types of transactions and other events should be reflected in financial statements, the paper explains.
On the surface, the new standards won't have much on the company's profits. Earnings per share fell only 1.1 per cent in 2003 when the company applied International Financial Reporting Standards, rather than U.K. Generally Accepted Accounting Principles, the FT reported.
Further, 2004 earnings will be broadly similar to those of 2003, Jon Symonds, AstraZeneca’s CFO and chairman of the Hundred Group of Finance Directors, the body that represents the CFOs and finance directors of the United Kingdom's largest companies, told the newspaper. But the process of applying the new standards “has wider implications in terms of decision-making and behavior,” according to the FT.
The company, for example, has curbed its reliance on derivatives in hedging its foreign-currency exposure, according to the report. AstraZeneca reported $101 million in costs from its hedging policies, which it expects take again in the second half, according to the FT.
The paper also noted that in its restated financials for the first half of 2004, AstraZeneca reported an extra $64 million charge for employee stock options, which works out to 4 percent of restated profits of $1.61 billion.
In one result of the changeover to the new standards, Symonds told the FT, companies with credit-rating problems might suffer downgrades as a result of their recognition of pension liabilities. He also said that accounting for derivatives and other currency hedges could cause earnings volatility at large European exporters.
AstraZeneca also reportedly said it will a fresh look at acquisitions and licensing arrangements, since under the new accounting standards goodwill is subject to impairment tests rather than amortization. Intangible assets, which are common in the pharmaceutical industry, are capitalized on the balance sheet, according to the FT.
AstraZeneca has trained 1,000 employees on the basic principles of International Accounting Standards. “We’re changing the financial language of the company,” Symonds told the paper.