Several major European companies including Vodafone could see their revenues fall significantly when reporting under new IFRS rules on group accounting, according to research by Fitch Ratings.
The credit agency says its analysis suggests there will be a 'material' fall in reported revenues, assets and liabilities for some corporates because of changes to IFRS 11 Joint Arrangements. This prescribes new accounting rules that prohibit proportionate consolidation for what are now defined as 'joint ventures.' For structures that are classified as 'joint operations,' a method similar to proportionate consolidation is now required.
The new IFRS standards are not mandatory in the EU until 2014, but many large non-financial corporates chose to adopt them in 2013. Fitch's survey of 24 large European non-financial corporates found that 13 had already moved to equity accounting and calculates the biggest loser will be Vodafone Group reporting revenues down by €7.6bn (£6.3bn), along with reductions at Robert Bosch, down by €7.3bn (£6bn) and BASF, down by €6.6bn (£5.4bn).
In its report, New IFRS Regime for Group Accounting, Fitch warns the changes have the potential to affect any line in the financial statements, and could reduce revenue and expenses, gross assets, and liabilities, which will be particularly significant if debt sits in the joint venture. However, profitability might increase if the joint venture is loss-making, as the equity method may restrict recognition of losses.
In contrast, Fitch's survey indicates that another new standard, IFRS 10 Consolidated Financial Statements, will not have a significant effect for most companies. These changes were targeted in particular at off-balance sheet structured entities and the agency says most of the group relationships that non-financial corporates have will be unaffected by the new rules.
Fitch says that the accounting changes introduced by IFRS 10 and 11 should not affect underlying credit quality, unlike a third new standard, IFRS 12. This provides for a further range of disclosures and Fitch says the information resulting from these will be useful in assessing the transferability of cashflows within a group and risks arising from interests in structured entities.
