As any reader of the business press would know, IFRS is finally being made mandatory from FY12-13 onwards, with transition rules implying application of IFRS to FY11-12 period also for comparable prior period reporting. While reams have been written on how IFRS will change the face of financial reporting, management compensation etc, investor relations is an area which should undergo a sea change with the advent of IFRS. CFOs, Finance Managers, Executive Assistants and others would do well to read the tea leaves, and move with the wind.
· Explaining the transition is important. Companies like Telus(Canada based telco, known for perhaps the best financial reporting globally!) gave reconciliation schedules and proactive estimated disclosures of the IFRS impact on their key metrics, and were quick to educate investors. In sectors like infrastructure where the balance sheet may see dramatic change due to consolidation rules etc, companies should reach out to analysts and investors. Same for companies with heavy foreign debt, market sensitive assets etc, which may now face more earnings volatility .
· Early IFRS adopters like Infosys and Bharti Airtel have been quick to give detailed business metrics, to allow investors to better appreciate the financials. While the foreign investor base drove the friendly investor relations for Indian IT companies like Infosys, the sheer complexity/multiple segments and desire not to get conglomerate discount drives companies like Airtel(DTH+VAS+Telecom) to give better metrics.
· One of the stated benefits of IFRS is to attract global investors, who can now compare stocks reporting on the same IFRS benchmark. But with great opportunity comes great pressure to keep with the global best reporting practices. Hence, conducting an annual benchmarking exercise of industry financial reporting practices, is useful to keep up with the competition. Taking part in annual report competitions is another way to do such benchmarking.
· And because IFRS entails more market to market exposure via frequent and rigorous asset valuations, companies would need to define ‘core earnings’ which are comparable across periods, be it good or bad. Of course, earnings metrics manipulation is a fine art abroad(especially USA), so Indian investors should be on the lookout.
· With areas like pension accounting, impairment testing, segment reporting and derivatives instrument reporting getting pride of place under IFRS, companies must be prepared to demystify those complex areas(and their impact on the company) for investors, or else risk a complexity discount as value investors shy away from difficult to understand stocks, leaving the field open for short term investors who may assign a lower value.
· All the above offer a golden opportunity to embrace multimedia like plant visit videos, concall mp3 files, 5minute flash videos, uploading commercials etc on the investor relations homepage, to allow broadband enabled investors to get a better feel for the company, especially its intangible assets.
All the above is not rocket science, but in case external help is needed, the Big4 would undoubtedly have people with relevant expertise/skill sets from foreign markets, and would be happy to help set up and staff the IR function. For MBAs/CAs with flair for communication, this is a golden opportunity to explain the strategy to investors, and leverage IFRS to the fullest extent.
[The article has been written by Anandh Sundar Tripuri. He is an MBA from IIM Ahmedabad 2010-12 batch and a ranker in CA/CS/CWA exams. ]