International Accounting Standards (IAS) are likely to have a more immediate effect on the hotel industry than many realise, comments Chris Gent of London based accountants, Wilder Coe.

The regulations can affect all areas of the industry, including hotels and their suppliers, whether owned by an international company, have links to overseas companies, or even if you think your company has nothing to do with any of the above.

It's also worth remembering that you need to start thinking about these changes no matter what your company size now, as the clock really is ticking. The new IAS rules were made mandatory for publicly quoted companies from December 2005 year ends, however, many none quoted companies will also have to produce accounts under the new rules and they will have to start thinking about the consequences right away. As the first sets of IFRS accounts are revealed across Europe and industry sectors, analysts and investors are now looking at the figures to see whether the goals set by IAS have been achieved.

In brief terms the new IAS are a completely new set of rules that apply to company accounts and financial statements. They replace the old Statements of Standard Accounting Practice (SSAP’s) and Financial Reporting Standards (FRS’s). They will change not only the profits that companies report and the assets that they show in their balance sheets, but also the tax that companies will pay. As well as providing more detailed information in a company’s accounts, IAS should help eliminate a wide range of discrepancies in accounting practice between companies operating in the same market. The intention is to give investors a much truer comparison between the performances of market competitors, allowing for more informed investment decisions.

An example of the effect that IAS will have on a company can be seen by looking at the different way that goodwill will be accounted for. Under UK accounting standards, goodwill is shown as an asset on the balance sheet and depreciated (amortised) over its life. Tax relief is available for the amount of depreciation charged in the accounts.

This means that tax relief can be obtained relatively quickly if the useful life is considered short. Under IAS however, this goodwill is not depreciated but is retained on the balance sheet as an asset indefinitely. Tax relief will be restricted to a mere four per cent of the cost of the goodwill per year. Under transitional arrangements it may even be possible that companies will lose the tax relief on goodwill acquired before the change to IAS.

Another significant change relates to cash flow statements. Currently these are not required for small companies or subsidiaries where the parent company produces a cash flow statement. Under IAS all companies will have to show a cash flow statement in their accounts irrespective of the size of the company. This will increase the cost of producing accounts and increase the amount of public information available about the company.

The changes may well have a bigger impact on businesses than changing their accounts. IAS have an increased focus on ‘fair value’ accounting and this will bring greater volatility to reported results. This will impact debt/equity ratios and may result in banking covenants being breached. Bonus or incentive plans for employees, based around results, will be similarly affected. Such changes will impinge upon corporate strategy and need to be planned for well in advance.

All none quoted companies are now allowed to produce accounts under IAS. This will mean that groups of companies that contain overseas members, which will affect many international hotel chains, will almost certainly be adopting the new rules as ‘group policy’ from that date. This will involve re-stating balance sheets for December 2004 as these numbers will be the ‘comparative’ figures for the 2005 accounts and comparative figures will have to be shown, prepared under the same new rules as the 2005 figures. In addition, in this first year, companies will be required to give a full explanation between the results under IAS and those they would have reported under the old UK accounting standards.

For some companies this will make a significant difference to their reported figures. Profits and assets will change as will the ability of companies to pay dividends. There will also be a burden in having to disclose additional information not currently required including segmental information as well as related party transactions. If the company uses financial instruments, such as forward contracts for currency to be used to pay for imports, then the change in the way these will be reported will alarm many of those who handle the accounts for your company.

Companies need to start planning for these changes straight away. The Auditing Practices Board has already issued guidance to auditors warning that many companies will fail to have adequate systems in place to report under the new rules and that this will result in qualified audit reports. As well as reviewing accounting systems, strategic plans will need to be updated to address issues regarding banking arrangements and employee incentive schemes.

The first thing to do is to speak to your Group finance director and find out what the adoption policy will be. If you are not a subsidiary then it may still be worthwhile discussing the issue with your significant overseas suppliers and similar companies to yourselves to see whether the industry practice will be early adoption. When doing this it is worth remembering that IAS will become mandatory for all companies at some, as yet unspecified, date in the future and making the change now could be advantageous.