Some of Ireland and Britain's leading companies may face a drop in reported earnings under proposals published today that will bring UK accounting rules - which also generally apply here - more in line with the rest of the world.
Sir David Tweedie, chairman of the Accounting Standards Board, said Britain could no longer "fly in the face" of international practice on accounting for tax, and companies should start accounting more fully for their liabilities.
Those companies affected will hope the market discounts the changes as a purely accounting issue which does not reflect a real alteration in underlying cash performance.
But there will be fears that investors will react to the changes. Among the measures affected will be debt-equity ratios, which are used by bankers to set lending policies.
"In the long term, this is about improving communications with investors and it may alter the allocation of capital as a result. In the short term, there may be a knee-jerk reaction," said Mr Ken Wild, technical partner with Deloitte & Touche in London. The proposals were first mooted five years ago, and it is likely companies have now accepted the UK and Ireland cannot resist falling into line with international accounting practice.
Sir David hopes to publish a binding final accounting standard on tax before he steps down next year, meaning listed companies reporting on or after December 31st must follow the new rules.
Under the proposal, UK companies could no longer disregard for accounting purposes tax bills which they judge will not have to be paid on the grounds that they are continuously offset by capital allowances on investments.
Accountancy sources here said last night that UK standards would also generally be applied here. This proposal, if implemented, would affect the accounts of some Irish companies which would not currently account for tax liabilities in their statements on the basis that they expected these to be offset by capital allowances.
But they pointed out that with the standard rate of corporate tax falling towards 12.5 per cent, this would not be as painful now for industry here as it would have been when the standard rate was set at a higher level.
While it is too early to estimate the impact on individual UK and Irish companies, analysts have in the past forecast that accounting fully for tax could cut the net asset value of some by up to a third.
Some of the worst affected will be in the utilities, transport, telecommunications and manufacturing sectors.
British Airways said providing fully for tax would add £900 million sterling (€1.1 billion) of liabilities cutting net assets to £2.4 billion: "At the end of the day it is not cash. We expect that the markets will look through the numbers."
Other companies which have recently disclosed in their accounts significant amounts of deferred tax for which no provision has been made include BOC, BT, and Cable & Wireless. In these cases, the liabilities are 1012 per cent of net assets.
While most companies used the rules legitimately, Sir David said others abused them to manage stock market performance. But Sir David's proposals do not exactly follow international practice, and industry is expected to welcome concessions which will cut the impact of any new standard.
In particular, UK companies will be able to discount long-term deferred tax liabilities. The recent cut in the rate of capital allowances is also expected to lessen the impact.
