78% Of Scotland's SME's Trading Abroad Unaware Of New Currency Reporting Regs

10th October 2006

78% OF SCOTLANDS SMES TRADING ABROAD ARE UNAWARE OF NEW IFRS RULES AFFECTING THE REPORTING OF CURRENCY RISK

IFRS will affect all SME businesses trading abroad and how they report currency risk

AIM (Alternative Investment Market) businesses have less than four months to prepare for P&L impact

There is a severe lack of awareness of new IFRS rules which will affect all SMEs trading abroad according to HiFX, one of the UK's leading foreign exchange specialists. Yet AIM-listed groups have less than four months to prepare for these changes, which have a serious impact on the reporting of currency risk.

AIM companies trading abroad could be seriously impacted by the adoption of International Financial Reporting Standards (IFRS) from 1 January 2007. By 2009 all UK companies are likely to have to adopt UK GAAP equivalent versions of IFRS; however, analysis by HIFX reveals that just one fifth of Scottish internationally operating SMEs are aware of the changes, let alone prepared!

*According to recent research by HiFX*, there are 4000 Scottish SMEs trading abroad of which over three quarters (78%) are completely unaware of the how IFRS or new UK GAAP will affect the impact on profitability and balance sheet valuations of derivatives.

IAS 39 - the issue for businesses
Foreign exchange fluctuations can have considerable impact on an organisation's bottom line profit. Many UK companies trading abroad employ forward contracts to manage foreign exchange risk and minimise profit and loss volatility caused by foreign exchange rate movements.

One of the biggest impacts of moving to IAS 39 or the equivalent new UK accounting standards (FRS 26) is the requirement for businesses to fair value all derivatives, including foreign exchange forward contracts, on their balance sheet and to report changes in fair value through the profit and loss - including those used for risk management purposes, unless hedge accounting is adopted.

Mark Bodega, Marketing Director from HiFX commented: "Up until now AIM-listed businesses just had to worry about using forward contracts to manage the economic risk their overseas transactions exposed them to, from 2007 they will also have an accounting risk to consider. IFRS rules are not intended to stop companies managing risk or using derivatives however complicated it all sounds. In fact the new rules in IAS 39 contain certain reliefs, namely hedge accounting which can actually reduce potential earnings volatility caused by derivative movements. However, in order to obtain these reliefs, IAS 39 requires detailed documentation of hedge relationships, to prove that they have been, and will remain, effective."

Bodega adds: "So what's the solution? Don't stop hedging foreign exchange risk because IAS 39 is coming into force; simply give your company plenty of time to understand the new rules and be better prepared so you don't experience P&L shock."

HIFX Plc advises on over £10 billion of currency transactions per annum and provides proactive foreign exchange advice to companies around the world including the Royal Mail and Manchester United. The currency management advice provided is tailored specifically to each company's needs and is determined by a host of different factors including the size and frequency of a client's foreign exchange exposure, their risk appetite and internal risk policies.

*Research was carried out by Continental Research in March 2006 asking 200 small to medium sized business on a telephone omnibus.