Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
Most analysts do not model future gains and losses on derivatives. For most
practical purposes, what is key is to remember that transaction hedges to protect
the company against foreign exchange risk, for example, will run out typically
after a year to eighteen months. So if there has been an adverse currency
movement which has not yet been reflected in trading profits, it will be! Unless
the exchange rate is expected to reverse, the risk is that a substantial impairment
to the value of the business is ignored. The marking to market of cash flow
hedges should at least alert analysts to this problem, which was often completely
obscure in the past.
8. Fixed assets
8.1 Why is it important?
Much of the balance sheet of today’s typical listed company is made up of
intangible fixed assets i.e. those with no physical presence. Exhibit 4.27 shows
the dominance of intangibles in the balance sheet of Vodafone, the telecoms
company. Therefore in order to analyse a company’s asset base appropriately and
indeed its return on invested capital we must have a good understanding of how
financial statements reflect this important asset group. In many ways the
accounting appears to obfuscate and confuse rather than show the underlying
economics of a company’s dealings in intangibles if not interpreted
carefully.Tangible fixed assets are also of importance although their accounting
tends to be more straightforward.
Exhibit 4.27: Vodafone tangible and intangible fixed assets
140000
120000
100000
80000
60000
40000
20000
0
1999 2000 2001 2002 2003 2004
Tangible
Intangible
Source: Vodafone published financials
154