EU's new accounting standards hamper acquisitions and exits

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According to press reports, the EU's revisions to the international accounting rules, which came into force in January 2005, are having a big impact on private equity acquisitions, exits and portfolio company valuations in Europe. The new rules apply to all listed portfolio companies, including those financed with publicly held debt, such as a high yield bond issue. Buyout firms with interests in these businesses will need to conform to the new international financial reporting standards. The crux for private equity firms is purportedly the way in which pension liabilities are treated on the balance sheet. Under the new standards, public companies with big deficits in their pension plans must report them directly in their accounts, which could have a dramatic impact on valuations. In accordance with the new rules, companies must reflect the fair value of assets and liabilities on their balance sheets, including defined pension deficits, derivatives, share options and hedging instruments. Firms with stakes in technology businesses, which often issue large numbers of share options to their employees, are also expected to be adversely affected by the new rules. Although the standards only apply to listed EU companies, it is believed that they will become the norm for corporate finance transactions in Europe.