A lukewarm reception

A snapshot survey of opinion among the readership reveals a high degree of
disgruntlement. Asked to judge the value of IFRS accounts as compared to their
UK GAAP predecessors, 65% of respondents said they were worse or much worse.
Just 13% thought they were better.

This is unfortunate, given the evident effort involved in IFRS adoption. The
technical accounting decisions involved and the pressure on finance manpower,
were cited as particularly significant challenges in the process. In addition,
almost three-quarters (74%) of respondents said they had ‘a few difficulties’ to
resolve with their auditors as a result of the IFRS switch, while 14% bemoaned
significant difficulties.

‘The general view is that it [IFRS adoption] hasn’t really made any
difference,’ says Ken Lever, FD of Tomkins and chairman of The Hundred Group’s
financial reporting committee.

‘It’s a bit like shopping: a lot of pushing and shoving and not a lot to show
for it at the end.’

For Tomkins, the adoption of IFRS has had relatively little impact on its
published accounts. ‘A lot of time and effort went into it, a lot of head
scratching, a lot of discussions with auditors, who didn’t necessarily know the
answers because they were learning as they went along,’ says Lever.

‘And the end product was not much more helpful than what you had before. Most
companies have worked exceptionally hard for the December reporting year end, to
get the numbers out, and in the end they didn’t see much effect.’

That hard work has been reflected in the expanded size of IFRS reports and
accounts. According to the survey, the majority of respondents said their IFRS
accounts (including notes) were longer (or likely to be longer) than their UK
GAAP predecessors. Around 40% estimated the IFRS accounts would be up to 20%
longer, and another 30% said they would be up to 50% longer.

This is a finding backed up in recent research performed by
PricewaterhouseCoopers. ‘We have reviewed the first 60 [IFRS] accounts to have
come out, and the average length of increase of accounts is about one-third,’
says Ian Dilks, IFRS conversions leader at PwC.

About 60% of companies’ accounts had increased by around 50%. ‘For some
companies, the size more than doubled,’ Dilks notes. ‘That means a lot of extra
work and finance resources have been grappling with new policies, quite apart
from the extra disclosures required.’

This may explain the strength of negative feeling about IFRS currently being
expressed. ‘What’s in people’s minds at the moment are the problems,’ says

‘People have just been through a period that’s been fairly torrid. But it’s
early days to be looking at any benefits. There’s been a lot of extra
disclosure, the benefits of which are probably more obvious to investors than
the companies producing the information.’

Nevertheless, some companies may have benefited from adopting IFRS. Lever
suggests that, the financial services sector aside, pensions accounting has been
the biggest issue for most companies moving to IFRS. ‘Some companies have
benefited, because they could push their pension fund deficit into the past, as
it were,’ he says.

‘Going forward, they are not having to charge that deficit through the income
statement, but that could be misleading because they still have to provide the
cashflow funding for the pension fund deficit going forward. Their earnings per
share have benefited, because the charge going through the income statement in
2005 is less than previous years because it’s taken care of in the opening IFRS
balance sheet. It got slipped through reserves. So some companies, from an EPS
perspective, have benefited.’

Nevertheless, if most companies are sceptical about any advantages of IFRS,
what of investors and analysts? As far as Tomkins is concerned, the move to IFRS
doesn’t seem to have excited analysts. ‘There haven’t been many questions from
investors or analysts,’ Lever notes. ‘They either look at it [IFRS accounting]
and understand it, or they decide it’s not that significant.’

But most of those who participated in our snapshot survey appear less
charitable. Just 5% thought investors/analysts had a good understanding of IFRS
numbers. Meanwhile, 93% thought their understanding was either only reasonable
or poor.

This article first appeared in the May edition of our sister publication
Financial Director

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