Widespread confusion could result from the introduction of international accounting standards over the next few years.In the long term, the idea that companies across the globe could one day all use the same set of standards is an attractive prospect.
Link: IAS special report
For Europe, IAS will undoubtedly help the single market function more efficiently, with the financial information provided by companies from different member states wholly accessible to shareholders and analysts throughout the European Union.
But adopting IAS is likely to have some surprisingly large effects on the company accounts. Differing treatment of goodwill and pensions, for example, can alter figures significantly.
An Accountancy Age survey of 500 FDs reveals a growing sense of despair about the state of preparation for IAS. The majority (85%) believes that less than half of investors would have a good understanding of accounts prepared in IAS.
Tony Clifford, Ernst & Young partner, says: ‘Some companies will see some unexpected effects in their accounts. Companies need to plan for IAS and understand the consequences. Preparation and control are going to be key.’
But the Accountancy Age research also highlights the growing divide in preparation between the larger companies and smaller concerns. While 18.5% of FDs rated the readiness of FTSE100 companies for compliance with IAS in 2005 as ‘very good’, only 2.8% thought the same could be said for the smallest listed companies. In fact, twice as many FDs (6.4%) described the state of readiness of smaller companies as ‘very poor’.
One FD surveyed sums up the general mood of smaller companies as: ‘More standards, more red tape and more people employed to find ways of circumnavigating the regulations.’
Larger companies simply have more resources at their disposal to come to terms with IAS and prepare the ground with analysts and investors.
‘I consider the burden to be much greater on fledgling-type companies than FTSE100,’ says another FD.
The Quoted Companies Alliance, a group that lobbies for the interests of smaller listed companies, is demanding the EU give smaller listed concerns a two-year stay on compliance with international standards. But as things stand, companies must be ready to prepare comparative statements from next year.
In the worst-case scenario, businesses may miss the deadline for international standards with confidence in the companies damaged and investors confused.
If investors do not fully understand the changes to the accounts from the adoption of international standards, they may even take flight. Larger companies will have fewer excuses than smaller players for not being prepared.
Companies would be more enthusiastic about IAS if they could see some tangible benefits. Worryingly, when asked how beneficial the introduction of IAS would be, the majority (57%) replied negatively. Only 5.8% of respondents believe the introduction of IAS will be very beneficial. ‘Surely it must be on the whole advantageous to have standards that everybody applies now we operate in a global economy,’ says one FD surveyed.
However, this is part of the problem that policymakers face if they want to sell IAS to UK companies. While it’s certainly true to say that the UK could reap the rewards of harmonisation in the EU, the picture is far less clear when the UK’s enormous transatlantic business relationships with the US are taken into account. The fact that the US has still not signed up to IAS continues to concern UK FDs.
‘The constant changing of standards tends to undermine the value of the accounts. The current difference between US and UK standards shown in many company reports cannot inspire public confidence especially when they are audited by the same Big Four firm,’ says one respondent.
At the moment, FDs are just not convinced about the merits of a standard that does not have the participation of the world’s largest economy.
One FD surveyed says: ‘I think there will be long-term benefits providing that the US complies with the IAS. In the short term, I see little benefit of the changes. I would also be concerned that IAS will be over bureaucratic and long-winded.’
Some fear the International Accounting Standards Board (IASB) could even put back European progress by making too many concessions to the US. Policymakers would do well to focus on the advantages for the EU’s internal market of having harmonised standards from 2005.
Sir David Tweedie, chairman of the IASB, says: ‘EU investors will be more readily able to understand the financial statements of companies outside their home jurisdiction. The result should be a more efficient allocation of capital, leading to increased economic growth in Europe.’
The IASB is aiming to eliminate most remaining differences with the US Financial Accounting Standards Board by 2005, but it admits that differences are likely to remain until at least 2007.
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