How would you rate the smoothness of UK plc’s transition to IFRS
using a scale of one to five, where one is extremely smooth and five is
DAVID CAIRNS: If we look at individual companies, I’m sure
we’ll find them at any point on that scale. If we look at companies overall, I
would put it somewhere between two and three on the process. The companies at
the smooth end have thought about IFRS ahead of time, done the training and
planning, looked carefully at the issues. The rocky ones may be misunderstanding
some of the requirements of IFRS and are perhaps very late in the learning
PHIL HOSP: I would say between two and three is probably the
broad message. Bigger companies typically started earlier. Inherently it was
probably more complex for them, but they could bring more resources to bear. So
while it’s been a tough process, I think it’s probably been relatively smooth.
I’m sure there are companies out there still grappling with it, particularly at
the smaller end. If you think about UK companies that aren’t listed, that might
be heading towards an IPO, they still have to think about IFRS. And it doesn’t
end at conversion. You’ve got a lot of companies that still have to issue their
first set of IFRS financial statements. Our experience is that it has taken an
awful lot of time and effort to pull together. Equally, we have a period of
ongoing change where the IASB will continue to issue new standards. We’ll get
greater clarity and greater consistency as to how to apply these standards, and
therefore companies are going to have to continue spending time and effort on
IFRS in the future.
RICHARD MARTIN: I would say two, because I think the issues
that have come up are generally ones where we were predicting there would be
difficulties – over taxation, distributable profits, and particularly when they
were being applied to subsidiary companies and in difficult sectors like
finance. And it’s been harder for some sectors than for others.
What has surprised you most about the transition?
DAVID CAIRNS: I’ve been very surprised that companies have
treated subsidiaries under UK GAAP as associates or joint ventures under IFRS.
To my mind, that is very, very surprising given that the roots of both UK
standards and IFRS on what is and what is not a subsidiary are in the same
How has the International Accounting Standards Board fared?
DAVID CAIRNS: Overall, the IASB has done well. It’s clearly
made mistakes, but one can see that it is learning from those mistakes. The IASB
has made some very necessary improvements to the standards. Standard setting,
whether it is national or international, is always an evolutionary process. I
support its focus on convergence.
Where have the main changes been seen?
RICHARD MARTIN: There are two main changes. One is the
recognition of financial instruments, which we had a complete gap on before.
That’s a huge improvement and is throwing up one or two interesting questions.
The other big change, which is an ongoing thing, is the treatment of business
combinations. We’re getting a more realistic picture on that, eliminating all
those goodwill amortisation charges and highlighting in a big and lumpy way when
things have gone wrong. We had an illustration of that with Vodafone coming
clean on the fact that some of its investments made in the past had been a
Will international standards hit smaller companies?
RICHARD MARTIN: Even if you’re not adopting IFRS, you’re
probably going to get there over the next few years. On big issues you’re going
to get there via the UK GAAP convergence, for example, we’ve already had a
partial introduction of IAS32 and 39, and share-based payments, in this country.
And the UK ASB is thinking about how to conduct its own convergence programme.
How would you rate City analysts’ understanding of the
PHIL HOSP: Some companies have worked quite hard to educate
analysts and that’s helped them. When companies and analysts look at the
accounts, some things are now extracted out for them that were not previously
extracted, such as movements in fair value and derivatives. Whether they
actually understand it and factor that into their analysis, I’m less sure.
THIS WEEK’S EXPERTS
David Cairns, IFRS consultant, member of the Financial
Reporting Review Panel and secretary general of the International Accounting
Standards Committee from 1985 to 1994.
Phil Hosp, director of the financial reporting advisory team
at Ernst & Young.
Richard Martin, head of financial reporting at ACCA, member
of the accounting working party of FEE, the European Federation of Accountants,
and technical adviser on the board of the International Federation of
Chaired by Damian Wild, group editor in chief of
Accountancy Age and Financial Director.
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