The board of directors of most listed companies will initially be looking to set a target date for publication of comparative financial information under IFRS, following recent recommendations from the Committee of European Securities Regulators.
While many companies will see the most appropriate time to release comparatives as just after publication of the 2004 results – Spring 2005 for December year-ends – experience of conversion projects to-date highlights that many things need to be done now to prepare for this deadline. There are several steps that need to be taken to ensure you have the right data.
The best place to start the process is by looking at IFRS1: first-time adoption of IFRS. A thorough understanding of this will help companies avoid considering the transitional provisions in other standards and ensure its specific requirements are not overlooked.
Generally IFRS1 has exemptions in a number of areas where there would be undue cost and effort in preparing the conversion balance sheet. One exemption not available is leases.
Under IFRS1, IAS17 leases should be applied from the inception of the lease. The UK has significant GAAP differences in relation to tax-based structured leases and combined leases. Leases of land should be considered separately.
IFRS1 specifically requires that goodwill is tested for impairment at the date of transition, while IFRS3: business combinations sets out how goodwill should be allocated to cash generating units.
With this guidance, preparations can be made for the impairment test.
If a group has a schedule for updating a long-term business plan, then this might be the right time of the year to put together the five-year cash-flow forecast.
Another aspect that merits early consideration is what companies are in the group. There are subtle differences between the definition of a subsidiary under IFRS and UK GAAP. Also there is a specific requirement in IFRS1 that all special purpose entities are assessed at the date of transition.
The group’s reporting units will rely on the central conversion team for instructions and guidance. The standards that require adjustments to be collected from reporting units should be analysed early.
Project management will be key for groups affected by the significant differences between UK GAAP and IFRS. Some companies in the utility industry follow renewals accounting, and will need to change because this is precluded under IAS16.
Innovative companies that currently elect not to capitalise development expenditure have that option removed, assuming their processes for managing product development are consistent with IAS38’s capitalisation criteria.
Any biological assets will require fair value to be estimated under IAS41: agriculture.
Is your group planning any acquisitions in 2004? It makes sense to collect information under IFRS as well, because the acquisition will need to be restated. The major challenge is the increased focus in IFRS3 on the separation of intangible assets.
In preparing for a mock-up of the financial statements under IFRS, an early decision is needed on the manner in which the information will be consolidated. The number of disclosure items that will need to be added to the financial statements, and the tightness of the 2005 reporting timetable, will together determine whether a spreadsheet or a major change to the annual reporting system is better. If a systems-based solution is chosen, a key factor will be the deadline by which the IT department requires the final format of the new reporting pack.
A decision that needs to be made before the mock-up is settled is what segments the company will report under IFRS.
The standards that are required from 1 January 2005 will also require advance preparation. They are IAS32 and IAS39, the financial instruments standards. Any hedge accounting documentation must be in place by the beginning of the first IFRS financial year. The adjustments required to the opening balances of financial instruments will also be needed.
It is likely that the group’s budgeting process for 2005 will need good estimates of the 2004 comparatives and the financial instruments adjustments. This may change the budgeting deadline.
Each IFRS conversion project is different. Most companies will not be affected by all the items here, and many will have additional items unique to their conversion project.
In putting together the plan, you should aim to leverage existing financial routines as much as possible. Experienced IFRS people are scarce – it is wise to assume that you have to rely on your own resources.
It may seem, at this point, that the deadline for comparative accounts is still a long way away – in fact the reality is that it is far too close.
- Joanna Osborne is senior IFRS technical partner at KPMG.