For companies 2005 is the year of the ‘stable platform’ – a 12-month breathing space to get to grips with new international financial reporting standards. But from January 2006 the accounting landscape will change again with a number of new standards that will bring both challenges and benefits to business.
The International Accounting Standards Board is already well into its 2005 timetable, reviewing around five standards as well as joint convergence projects with the US Financial Accounting Standards Board. Businesses should start to see some changes from next January, but the convergence projects will be longer term, with the first standard possibly operational in 18 months’ time depending on the IASB’s progress with its US counterpart.
The IASB is already running slightly behind its original timetable, published in February, but as Elizabeth Hickey, its director of technical activities concedes, it is a ‘very involved’ procedure that is open to consultation and change along the way.
The first changes are likely to be those governing financial instruments, the controversial standard IAS39. Three new variations; the fair value option, cashflow and hedge accounting and financial guarantee contracts are designed to tidy up the more problematic areas of the standard.
The fair value option, agreed by the IASB in April, is designed to specify more clearly the circumstances in which fair value can be used. As Hickey points out this should give companies more clarity, but it is an optional standard.
The two other potential standards are yet to be agreed with discussions ongoing, particularly on the financial guarantee proposals. Peter Holgate, accounting technical partner at PwC, says these changes are unlikely to dampen the controversy surrounding IAS39.
‘These will solve some problems and meet some objectives but it is still an unpopular standard. It’s still complicated and will give results that ‘are more volatile than before. In a way it’s more realistic. It doesn’t create the volatility; it simply reports the volatility that’s there.’
A fourth change is to disclosures, merging IAS30, which covers banks, and IAS32 which covers all other organisations, into one new standard – likely to be called IFRS7. The IASB thought it ‘more sensible’ to bring the two standards together and along the way has decided to expand the disclosure requirement.
The joint convergence projects, most of which are yet to reach draft stage, could have a wider impact, although harmonies between UK and US standards are not always obvious and could take longer to agree.
Analysts are quietly whispering that any new standards are likely to err on the side of the current US equivalent.
Changes are currently planned to the year-old IFRS3 on business combinations. This relates to the purchase method on acquisitions and is based on the US standards FAS141 and 142. This joint project will lead to changes in the way acquisitions are accounted for, including allowing companies to account for more goodwill. So if a company acquires a 75% stake in a subsidiary it will be able to account for 100%, rather than the current practice which would allow 75%, in this case.
The expense of acquisitions, such as accountancy or legal fees, will also change with companies writing them off immediately in their profit and loss accounts rather than counting them as part of the cost of buying a company.
This, as Holgate explains, will not be popular with all sections of the business community. ‘This will reduce the profits of companies so many will not be in favour. Analysts, however, will be, as it increases the transparency of accounts.’
A further group of standards fall under the Short Term Convergence project. This includes IAS12 Income Tax and the replacement of IAS14 on disclosures; initial drafts on both are not expected until the end of this year.
The current IAS12 relates to deferred taxes, which companies have to register in their accounts to be payable later. IAS12 is likely to be harmonised with a US standard and could lead to even higher provision for deferred tax on balance sheets. Under IAS12 companies are already under a duty to account for more deferred tax than previously so this move could prove controversial.
‘This might not be altogether realistic,’ warns Holgate. ‘It could lead to companies accounting for bigger deferred tax liabilities than the amount they will have to pay over time.’
There are also discussions on the replacement of IAS14, again the expectation is that this will mirror the US standard. Under this businesses are required to analyse their activities in segments, detailing where profits come from and where assets are. The US standard also requires that the information provided to chief executives and boards internally, which allows them to understand their business, should also be given to shareholders.
This would improve transparency and would be popular with shareholders and analysts, but may not be so favourable among companies, especially when it comes to price sensitive information.
So while companies continue getting to grips with IFRS, it is worth remembering, the standard setters are busy at work.
The future timetable
(reviewed only after consultation with the Standards Advisory Council)
IAS39: fair value option – became IFRS April
IAS39: cashflow hedge accounting – expected IFRS shortly
IAS39 & IFRS4: financial guarantee contracts and credit
insurance – IFRS later this year
ED7: disclosures (expected to be IFRS7) – IFRS later this year
IAS32: shares puttable at fair value – draft due in 3rd quarter
Joint projects with FASB
Business combinations and related issues:
Phase II: application of purchase method (reform of IFRS3) – draft due 2nd quarter
Minority interests: amendment to IAS27 – draft due 2nd/3rd quarter
Intangibles: amendment to IAS38 – draft due 2nd/3rd quarter
Short-term convergence of IFRSs and US standards
IAS12: income tax draft – due in 3rd/4th quarter
Amendment of IAS20 – draft due in 2nd/3rd quarter
IAS14: disclosures on segments draft – due in 3rd/4th quarter
IAS37: provisions, contingent liabilities and contingent assets – draft expected 2nd quarter
Other joint projects
Reporting comprehensive income discussion paper – due 2006
Revenue and related liabilities discussion paper – due 2006
Conceptual framework discussion paper – due 2006
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