IFRS update October 2005 – Non-execs

The role of the non-executive
has changed drastically in 2005. Ever since the introduction of
international financial reporting standards on 1 January, NEDs have been under
pressure to re-examine their position on the board, how they should adapt and
what role they should play alongside the other directors in ensuring that
compliance and convergence don’t become a burden, but instead benefit the
company’s bottom line and satisfy hungry investors.

Link: Access
IFRS – PwC’s IFRS resource centre

NEDs are more important than ever. Indeed there is plenty of anecdotal
evidence around to suggest that NEDs now play a key role in ensuring that IFRS
projects are properly controlled and that they are able to communicate a
company’s restated results back to front.

Despite companies reacting in different ways due to varying year ends, the
issues of concern at the top of the NED radar revealed some common themes. For
example, 82% of NEDs felt they needed an external communication plan reflecting
the changing perceptions of their company and the sector in which it operates.

Over 80% wanted to see common management information systems to support IFRS
detail ­ including budgets and forecasts ­ while 69% said there was a need for
greater contextual information in annual reports.

Philip Wright, chairman of the NED programme at PwC, says these answers point
to a trio of areas that corporates and their NEDs were not facing to such an
extent nine months ago ­ increased communication, increased complexity and
automation in how companies report and more detailed reporting and

‘Overall there has been a huge desire for knowledge of IFRS. Most NEDs
believe their companies have prepared well for the changes. They have also
recognised that there needs to be changes in the way they communicate their re
sults with a need for greater contextual information and added detail, as well
as how to explain more obscure accounting movements such as deferred tax’, says

But NEDs may also have more work to do. For example, the PwC research has
found that 69% still don’t have a plan in place to manage subsidiary company
conversion, 67% are still without a plan to ensure there is sufficient skilled
resource within their business units, only 40% have considered measures of
performance or remuneration policies and only 35% have planned changes to their
management information systems.

These figures lend a more worrying tone to how NEDs have reacted to the new
dawn of IFRS. If an Ernst & Young survey of board members carried out
earlier in the year is correct, this could be set to continue with over 40% of
respondents suggesting they had become sceptical about rising to the ranks of
non-exec status because a larger proportion of their time was spent examining
compliance issues compared to a year ago.

Steven Brice, head of IFRS at Mazars, says that NEDs need to be thoroughly
versed in the rules, have a clear communication strategy to ensure external
announcements are correctly expressed and should be kept firmly in the loop.

‘They are at the top of the chain as a vital link. They must be kept informed
of the situation and be fully integrated in the process ensuring good corporate
governance and internal controls.’

Brice also believes NEDs are now ‘putting in more hours’ than normal due to
the changes in accounting rules. ‘Some may have seen this as an easy number but
many are having to work harder to keep up to speed.

‘It is a big responsibility and has come with unprecedented importance and
complexity and with NEDs now exposed to new risks from IFRS it has pushed their
role further up the chart,’ he adds.

Will Rainey, head of financial reporting advisory at E&Y, says that NEDs
will face new challenges on top of IFRS, such as the operating & financial
review that brings with it added disclosure of future targets for companies.

‘The new OFR legislation will bite for companies that have a year end of
March 2006 but some of the disclosures involved in IFRS will overlap with the
OFR and non-execs need to be very aware of this.

‘But throughout this year, NEDs have been very good at assessing the new
detail that has emerged and they have scheduled specific meetings to deal with
the changes.’

Related article: The
view of the Non-Executive community. Visit Access IFRS – PwC’s IFRS resource

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