The path to IFRS compliance for
Market-listed companies is exactly the same as that faced by those on the
main market except it is totally different.
On the surface, the route taken by AIM businesses to IFRS appears identical
to that for FTSE organisations, but there are essential differences that must be
carefully managed by finance directors, and that managing must start now.
First, and quite obviously, there are the dates. AIM companies must be
compliant for accounting periods that begin on or after 1 January 2007. This is
compared to other UK-listed companies that officially began IFRS compliance for
accounting periods on or after 1 January 2005.
In turn, the first main similarity between AIM and main market companies
relates to the processes and timetable for progression towards IFRS. AIM
companies must look to produce comparative sets of accounts which means
producing both IFRS and UK GAAP numbers for 2006 interims.
This will enable businesses to produce IFRS figures to compare against the
first IFRS-only numbers when they produce 2007 interims.
This process caused main market companies a lot of pain back in 2004, as many
approached the IFRS compliance deadline with their heads in the sand.
‘AIM businesses are already entering a comparative period,’ says Smith &
Williamson assurance and business services director David Hunt. ‘This is the
time to get up to speed.’
Another difference between the two situations is that while the main market
hurtled towards change with many of the most controversial standards, such as
IAS39 on financial instruments or IFRS2 on share-based payments, struggling to
be clarified and agreed, AIM companies will find the standards more settled.
The biggest issue facing AIM-listees lies in complexity, or lack of it. On
the whole, AIM companies are less sophisticated than their main market
counterparts. Many do not have overseas operations, use complex financial
instruments, or run big pension schemes.
But while this is a huge advantage, most also lack the people resources or
knowledge within the finance function to handle IFRS projects without
significant external support, according to PricewaterhouseCoopers assurance
senior manager Simon O’Brien. ‘A multinational organisation would be complex to
deal with,’ he says.
O’Brien believes there is a risk that smaller business may leave projects in the
hands of less senior staff, which could lead to a lack of buy-in within the
company to handle the transition.
‘If a junior accountant goes to the IT director and says “the business needs
to capture different financial data”, then it may not be done,’ he warns.
Hunt and O’Brien agree that while smaller companies such as those on AIM may
find the transition relatively easy, they still have their own hurdles to face
especially around the issue of resources.
‘Many will not have the sophistication or resource to handle the change,’
says Hunt. ‘Proportionally, they could require more external help than FTSE
Hunt expects many AIM businesses to go straight to their auditors to ask for
advice over the changing requirements.
This, he says, will involve initial discussions followed by working out the
format of the new reports and checking current accounting policies.
After that the company will probably look to another adviser for help with
any changes required to IT systems in terms of data capture or reorganising
Some finance directors will have to stay on their guard, warns Hunt, as their
accounting firm may not be quite as up to speed with IFRS transitions as others.
Indeed, some firms may not have even dealt with switching a client over to IFRS
at all. ‘Some smaller firms may be stretched by the work,’ says Hunt.
What is clear is that few AIM companies have leapt at the chance to make
themselves IFRS-compliant ahead of their peers. It seems that any competitive
advantage to be had from moving across earlier, such as for best practice, or to
engender investor confidence, has given way to cautiousness, a move that could
prove correct for some, if not all.
‘Although the majority of AIM companies are better off not switching to IFRS
before the due date, this is not true for all of them,’ says PKFnational
assurance and advisory director Tony Upson.
With finance departments having so much to do to make accounts IFRS-enabled,
checking out what the competition is doing may not be a bad thing.
One last observation concerns the investment community. AstraZeneca CFO
Jon Symonds was incredibly proactive when it came to letting analysts and
investors know what changes the company was making during the transition period.
His approach confirms what many commentators always observed that
communication is key, whether it be with the finance function, auditors or
investors, to make the transition possible.
SMEs and IFRS
Small and medium-sized companies face a great deal of uncertainty following
the introduction of international financial reporting standards, even though the
standards primarily affect the reports of listed companies.
The IASB and ASB have planned projects to scale down IFRS for smaller
businesses in the medium term.
And even though SMEs have put up with many changes to regulation in the past,
the pace of change is set to pick up. Unfortunately, while the goal is known, it
is not clear how standard setters will get there.
Plans by the IASB to release its own IFRS-centric version of the UK’s
Financial Reporting Standards for Smaller Entities (FRSSE) later in the year,
and the ASB’s own path towards making UK FRSSE more IFRS-like, could spell
confusion and provoke debate about the kind of format in which SMEs will report
in the future.
‘We don’t know what the IASB’s FRSSE will look like, but we know that the
IASB recognises that current IFRS are very much for larger companies,’ says ACCA
head of financial reporting Richard Martin.
Despite the potential problems in merging two FRSSE projects that may look at
IFRS differently, Martin believes that discussions between both the IASB and the
ASB have been productive in the past and should continue to be so. However, he
urges interested parties to make their opinions known.
‘It’s important that SMEs and accountants contribute to any debate,’ says
And for the small percentage of SMEs that are looking for venture capital,
private equity or to make the leap onto a listed market, Martin believes that
moving to IFRS-style reporting will be an advantage to potential investors in
terms of making it easier to compare financial performance.
The main benefits of having FRSSE are to provide better presentation and
disclosure of SME accounts than would be the case using complex standards only
applicable for the largest organisations.
As the change gathers pace, SMEs and their advisers will hope it is not too
dramatic, too quickly. By the end of 2006 everyone should be clearer about the
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