PracticeAuditIFRS – Satisfying the regulators

IFRS - Satisfying the regulators

Fancy a flutter on IFRS? City spread betting firms may be two a penny these days, offering bets on everything from price changes on the oil futures markets to daily movements on the FTSE and Wall Street - but we've yet to hear of any wagers being taken on the consequences of this most dramatic of standards switchovers.

Link: PwC’s IFRS checklist

It’s different for listed companies in the UK, of course. They are betting heavily on passing off the change to international accounting standards without a hitch.

William Hill group finance director Tom Singer, a man whose day job requires him to know a thing or two about gambling, is among them. In recent weeks he has told investors to expect changes to the way in which the group presents costs and revenues on share based payments, holiday pay, deferred tax, pensions and dividends.

Nevertheless, like his colleagues elsewhere in the UK’s biggest companies, Singer doesn’t want to give the impression that root and branch changes to the numbers are on the cards.

‘The group does not expect the adoption of IFRS to have a material impact on the reporting of financial performance as compared to results prepared in accordance with UK GAAP and anticipates no adverse impact to its tax affairs or banking arrangements resulting from the transition,’ he says.

Singer is not alone in having sought to assess the impact of IFRS before it bites and – crucially – ensure the findings are communicated to analysts, investors and regulators.

Some finance directors, it should be said, are making heroic efforts to prepare their departments, their board colleagues and their investors for the change. A handful, not least AstraZeneca’s Jonathan Symonds, are leading from the front. In truth the bigger the company, the more progress has been made.

Analysis by PricewaterhouseCoopers confirms the gap between mid-cap companies (with a market capitalisation of under euro 1bn) and the big boys (with a market capitalisation of over euro 10bn). ‘Mid-cap companies are well behind on almost every measure,’ PwC says. ‘There is cause for concern, especially when you consider the difficulties mid-cap companies are having in finding sufficient resources for their projects. A majority of these companies need to make rapid progress.’

The picture is far from uniform though. Many companies in the lower reaches of the FTSE are making good progress. Speedy Group, the equipment hire services company, is among those small caps to report good progress in its IFRS preparations, having completed a review of its financial statements.

Then there are finance directors like Mark Fenoughty and Adrian Coleman, of Sheffield United and Numerica respectively, who expect to jump before they are pushed. The index on which they are listed, the Alternative Investment Market, has given member companies a two-year reprieve from IFRS compliance but both Coleman and Fenoughty are looking to fall into line early.

For some finance directors in particular sectors, particular standards will be a problem. Some will be unexpected, others have proved to be controversial.

Banks and other financial businesses have already faced perhaps the most significant challenges. They will be hit hardest by IAS39, the controversial accounting standard on derivatives that has emerged as the major point of conflict in the entire changeover project.

Lloyds TSB , for example, told investors and analysts that the overall impact of applying international accounting standards would reduce group earnings by less than 5%, in line with its peers.

However it could only be so detailed by making a forecast ‘excluding the effects of derivative and equity valuations introduced with IAS39’, because ‘we can?t predict market volatility’.

That’s why the market is watching this group so intently. Ratings agency Fitch has warned that the way in which companies are accounting for their derivatives’ transactions could bring problems in the future.

‘The complexity of current derivative accounting standards and the low level of transparency create a new set of challenges for investors and analysts,’ it says.

But even in the financial sector many are relaxed about progress. Barclays Bank says its balance sheet and equity will suffer the biggest impact from the switch to international financial reporting standards, but insists there will be ‘minimal impact’ on profits. Under IFRS profit before tax will be reduced by pounds 125m, according to Cathy Turner, head of investor relations, a drop in the ocean when you bear in mind that Barclays’ profit before tax for 2003 was pounds 3.85bn.

So what do the regulators think? They, after all, will be policing the new regime. ‘We are in a period where major changes are expected in the financial reporting framework, in many cases over a relatively short time frame,’ acknowledges Financial Services Authority chief executive John Tiner.

FSA director of markets Gay Huey Evans set out a clearer vision in a letter to chief executives of listed companies last October. In it, above all else, she urged transparency.

Latching on to the confusion surrounding IAS39 – which will see some companies adopt the carved-out version endorsed by the European Commission and others the full version as drawn up by the International Accounting Standards Board – she wrote: ‘It is therefore extremely important that issuers are transparent about the assumptions made and methods followed for determining values referred to in hedging transactions.’

She warned that failure to do so could put a company in breach of the listing rules, which require businesses to ‘take all reasonable care to ensure that any statement or forecast or any other information it notifies to a regulatory information service or makes available through the UK Listing Authority is not misleading, false or deceptive and does not omit anything likely to affect the import of such statement, forecast or other information.’

Evans offered an olive branch, however, in the form of a 30-day extension for preparation of interim accounts. There was a condition attached: ‘Companies who wish to take advantage of this relaxation are required to announce the intended delay to the market.’ It all comes back to disclosure.

If any FD – or indeed any auditor – were looking for a buzzword to bear in mind as they seek to minimise the impact of IFRS on their business, they could do worse than scribble the word ‘disclosure’ on a yellow sticky and attach it to their monitor.

AstraZeneca’s Jonathan Symonds, who has led in this field, believes this is a general lesson and not just one that applies to IFRS. ‘I have always wanted to inform the market of things that are important,’ he says. ‘My views on that are the same no matter which hat I have on.’

Put simply: disclose a timetable, reveal the impact and declare any assumptions made. And if you haven’t done so already, do it fast.

What should you and your clients be doing?
FTSE 350 companies:
‘Consider what other companies in your sector are doing – for example press releases, analysts presentations and releases on web-sites,’ suggests PwC partner Peter Holgate.
‘Consider whether you can improve on their presentation – especially companies with a March year end, who can draw on published results of December companies. Review press and analyst comment to see what the market considers important. And review IFRS accounts or press releases from competitors overseas – especially in the EU or in other territories that already use IFRS.’

Other listed companies:
On the assumption that companies below the FTSE 350 will not be making an early voluntary release of IFRS information, they should monitor and study the releases of information by larger listed companies, preferably in same industry:
(a) to see what accounting policies they are adopting. If different from the accounting policies chosen for own company, consider whether to stick with those or change to what market leaders are using.
(b) to see how they are presenting the information (eg separate disclosure of exceptional items, or non-GAAP measures such as earnings adjusted to remove volatility); and
(c) to consider whether the impact on own company will be similar or different – eg is own company’s share scheme similar/different, larger/smaller than comparator company? Link: Access IFRS

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