IFRS update spring 2006 – beyond compare?

In association with PwC

Amid all the controversy over the switch to international financial reporting
standards, the ongoing problems with IAS 39 and increasing fears over undue US
influence on the new principles, it is sometimes easy to forget exactly why the
financial markets of the European Union have undergone such a difficult,
time-consuming and costly exercise.

Link:
Access IFRS – PwC’s IFRS
resource centre

While multinational companies will no doubt see some benefit from now being
able to work with far fewer sets of accounting standards, the true beneficiaries
of the IFRS
conversion are meant to be Europe’s investors and other market watchers.

As well as providing more detailed information in a company’s accounts, IFRS
should help eliminate a wide range of discrepancies in accounting practice
between companies operating in the same market. The intention is to give
investors a much truer comparison between the performances of market
competitors, allowing for more informed investment decisions.

As the first sets of IFRS accounts are revealed across Europe and industry
sectors, now is the time for analysts and investors to sit down with the figures
and start to work out whether this goal has been achieved or not.

But while great strides forward in comparability can be anticipated in some
ways, many IFRS experts have warned investors not to expect perfection just yet.

‘If you take a pan-European view, there is going to be a huge step forward on
comparability,’ says Ian Dilks, lead IFRS conversion partner at
PricewaterhouseCoopers. ‘If you are a European analyst or fund manager that has
been looking at 10 different GAAPs, you are now down to just one. Taking the
broad view across Europe, you would say that it is a major step forward because
you have much more comparability than you used to have.’

Mark Vaessen, head of KPMG’s international financial reporting group, agrees.
‘Generally, at a high level we will certainly see greater comparability,’ he
says. ‘I think we have much more disclosure under IFRS than in any of the
national GAAPs, so there will be more information there to make the comparisons
across Europe.’

That’s a great thing from a European point of view, but there are still some
doubts about the overall benefit when comparing like-for-like UK companies.

‘In the UK I wouldn’t say there was a huge increase in disclosures, but
certainly in certain areas there are probably some more insights, such as on
share-based payments,’ says Vaessen.

‘If you are looking at any one country ­ in particular the UK ­ then you were
on one GAAP before, so clearly you are not necessarily introducing greater
comparability,’ concurs Dilks.

In fact, it could well be that the ability to compare figures may be worse to
start off with, as companies move away from the previous, better-established
regimes and get used to the new standards.

Experts believe there will be some differences in how companies report under
IFRS because they have never been involved in a project based on such a global
scale before.

Observers say that at best there will be a ‘background noise’ of
inconsistency, with separate users viewing each application of the standards
slightly differently.

At the moment that noise is much louder and at a much wider ‘bandwidth’ than
it should be in the future. Trouble is, the noise can’t just be switched off or
down. There inevitably has to be a learning process as users and the standard
setters sort out what is acceptable from what is not.

Observers expect, in these early stages, the breadth of inconsistency to be
wider than when IFRS has been applied and bedded down for some years. But
experts say the accounting will come together over the next three years and
possibly with much more consistency than at first anticipated.

The allowances provided to companies by the standards as they made the switch
have also introduced a greater degree of variability into the accounts of
companies using IFRS than may have been there previously.

‘We were inevitably not going to get complete comparability from 2005 onwards
because, with the first-time application, people were allowed choices on the
extent to which they would restate items,’ says Richard Martin, head of
financial reporting at ACCA. ‘These next couple of years should see some
significant strides made towards better comparability.’

These strides are likely to be made by the companies themselves, rather than
any tightening of the standards to reduce interpretation. If companies within an
industry truly want to put out accounts that provide a real comparison, it will
be down to them to agree on ways to do this.

‘We will see best practice being established as we go along, companies
looking at each other and talking within industries, but it will take some time
to get there,’ predicts KPMG’s Vaessen.

Unfortunately, until this best practice has been established, it is likely to
be the investors, whose lives IFRS was designed to make a little easier, who
will have to bear the brunt of the hard work to ensure that company performance
can be compared. They may now be working with just one set of standards, but
that may not cut down so much on the variety of interpretations used.

‘Investors are going to be less familiar and they will need to make sure they
have ploughed through the detail to understand how companies have adopted new
standards,’ says Dilks. ‘Where they do find a lack of comparability I don’t
think there is going to be a major problem in the P&L or balance sheet, but
you may find a greater variety in footnotes.’

Comparing a single company’s IFRS accounts over the years

While trying to work out the comparative performance between two companies in
the same industry sector under IFRS will prove to be a bit of a challenge over
the next few years, comparing the performance of one company year-on-year could
prove equally tough.

IFRS is brand-new to almost everyone in Europe. The accounts we are now
starting to see come out were almost all prepared and produced by IFRS novices,
despite all the training they no doubt received over the course of the last few
years.

Yes, companies have already put out restated 2004 accounts and interims under
the new regime, but these are nothing compared to getting into the swing of the
full 2005 results.

No doubt there have already been many changes in the ways things were treated
for the restatements and interims in comparison to the full-year figures. This
is, after all, what the learning process is all about. And it is unlikely to
stop there.

As we get towards the production of 2006 figures the many painful lessons
learned the first time round will come to bear and accounting treatments for
certain items will undoubtedly change.

Add to this lessons learned by the industry in general and peer pressure to
conform to a certain method of accounting, and some parts of the books could
look quite different indeed.

As with all changes under IFRS, there will be no need to panic, as long as
the changes that are made are fully explained to those who matter: the
shareholders.

Link: For the latest news and analysis on IFRS, updated
every week, visit Access IFRS –
PwC’s IFRS
resource centre.