IFRS update summer 2006 - coping mechanism

With the first wave of year-end accounts under International Financial
Reporting Standards now largely published, what
conclusions can be
drawn in terms of past performance, on-going issues and future challenges?

Link: Access IFRS –
PwC’s IFRS resource centre

In Churchillian vein, this is not the end, nor even the beginning of the end,
but, perhaps, the end of the beginning.

As of mid May, around 60 per cent of December year-end accounts for FTSE100
companies had been published, providing a substantial sample and a good chance
to take stock of the situation.

On a positive note, evidence suggests that both companies and the markets
have coped fairly well with the challenges of IFRS reporting. No major deadlines
have been missed. Although a few listed companies put back their announcements,
they did so only for relatively short periods.

According to the latest PricewaterhouseCoopers survey of fund managers’ views
on IFRS reporting, the vast majority (almost four out of five) believe that
companies have coped well. A high proportion ­- two thirds -­ also express
positive opinions about the role of the audit profession.

The sense of well-being is impressive given the extent of the challenge,
which can be physically seen in the size of the IFRS accounts produced. The
average length of IFRS reports and accounts has increased by 50% over their UK
GAAP predecessors, with some increasing by around 150%.

Companies have successfully delivered these reports, despite no comparable
increase in their resources and despite much of the information having to be
provided by parallel or offline systems.

Producers of group accounts in particular have had to work hard, given that
in most cases their subsidiary accounts remain on a UK GAAP basis, with the
duplication of effort that entails.

Meanwhile, on the receiving end, the fund management community has
successfully navigated its way through the new IFRS accounts, despite the
greater mass of material and its unfamiliar form. Overall, all parties involved
in this first IFRS reporting adventure deserve to be commended for their
efforts.

This is a good time for companies to take stock. It has not been easy
reaching this point, with some resources having had to be diverted from
elsewhere. These resources now have to return and IFRS reporting must become
business as usual.

Accounting treatments

One challenge involved in this first year of IFRS reporting has been the
frequent difficulty in identifying the right technical treatment. Reaching
agreement has often not been easy. Furthermore, the impact of the new accounting
treatments on investors’ perceptions has been difficult to predict.

In fact, as the most recent PricewaterhouseCoopers fund manager survey
confirms, it is investors’ perceptions of individual companies that are most
likely to be influenced rather than perception of sectors or countries. This
places considerable responsibility on individual companies to explain their
position well.

At a strategic level, the question of where IFRS is going remains to be
answered. Debate has intensified about issues such as the degree of likely, or
possible, convergence with US accounting standards, and the increasing use of
fair value.

As such debates continue ­ and these are important debates ­ the UK business
community must decide the extent to which it wants to be involved. It has been
noticeable that UK business has probably not been as active in monitoring and
seeking to influence the direction of IFRS as some other countries’ business
communities. More could and perhaps should be done to increase participation.

There are also key discussions to be held about the potential convergence of
UK GAAP with IFRS ­ if, when and how this should happen. On 10 May the
Accounting Standards Board issued a further request for comment on future IFRS
convergence.

The ASB asks, for example, whether all UK public quoted and other publicly
accountable companies should be required to apply full IFRS, regardless of
turnover ­ a move which would affect up to 1,500 companies.

These are important issues, of major significance for those not currently
having to comply with IFRS. PricewaterhouseCoopers intends to be active in the
debate. Given how much is at stake, it is important that companies also respond
to the ASB’s questions and take this opportunity to influence future key
decisions.

At the same time as strategic issues are discussed on the UK and
international stage, so companies need to look internally at their own IFRS
reporting approach and processes. There is no doubt that the introduction of
IFRS has increased the costs and risks associated with financial reporting.

Costs have increased because of the greater mass of information being
produced and reported, and because of the parallel systems that many companies
have been running in order to produce, for example, subsidiary company accounts
under UK GAAP. Similarly, those parallel systems and dual GAAP usage have
increased the associated reporting risks.

Therefore, important decisions need to be made as to how quickly companies
will move over to IFRS in totality. As yet, only a minority of groups have taken
the decision to switch to IFRS for their subsidiaries.

A significant proportion are considering the move in the near future, but
many remain some way away from taking that decision. Any decision to switch over
in entirety to IFRS has repercussions for other company-wide systems, not just
financial and IT ones, but many others, such as reward systems.

Another major priority for many companies going forward will be to address
the challenge of how to communicate consistently under IFRS. This first year has
seen many different approaches, such as the various ways that companies have
made their IFRS disclosures.

Similarly, because of the lack of prescription about presentational formats
under IFRS, many reporters this year opted for presentational approaches similar
to the old UK model in order to improve comparability with the past.

However, to do so, around half of companies have had to resort to additional
columns and boxes. In addition, over 40% used alternative performance measures.

For users of accounts, such inconsistencies undermine one of the original
aims of IFRS adoption around the world ­ the desire to improve the comparability
of companies from different jurisdictions. In time, comparability should
increase.

The current high volume of reporting might also reduce as ways are found to
provide key information in forms that are more helpful to users of financial
statements although there is an equal risk that analysts and investors seek ever
more information.

Companies can assist users’ understanding by continuing to invest in
education. The PricewaterhouseCoopers survey shows that companies are seen as
the main information source for improving IFRS understanding.

Clearly the process of IFRS adoption is far from complete. Companies have
many internal and external, operational and strategic issues to address. But as
the end of the opening phase approaches, there is encouraging evidence that the
new reporting regime has so far been introduced as smoothly as could be
expected, and that, after some more hard work, could in future deliver the
benefits that companies and markets desire.

This is encouraging given the likely significant increase in the number of
companies that will be reporting under IFRS in the next few years, whether
driven by AIM requirements, transaction activity or the convergence with UK
GAAP.

Ian Dilks is the IFRS conversions leader for PricewaterhouseCoopers

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