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Sir David on…(more questions answered)
IAS special report
Which standards will present the greatest challenge to UK companies?
To be honest, I think many companies will find little has changed. I don’t think the UK is going to have nearly as much of a problem as I think others are going to have. IAS39 and IAS32 on financial investments are going to be the toughest for the UK.
Why did the European Commission choose 2005 as a deadline?
I gather it chose it because in 2000, when it started looking at this, it suggested a 10 year timeframe and then said: ‘why not split the difference’, so that’s why we got 2005.
Are accountancy institutes and other regulators doing enough to prepare users?
There is a lot of training going on. And the big firms are doing a lot, as well as the institutes. Accountancy Age has also helped make people aware by asking: ‘Are you ready and are you thinking about it?’ IAS is coming and it is a change that is going to make things easier if you invest overseas by taking away the accounting risk. I think there is a lot of work being done out there. People in this country are pretty clued up on what is going on.
How should UK-listed companies treat subsidiaries in countries unaffected by the 2005 changeover deadline?
It will partly depend on the jurisdictions. In some countries you may not be allowed to use IAS, which I think would be a mistake. But if you are allowed to use international standards, you are going to save yourself an awful lot of work if you already have their books in international standards. Otherwise, you will simply have to do their accounts twice.
If I were an FD reporting using international standards, and I had the opportunity, I would make the subsidiary use international standards as well.
Is there enough understanding in the City?
Well, I am not sure. The City really has to be very careful that it really understands what the differences are. I suspect what the institutes can do – and firms as well for that matter – is actually start highlighting what the changes are going to be, and which sectors are going to be affected by them. That would help the City, as a lot of people in these investment companies are not necessarily skilled accountants.
Should SMEs bother to do anything given that they are unaffected by the 2005 deadline?
The UK government has already said that SMEs in the UK will be able to use them. Of course, this spreads the net much wider. For SMEs it would require the Inland Revenue to act differently and bankers to react differently.
There is a whole new trading issue there. We are trying to get standards for SMEs in there and we have asked someone to look at that. He is pulling the principles out of an 80 to 90-page standard, and asking what else small companies would need to operationalise that. His first crack at it reduced that standard to about eight or nine pages. For the bulk of the standards that should deal with it, but if you are going to start speculating on derivatives it’s not going to help you – you need the derivatives standard. The existing FRSSE in the UK will probably get more and more like international standards anyway.
Will charities and public sector organisations be affected?
I am not responsible for public sector organisations, but I can see these things moving closer together.
When should a company look to inform its shareholders of the likely impact of IAS?
It depends on when their year-end is. If the company is in the middle of the 2003 year-end, this is not the greatest time to start. If their financial year starts in September, for example, they have got the time to look at them now.
Will auditors be ready for 2005?
The accounting firms have been getting ready for some time and they, of all people, have known this is coming. As we see with Parmalat, you need proper auditing, but you do sometimes have people who are just out to deceive. There is more than one issue. We need to have good accounting standards, good auditing standards and enforcement. In the UK, the Financial Reporting Review Panel has been a great success. The standard of accounting in the UK is immeasurably better than it was in the late 1980s – that was a dreadful time. The things people did made you embarrassed. I think auditing has improved and I think FDs have grasped the nettle and are doing far better. The other area is corporate governance. In the UK, with the Higgs and Smith reports, we have run pretty well ahead of the game.
That has got to spread internationally. And that is going to be an issue for some countries.
Will companies with listed debt be affected?
They will be public too. I would be very surprised if eventually they are not caught. The UK government eventually will say international standards will apply from listed companies right down to whatever. And the fact is that the UK standards will be identical. Any get-out is going to be a pretty short one, so sooner or later these companies are going to have to start abiding.
Could the whole IAS changeover programme be rocked by political interference?
When politics comes into the equation, anything can happen. Basically, we can’t force anyone to take our standards. It entirely depends on the national jurisdictions. They can do what they like. I think there is danger when you look at what happened in the US in 1994 and 1995 when Congress got campaign contributions from companies to fight the share options standard and they stopped it by threatening to put through a bill.
Have you listened to utility companies’ concerns about IAS39?
They have to do it, just as everybody else has to do it. People are always telling me that I do not listen. I have spent my life going around listening to people, but not necessarily agreeing with them. That is the difference.