To date, relatively few companies have completed their first full set of
This is not surprising, given that only around half of FTSE companies have
December year-ends these are early days in terms of assessing how companies
have coped and how the market has responded.
It is possible, all the same, to take an early IFRS pulse reading, based on
announcements to date and anecdotal evidence. The resulting assessment is: so
far, so good.
For example, the impact on share prices has been limited. A few companies saw
some IFRS-related share price wobbles last year, but most of these proved to be
brief blips occurring around the date of release of IFRS information.
The Financial Reporting Review Panel’s recent report on interim accounts also
offers reassurance about the quality of early IFRS reporting. Having reviewed
the interim accounts of 70 companies, the FRRP required some form of change for
just 16 of the sample, with none having to formally restate their interim
announcements. This reflects the huge efforts made by finance teams in preparing
their first IFRS interims.
That said, the FRRP did find some common failings, although all were in
relatively minor areas. Assuming the panel’s future reviews of full IFRS
accounts will be no less detailed, a fair number of future challenges or
adjustments can reasonably be anticipated.
This is to be expected, given the two key attributes of IFRS accounts:
complexity and volume. With interim accounts produced, much of that complexity
will already have been addressed. The complicated principles behind IAS 39 and
accounting for financial instruments, for example, will have largely been dealt
with at the half-year stage.
But some complexities have to be resolved at year-end. Goodwill impairment,
for example, will need to be considered and specific impairment reviews
conducted. For some companies with underperforming operations in competitive
markets, this could lead to potentially significant goodwill write-offs and
resulting market disappointment.
However, volume now provides the main challenge in terms of producing IFRS
year-end accounts. Many companies’ annual reports and accounts will be at least
50% bigger than their UK GAAP predecessors. Much of the data will be new.
Given that few, if any, finance teams have been given 50% more resources,
compiling the new reports and accounts is a challenge. By now, some will have
finished putting together the enhanced IFRS disclosures, but many others will
still be in the midst of the process.
If finance teams have been completing the equivalent of an assault course,
what do investors make of the new IFRS-based world? Surveys conducted by
PricewaterhouseCoopers have found that investor groups in the UK and continental
Europe are generally positive about the efforts made by management to cope with
the new accounting standards.
This isn’t an easy time for investors or analysts, who are also having to get
to grips with the new methods and formats. The new accounts seem to have had an
impact and there are indications that IFRS accounts are altering investors’
perceptions of companies.
In addition, many investors are scrutinising some aspects of company
reporting far most closely than previously an understandable result of the
switch to an unfamiliar accounting regime. Just as fog makes drivers pay more
attention to their actions, so investors working through IFRS accounts may find
the uncertain territory leads them to study some issues more attentively than
The response from investors has, of course, been based primarily on interim
accounts and other announcements made by companies preparing the outside world
for the impact of IFRS adoption on profits and balance sheets. The impact of
full IFRS accounts has yet to be seen.
Only when investors receive companies’ year-end reports and accounts will
they fully appreciate the vast increase in volume. Inevitably, it will take some
time for investors to digest the contents and gain an understanding of what it
One of the challenges to that understanding may be simply due to some of the
presentational choices that companies have when reporting under IFRS.
Comparability of reported figures will be enhanced as, across Europe,
companies begin complying with the same accounting standards. But in the UK,
where consistency of standards existed before the move to IFRS, there are
decisions that preparers of accounts have to make in terms of presentation,
which could lead to some differences in formats in the first year or so.
Companies are aware of the problem and some are coming together for
example, in industry groups to work towards commonality. Nevertheless, in the
first year of full IFRS accounts, investors and analysts may find it more
difficult to compare companies, even in terms of the more obvious measures of
performance, such as profit.
Time will certainly ease this challenge. Looking ahead to the 2006/07
reporting season, finance teams will have had a chance to look at what their
competitors have done and compare that with their own approach.
Greater consensus on presentation may emerge as experience of IFRS reporting
grows. Similarly, users of accounts will themselves become more familiar with
the formats of the accounts being published.
Turning again to the demands made of finance teams, completion of the first
set of full IFRS accounts won’t mark the end of the hard work. Clearly, some
special efforts have had to be made in the first year, as with the need to
restate prior year comparatives a one-off burden. But the production of future
sets of IFRS accounts will not necessarily be smooth.
Many companies have prepared their IFRS accounts using manual input and
spreadsheets rather than their mainstream systems. This creates new challenges
in terms of risk management and the need for additional controls. Project-based
staff may have been called in to help get things done on time, adding to the
total IFRS adoption cost.
As IFRS becomes business as usual, companies will need to look at how they
embed IFRS accounting into their mainstream systems and procedures. The twin
aims of cutting cost and increasing reliability in the reporting process will
create new challenges.
The question of whether, and when, to switch subsidiaries’ accounts over to
IFRS may also need consideration, bearing in mind the potential impact on tax
and distributable profits in particular.
In other words, there is no easy life in sight for finance teams for the near
future. Much hard work has already been completed and finance teams may feel
they deserve a brief rest. But once they have caught their breath, new impetus
needs to be given to both external and internal matters.
Externally, companies will need to consider the views of investors,
competitors’ IFRS accounts and emerging sector trends in order to refine their
own reporting. Internally, they will need to find ways of streamlining their
IFRS reporting process to reduce both the burden and the related risks. These
are both important challenges for the future.
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