PracticeAuditIFRS – The next steps

IFRS - The next steps

What many people may have failed to realise is that the 1 January 2005 watershed is not the end of the waiting, but rather the beginning of a comprehensive shake-up in global financial reporting.

Link: Next steps with IFRS

The 1 January deadline for publicly listed companies in the European Union to switch to international financial reporting standards began a process that will eventually see all public, private and governmental bodies in the UK using the single set of globally recognised accounting rules.

It’s a tall order, but then the UK accounting standard setters have always been global leaders in this field.

You may well be thinking: ‘whoooa there’, that it’s way too early to be thinking about IFRS for smaller listed companies and SMEs. But five years ago when it was announced that all Europe’s 7,000 publicly traded companies would be required to report under IFRS by 2005, the reality appeared to be light years away.

Yet, here we are already, with preparedness for the transition among listed companies causing a great deal of eyebrow raising among the financial reporting and investing communities.

So the main message here, say IFRS experts, is to keep on top of the changes and prepare well in advance because initiatives to get all British organisations, whether public or private, reporting under the same rules are set to accelerate.

For starters, all companies listed on the Alternative Investment Market are required to report under IFRS in two years’ time.

In a statement last October, Mathew Wootton, deputy head of AIM, announced that ‘the exchange intends to mandate international accounting standards for all AIM companies for financial years commencing on or after 1 January 2007.’ Note Wootton’s next statement: ‘AIM companies are encouraged to prepare for this change well in advance of this date.’

The thinking behind the respite for AIM-listed companies – they had originally been given the same 2005 deadline as others but AIM’s move to become an exchange-regulated market changed that – is that they are smaller and therefore have less resources at their disposal to comply in time.

However AIM has allowed those companies that want to adopt IFRS earlier than required, to do so. An LSE spokesman said there were more than 100 international companies listed on the exchange and many of those would have adopted IFRS already.

David Smailes, director of London capital markets group at PricewaterhouseCoopers, argues that it is better to comply sooner rather than later for a number of reasons.

Firstly, if you are on AIM, he argues, it’s very much a precursor to listing on a main market exchange, where all companies are now required to report under IFRS.

Secondly if an AIM-listed company is planning on moving to the main board then ‘they will be required to do some IFRS work. The world will get used to IFRS so there will be an expectation that IFRS is best practice,’ says Smailes.

And lastly the UK’s Accounting Standards Board is writing its standards to converge more and more with IFRS rules. In December the ASB issued six new British accounting standards that are in line with IFRS.

Smailes adds that once analysts are more familiar with IFRS there will be pressure on AIM-listed companies to report early under IFRS ‘to minimise the confusion in the market place’.

Timescales and strategies for the adoption of IFRS for non-listed companies and government bodies are, however, much more vague. What isn’t ambiguous, however, is that the decision-makers are keen to speed up the process.

John Stanford, assistant director of technical and international at public sector institute Cipfa, says: ‘International convergence is definitely going to impact on these sectors. The question is about the timing’.

Stanford says there are two potential scenarios: the fast-track method where public services directly adopt IFRS; or the medium-track approach where public bodies effectively wait until all UK accounting rules mirror those of international rules.

The latter approach is expected to be the preferred method, not least because there are legal barriers hindering direct adoption.

But Stanford emphasises that the medium-track approach could well move sooner than anticipated.

‘There are some indications [from government] that convergence through the medium-track approach should happen quicker than initially anticipated,’ he says.

The mistakes that these bodies should not make, says Stanford, is to assume there are few differences between UK GAAP and IFRS. Although it is widely accepted that UK rules are probably the most similar to IFRS, there are still many important differences.

‘In the majority of cases, IFRS don’t differ that much from UK standards but there are a number of areas that could be quite significant,’ he emphasises.

He cites PFI work as an area that could be materially affected by the shift to IFRS.

‘The jury’s still out on what the full implications will be but they will be significant,’ he explains.

At the small and medium-sized company level, the IASB has finally agreed on the definition of an SME and is slowly moving forward to develop rules specifically for this sector. It is hoped that the IASB will issue a draft document outlining rules for SMEs by the end of this year.

David Cairns, former secretary general of the IASB’s predecessor, who sits on the IASB’s SME project panel, says: ‘Part of the problem in the delay is that there was some confusion over the definition of an SME. Now that’s been clarified the intention is to get a draft document out by the end of 2005.’

But he says the ultimate decision over whether SMEs the world over apply IFRS will lie with national jurisdictions. The IASB cannot enforce this.

At present, SMEs and government bodies are waiting on tenterhooks for the ASB to publish its policy statement on IFRS convergence. Once that happens, the timetable will become clearer.

In the meantime companies in this sector should be getting to grips with what lies in store for them.

The clock is ticking, as the listed companies will no doubt unhappily tell you.


Towards convergence
On 2 December the ASB issued six standards, representing a major step towards aligning the UK accounting rules with IFRS as part of the ASB’s strategy for convergence with global rules.

The six standards are:
FRS 22 (IAS 33) ‘Earnings per Share’
FRS 23 (IAS 21) ‘The Effects of Changes in Foreign Exchange Rates’
FRS 24 (IAS 29) ‘Financial Reporting in Hyperinflationary Economies’
FRS 25 (IAS 32) ‘Financial Instruments: Disclosure and Presentation’
FRS 26 (IAS 39) ‘Financial Instruments: Measurement’
Amendment to FRS 2 ‘Accounting for Subsidiary Undertakings: Legal Changes’.

Five of the standards supercede existing requirements in the UK and the Republic of Ireland.

By contrast, FRS 26 introduces, for the first time, requirements for the measurement of financial instruments in the UK. It implements in full the measurement and hedge accounting provisions of IAS 39.

The ASB has not applied the version of IAS 39 as adopted by the European Commission, which carves out certain provisions to restrict the use of the full fair value option and to permit a wider application of hedge accounting.

Ian Mackintosh, ASB chairman, said: ‘The standards issued represent an important step forward in the ASB’s strategy to introduce international standards into the UK and demonstrate our commitment to convergence.

‘The introduction of FRS 26 is an important addition to UK accounting standards, which will improve the quality and the credibility of our financial reporting regime.’


Link: PwC’s IFRS Resource Centre

Related Articles

Is predictive analytics the end of the annual audit?

Audit Is predictive analytics the end of the annual audit?

2d Martin Herron, MHA MacIntyre Hudson
Auditors ‘in the dock’ over Carillion as report calls for Big Four break-up

Audit Auditors ‘in the dock’ over Carillion as report calls for Big Four break-up

7d Emma Smith, Managing Editor
PCAOB sanctions former Deloitte Turkey CEOs over altered documents

Audit PCAOB sanctions former Deloitte Turkey CEOs over altered documents

2w Alia Shoaib, Reporter
KPMG South Africa to review past audit work amid fresh scandal

Audit KPMG South Africa to review past audit work amid fresh scandal

1m Alia Shoaib, Reporter
FRC introduces £10m sanctions for Big Four firms

Audit FRC introduces £10m sanctions for Big Four firms

1m Alia Shoaib, Reporter
Ukraine’s PrivatBank files $3bn claim against PwC

Audit Ukraine’s PrivatBank files $3bn claim against PwC

2m Alia Shoaib, Reporter
Grant Thornton to exit FTSE 350 audit market, citing Big Four dominance

Audit Grant Thornton to exit FTSE 350 audit market, citing Big Four dominance

2m Alia Shoaib, Reporter
Big Four dominate FTSE 250 audit market in Q1 rankings

Audit Big Four dominate FTSE 250 audit market in Q1 rankings

3m Alia Shoaib, Reporter