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Hundreds face restatement in wake of standards chaos

Hundreds of companies will be forced to restate their accounts after a spate
of unexpected re-assessments of international accounting standards.

As many as 40 accounting treatments proposed by companies have been rejected
this year by the
International Financial
Reporting Interpretations Committee
(IFRIC), prompting a likely wave of
restatements, senior figures said.

The disagreements over accounting treatments have arisen as IFRS has been
implemented, and prompted complaints that restatements seem an unduly harsh
punishment for companies with genuine misunderstandings, and also create the
potential for abuse.

While it is not yet clear how many or which UK companies have to restate
their accounts, IFRIC sources said hundreds of businesses worldwide could have
to restate accounts in which their lease figures were incorrectly treated.

Other key areas where there have been disagreements include revenue
recognition and the reporting of income tax charges.

Richard Thorpe, head of accounting and auditing policy at the FSA and the
UK’s representative at the
Committee
of European Securities Regulators
(CESR), said: ‘We’re concerned about
market reaction to rejections on the basis that the standard is clear.

‘There is general agreement in CESR that where the standard is clear, then it
should be treated as a correction of an error arriving from a period of
misunderstanding.

‘It’s more important that a company should not be punished by the markets or
otherwise, for making those sorts of errors, ‘said Thorpe.

IFRIC previously issued rejections without commenting or offering reasons.
But in order to be helpful, it began explaining why it had rejected certain
accounting treatments.

But Ken Wild, Deloitte partner and IFRIC committee member said that this
process began to move too close to interpretations, for which there are
consequences in some countries.

‘We have moved away from saying things are clear, to giving reasons for this,
and then accepting that we’re all part of a learning process, especially given
the application of IFRS,’ said Wild.

The process may now also be open to abuse, he said.

‘There is a danger, if we say this is part of the learning process, that
somebody may now engage in practice with intent and thereafter immediately issue
a question with IFRIC to cover themselves,’ he said.

The US market particularly tends to interpret restatements as errors unless
accounts have been restated due to a new accounting standard.

Further reading:

IFRS update Summer 2006 – lost in
translation

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