E&Y report shows difficulties in applying IFRS

Eight thousand companies have implemented International Financial Reporting
Standards, but there is a risk that key information could be obscured by the
sheer volume of data required by the new standards.

This is the conclusion of an Ernst & Young report released today, which
followed a review of the financial statements of the 65 largest companies
reporting under IFRS for the fiscal year ended 31 December 2005.

E&Y’s head of global IFRS practice, David Lindsell, said companies still
had a long way to go improving consistency and comparability.

‘The onus is on regulators, advisors and corporate managements to rapidly
come to common understandings to drive best practice and remove anomalies in the
existing standards, so that IFRS adds real value for investors and companies
alike,’ he said.

Issues that emerged with the application of IFRS include:

• Companies have adopted an approach that minimises the changes from previous
national standards, reducing the ability, for example, to compare across an
• Due to the gaps and inconsistencies within the body of IFRS standards and the
absence of industry-related accounting guidance, IFRS implementation has
required extensive judgement to be used in the selection and application of IFRS
accounting treatments, again reducing consistency and comparability. IFRS is not
based on a coherent, integrated set of principles, while some individual
standards specifically permit alternative accounting treatments.

• Companies are not confident that IFRS financial information is sufficient,
or in some cases entirely appropriate, for the purposes of communicating their
performance to the markets.

• IFRS financial statements are significantly more complex than financial
statements based on national accounting standards. This complexity threatens to
undermine the usefulness of IFRS financial statements in making decisions. There
is a real danger that the preparation of financial reports will become a
technical compliance exercise rather than a mechanism for communicating
performance and the financial position of companies.

Lindsell added that greater emphasis needed to be placed by preparers of
financial statements on explaining the key judgments applied in determining
amounts reported, including the sensitivities around those judgments.

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Fiona Westwood of Smith and Williamson.