New accounting standards ‘welcome but challenging’

MAJOR PLAYERS have welcomed yesterday’s release of four new International Financial Reporting Standards with a mixture of caution and enthusiasm.

IFRS 13 sets out a new definition of fair value accounting, an issue that came to the fore during the credit crisis when the question of how to value complex financial instruments threatened to bring down the banking system.

Deloitte, KPMG and the ICAEW alike heralded the standard as an important step in the right direction, helping companies develop sound fair value accounting and giving analysts greater insight into their financial status.

The standard does not bring in new requirements governing when fair value should be applied, but rather, offers further guidance on how to measure it. Additionally, it establishes disclosure requirements designed to provide more information for users of financial reports.

Julie Santoro, partner in KPMG’s International Standards Group, described the standard as “robust”, and said the resulting disclosures will “further improve the transparency of fair value measurements used in financial statements”.

IFRSs 10, 11 and 12 make up a three-pronged project that seeks to deal with the various facets of disclosing entities. IFRS 10, Consolidated Financial Instruments, makes control central to the decision of whether to bring entities on balance sheet; IFRS 11, Joint Arrangements, sets out how entities controlled by two or more interests should be accounted for; IFRS 12, Disclosure of Interests in Other Entities, defines how tools such as special purpose vehicles and off balance sheet arrangements should be reported.

Mike Metcalf, technical accounting partner at KPMG, said the triple standard is an attempt to deal with the myriad and increasingly complex entities used by financial institutions. It attempts to set out clear terms for when and how they should be brought on balance sheet, thereby dealing with one of the major problems of the credit crisis.

Dr Nigel Sleigh-Johnson, head of ICAEW’s Financial Reporting Faculty, said the new standard will aid “investors seeking to compare the financial health of companies reporting to US GAAP and companies reporting to IFRS”, calling it “an important milestone in the convergence project”.

Deloitte IFRS experts Veronica Poole and Andrew Spooner also welcomed the triple standard, but warned it “will create challenges for corporate reporting”, as companies will have to carefully re-examine their consolidation decisions.

Metcalf highlighted the disclosure aspect of consolidation, saying: “Increased disclosure will apply regardless of whether or not the new standard changes the population of entities that a company consolidates.” Companies have several years to comply, and it may take them this long to master the revised consolidation approach. However, of more immediate interest will be disclosure, as they may need to capture new data and decide on the best way to work the information into accounts.

The main worry for companies is that the new accounting standards will cause significant fluctuations in their accounts, potentially sparking panic among investors. Some are unhappy with the new rules for joint arrangements set out in IFRS 11, which could hit profits hard by shrinking balance sheet entries – which previously recorded profit, loss and interest – to a single line entry in the profit and loss account and one on the balance sheet.

Outstanding IFRS projects include hedge accounting and insurance, with the board aiming for completion by the end of the year.

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Fiona Westwood of Smith and Williamson.