The challenges of switching to IFRS

The biggest piece in the IFRS jigsaw looks likely to fall into place by 2014
when the US adopts the standards. But what challenges might the world’s biggest
economy face? A new research report published by ICAS might provide some clues.
It suggests that the transition to IFRS has a significant impact on financial
statements – in particular, the profits and net equity of companies. The study
examined the annual reports of 175 companies in the UK, Italy and Ireland. The
most significant change was in the UK where reported IFRS profits were 51%
higher than those reported under UK GAAP and net equity was 35% lower compared
to that reported under UK GAAP.

What are the implications? Reporting higher profits may well influence the
value of a company’s stock, and a reported reduction in net equity for any
company is not great news if you are seeking additional finance. Any change
which heightens the perception of risk could scare off potential funders.
However, the message to users should be loud and clear. Despite the change in
reported figures, the economic reality of the business has not been affected by
the switch to IFRS, and this should be emphasised to all investors.

The views of users on the change is telling. UK and Irish users who were
interviewed for the report did not feel that IFRS made their analysis of
financial statements any more useful than UK/Irish GAAP. Italian users were more
positive about the changes, probably reflecting the fact that Italy has
traditionally viewed creditors as the prime users of financial statements and
IFRS, which is geared towards more towards investors, provides more useful and
transparent information. An already investor-geared financial reporting
structure in the US suggests that the impact of IFRS will not be revolutionary.

A final point worth mentioning is that a significant gripe from those who
have experienced the transition was that there was inconsistency amongst
auditing firms on the treatment of the new standards. I predict that as the US
embarks on its roadmap towards eventual adoption of IFRS, the experience of the
UK will be beneficial in ensuring a smoother implementation. Compared to dealing
with the current turbulence, IFRS adoption should be a doddle!

David Wood is executive director, technical policy at ICAS

Further reading:

Download the report
from ICAS’s website

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