The Debate: Adopting international GAAP

Why big bang is best

By Peter Williams

Adopting international standards piecemeal over four years is absurd.

A gradual approach will mean that companies’ accounts are going to have to be restated endlessly. Preparers and auditors are going to be confused enough in the switch over from UK GAAP to international GAAP, so just imagine how bemused users are going to be. Especially as confidence is at an all time low among the investor community in the veracity of financial statements, following the US accounting scandals.

Yet by this creeping change we are delaying restoring much needed confidence in the reporting process.

If companies were allowed to adopt a big bang approach the accounts would still need to be restated. But only once, not four times. After that they would only have to take account of the changes brought about by the introduction of new international standards, in the same way they do now when new UK rules are introduced.

It is doubtful whether British industry considers piecemeal adoption attractive. The position laid out by Ernst & Young in a report earlier this year ‘Adopting IAS in the UK: clarity or confusion?’, argued that if any company wanted to adopt international standards before the deadline they should be allowed to do so. Of course this is against company law and the DTI would have to give permission.

The other argument against early adoption is that it will reduce comparability within the UK. But those companies that might wish to adopt the standards early will be global companies. And their main competitors are non-UK multinationals that are likely to be reporting already either under US GAAP or international standards.

If a few big British companies went for early adoption it would increase faith in the whole international standard setting project. Fortunately piecemeal adoption looks unlikely to happen, particularly if British industry disagrees with the ASB approach.

Therefore as long as common-sense prevails, creeping adoption and chronic confusion will be avoided.

  • Peter Williams, a freelance journalist.

You can’t hurry changeBy Peter Holgate

Imagine you are a busy listed company finance director. Perhaps you are. Many priorities compete for your attention. So how would you react to this: ‘Here are eight exposure drafts proposing changes to UK accounting.

They reflect the Accounting Standards Board’s convergence of UK GAAP with IAS. You won’t have to do anything for three years. But we’d like you to spend time considering them and give us a view.’ In three years, you may have become chief executive, be working for a US company or have retired.

In 2005, if still in post, you start to pay attention. By then there are changes to 30 standards to consider. Accounting help with the right skills will be hard to find. None of your finance team will be prepared, but most of your accounting numbers will change to ones that are unfamiliar.

The pattern of earnings will have been upset, budgets will be on an inappropriate basis and incentive schemes will be out of tune with external reporting.

Unfortunately, this is not fanciful. One of the findings of PricewaterhouseCoopers recent survey of 667 CFOs throughout Europe concerned the time taken to convert to IAS. Those who had already gone through the exercise advised: ‘It takes longer than you think. Start early.’

On the face of it, to convert to IAS in 2005 as a large, one-off exercise is attractive because it is one disruption, one change of accounting policy. This is misleading.

We can cope with small-scale changes of policy every year. But in a one-off exercise, so many things would change that boards and external users would easily lose their bearings.

The fact is it is less onerous to do the work if it is spread over three years. Preparers and users will have more time to digest the changes.

The most compelling reasons are to do with education and motivation.

A series of manageable changes that starts now forces preparers and users to learn from an early stage what IAS is all about and how it will affect them. Waiting until 2005 would lead to complacency followed by an ill-prepared UK plc.

  • Peter Holgate is senior technical partner with Pricewaterhouse-Coopers.

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