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AIA

Cautious start for international standards

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10th Jan 2005
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The introduction of International Financial Reporting Standards (IFRS) will inevitably create some confusion. But private companies could do worse than grasping the nettle and adopting them in the short to mid-term, according to a PricewaterhouseCoopers technical partner.

For accounting periods beginning on/after 1 January 2005, the new standards are now obligatory for most of Europe's 7,000+ listed companies. The new IFRS and existing IAS guidelines cover all aspects of a company's consolidated accounts and represent a major shifting of goalposts in 90 jurisdictions in which they take effect.

Yet a December survey by PwC found that many of Europe's listed companies were not prepared for this attempt to create a universal financial "passport" to provide consistency and comparability between Europe's different capital markets.

For UK companies, the transition will be slightly less drastic, largely because Sir David Tweedie, formerly head of the UK Accounting Standards Board and current chairman of the international board (the IASB), set UK standards on the road to convergence several years ago.

Nonetheless, PwC partner Ian Dilks, who has overall responsibility for IFRS convergence within the auditing firm, says that the transition will take some adjustment. He told AccountingWEB, "Inevitably, it'll be a bit like switching the side of the road we drive on from left to right - there's almost bound to be some accidents."

And he added, both company managers and the investor community will have to get used to the new language of accounting. The changes he says, will be more profound than some might expect.

"A lot of companies will need considerable redesigning internally - with issues such as share options. It could change management behaviour in a number of ways."

While in the long term, IFRS are intended to save auditing costs, Dilks believes that the cost of training up staff and related costs could be considerable in the near future.

But Solomon Hare partner Paul Gee says the new regime has been accompanied by a large amount of "hype and misinformation". He and points out that for the moment only those companies that are fully listed are obliged to adopt the new standards.

Companies listed on the Alternative Investment Market (AIM) are not obliged to adopt IFRS until 2007, but can do so if they desire to. While Dilks saus that some larger private companies are already looking to adopt IFRS, companies meeting the requirements of FRSSE (Financial Reporting Standard for Smaller Entities) are for the moment forgiven for disregarding the IFRS fuss.

But FRSSE is under review. Paul Gee says that looking to the future, the ASB will gradually change FRSSE to bring it into line with international GAAP.

For its part, the IASB has its own plans for the accounting of SMEs, a project to develop parallel IFRSs for small and medium size companies that are cheaper and easier to comply with, less text-heavy, and demand a lower level of disclosure. Gee predicts that the board's criteria for applicability will be based less on an entity's size or turnover than on public interest - for example the breadth and nature of the investor base.

Quite how IFRS will affect companies' profits is yet to be seen.

Gee points out that the impacts largely depend on the industry sector a company is in, and its approach to share schemes, employee benefits and other factors. Companies with large property portfolios, for example will be able to account for increased property values as profits, and not reserve.

Some of the effects of IFRS will be less welcome: "merger accounting", which flatters the profits of an enlarged group, is out. And acquisitive companies will not be able to write off goodwill, but are now obliged to carry into over onto the books in full. Companies will also be obliged to declare the cost of share options.

Gee says that the most important thing companies using IFRS can do is communicate the kind of impact that the changeover is going to have on company figures. This, he points out, is what a number of listed companies are already doing on their websites. AstraZeneca, for example, issued a statement of financial information for 2003 and the first half of 2004 comparing the figures as prepared under both UK GAAP and IFRS. (In its case, the differences were minor. Other companies may be less willing to undertake the same exercise.)

Press reports have emphasised both the potential for confusion IFRS may cause, with prominent warnings that the unscrupulous may exploit unfamiliarity with the new system for their own fraudulent ends. Gee regards this as possibly scare-mongering, telling AccountingWEB, "I'd be surprised if more than a very small number of people take advantage of the changes."

Tom Blass
[email protected]

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