Applying IFRS to small companies - update. By Steve Collings

Thanks for the explanation Steven. Sounds logical, but there will be different views I'm sure.

There were all sorts of arguments going back and forth as to why amortisation of goodwill should remain appropriate. However, the IASB view is that it is generally not possible to predict the useful life of goodwill and the pattern according to which it diminishes so their view is that any amortisation in a given period is (at best) an arbitary estimate of how much the entity has consumed its goodwill and is therefore essentially unreliable.

The American standard setters then came along and also argued that it is virtually impossible to predict the useful life of goodwill and thus it follows that amortisation is not a faithful representation of the pattern of decline.

Instead of amortisation the IFRS regime requires management of a company to test the goodwill annually for impairment. The argument here in favour of impairment is that it results in improved financial reporting. Standard setters also said that a good impairment test promotes transparency because it reacts to underlying conditions within the business as opposed to amortisation which is an estimate at best. The view here is that goodwill should be an appreciating asset if the business is properly managed and if it isn't then an impairment test will recognise any reduction in value.

An interesting article overall. Thanks Steve.
One point that caught my eye in the examples of changes from GAAP to IFRS was "no amortisation of goodwill". Is there a simple explanation for this change of reasoning? Over the years there has been much debate on this issue. Fortunately I do not meet up with the subject very often in practice. However I am always interested in the thinking of the powers that be. Can anyone explain?

A fantastic piece on IFRS 1 here. I am always interested to read Steve's articles because I lecture on exactly what Steve writes about and also take an interest in the IFRS issues affecting the smaller companies. I am technical principal of a large accounting firm so am always interested to hear others views.

I would agree that failing to comply with IFRS when it eventually does become mandatory for SME's in the UK will cause lots of upset and indeed lots of PI claims as well as HMRC interest.

I do not think the standard will become mandatory for accounting periods commencing on or after 1 September 2008 as previously reported because I suspect this will be too soon. The standard setters always want to make sure the transition period is as smooth as wholly possible.

Hi,

The IASB have not actually issued the standard as yet as Marie Windsor has pointed out so there is no 'effective' date as yet. However, the IASB have said that they plan to issue the standard in quarter 2 of 2009.

When the listed PLC's in the UK started to use IFRS it became effective from 1 January 2005. AIM listed companies had to use IFRS from 1 January 2007 so it could be that IFRS for SME's could be effective for accounting periods starting on or after 1 January 2010 (ie December 2010 year ends). That is only my suspicion, the IASB could impose another 'effective' date.

UK GAAP is relatively the same as IFRS anyway other than some notable differences, the majority of which don't really affect SME's e.g. defined benefit pension schemes or companies in the exploration industry. The other difference is the terminology e.g. profit and loss account becomes 'income statement' - balance sheet becomes 'statement of financial position', sales become 'revenue' and stock becomes 'inventory'. The main issue I think that is going to cause frustrations with accountants is the mandatory cash flow statement. I do know the IASB considered dropping this for SME's but then decided not to!

I think when it comes to converting UK GAAP accounts to IFRS (a) your accounts production software should handle most of the presentational aspects and (b) it's just a case of ensuring your client's accounting policies comply with IFRS e.g. no valuation of stock under LIFO and no amortisation of goodwill.

It is true that the end user won't really benefit but as practitioners we have a duty to prepare accounts that are true and fair and that involves using UK GAAP whatever that might eventually be. A fellow practitioner who I have known for 20 years + is in the process of a disciplinary with the ICAEW because of failings in his accounts mainly because of a lack of understanding.

Bill I've asked a similar question in the past when attending these types of courses as to what if the accounts don't conform to this IFRS. The Revenue insist accounts are prepared under UK GAAP so if that becomes IFRS then we have to prepare them under IFRS. If they aren't compliant with this I understand they will look into the client given that they now employe technical accountants to look at these issues. Also I understand that proffessional bodies are also clamping down on firms who fail to prepare accounts that comply with requirements.

I attended a seminar at the back end of last year where the speaker [cant remember her name but she sits on the panel of reviewers] actually said that the Financial Reporting Review Panel do now look at accounts filed at companies house and if they do not comply with accounting standards they will force you to make them comply as essentially you will be in breach of the companies acts.

Steve can you tell us when you think this will eventually come in? The lady at the seminar I went to last year said that a standard would come out this year but will it be applied this year?

What is the sanction if small company accounts do not comply with IFRS ? They are not audited so no opinion is required. If the accounts comply with the Companies Act then Companies House should be satisfied. Are HMRC going to ask for accounts to comply with IFRS and refuse to accept them if they do not ?
All of this will require extra work and extra fees and in the overwhelming majority of cases the user of the accounts will be no better off for having accounts prepared under IFRS than they would if they were not.

Steve.....pls advise if a date has been set as to when the IFRs will become mandatory for ALL companies

Many thanks