The great IFRS debate

Steve Collings responds to recent calls for IFRS to be scrapped for UK financial statements and looks at how the ASB could retain the FRSSE.

IFRS is, once again, causing quite a stir within the profession, with certain critics urging the UK government to repeal the requirement to apply IFRS to UK financial statements –although I am not sure how entirely successful this would be.

This article will look at why IFRS was brought in to the UK, where current developments are up to in relation to the proposed IFRS for SMEs and how the ASB could possibly save the much-loved FRSSE.

Currently in the UK, quoted companies (and those on AIM) are required to adopt IFRS as their financial reporting framework. Companies not obliged to report under IFRS can choose to do so (although in reality very few companies voluntarily adopt IFRS.) If a company chooses to voluntarily adopt IFRS, it’s a ‘one-way’ switch only – they cannot switch back to current UK GAAP if things do not go according to plan.

Current developments
In July 2009, the International Accounting Standards Board (IASB) issued IFRS for SMEs, after a five year development process. The IASB estimates that companies that fall under the scope of a SME account for 95% of all companies, and an extensive consultation took place with companies in the SME sector worldwide.

The UK Accounting Standards Board issued a policy proposal ‘The Future of UK GAAP’ in August 2009 and comments on this proposal closed on 1 February 2010. The ASB received in excess of 150 comments and is currently in the process of sifting through the responses. An exposure draft is due to be issued containing the ASB’s proposals for the future of UK GAAP.

IFRS criticisms
The primary objective of the IASB is to produce a set of accounting standards which are intended to be adopted on a worldwide level. IFRS was introduced in 2005 by the European Union and has been criticised quite heavily, particularly with regards to the use of the fair value model of accounting as opposed to depreciated historic cost. Critics have blamed the fair value model for disproportionately overstating banks profitability and in turn overstating profit enabling excessive dividends to be paid. The upshot of all this led to the financial crisis, resulting in banks having to be bailed out by the taxpayer. Well known financial institutions such as Lehman Brothers collapsed and the accounting profession was in the spotlight, once again, for all the wrong reasons. Indeed, the adoption of full IFRS by larger listed companies has caused problems with its implementation.

Continued...