Vol 2 (2005) - Issue 6

Article preview

The Move to International Financial Reporting Standards A whistle-stop tour for the business recovery professional ...

The position at September 2005

As part of the drive to develop a single capital market across Europe, and to ensure as far as possible a common ‘language’ for financial information, publicly listed companies across Europe now have to report their results in accordance with International Financial Reporting Standards (IFRSs). At the time of writing (September 2005), IFRSs only apply to those companies that are active and direct participants in the capital markets: in other words, those that have shares or bonds that are publicly traded on recognized exchanges. There are approximately 7000 such companies (of whom approximately 2500 are in the UK), and, for these companies, IFRSs have been mandatory for all consolidated financial statements for accounting periods starting on or after 1 January 2005. This has been one of the most important and wide-ranging accounting changes the financial world has seen, but it represents the start, rather than the end, of a process of harmonization that will eventually affect all European businesses.
The international conformity of financial reporting standards had been, until 2000, the responsibility of the International Accounting Standards Committee. This was restructured under the EU’s financial harmonization plan as the International Accounting Standards Board. Its brief: to produce a single set of high quality accounting standards for use by participants in the global capital markets.
The IASB has, to date, produced 6 new IFRSs, and adopted all the 41 International Accounting Standards (IASs), which had been written under the auspices of its predecessor. Both sets of rules now have the same legal effect, and the term IFRS is now used to include both the new IFRSs and the ‘old’ IASs.
The US is not (yet?) part of the group of countries that have begun to adopt IFRSs, although since 2002 the US Financial Reporting Standards Board and the IASBs have undertaken several initiatives to reduce differences between new accounting standards. The SEC, however, has stated that it has no plans to accept financial reports prepared under IFRS without reconciliation to US standards, although in Canada, foreign companies can now use IFRS without amendment.

AIM and private companies to follow

The process of harmonization does not stop with listed companies and their consolidated accounts. As it currently stands, companies quoted on the Alternative Investment Market will be compelled to report under IFRSs for financial years commencing on or after 1 January 2007, and they are being encouraged to do so earlier if possible. As share analysts become more familiar with IFRSs, it makes commercial sense for AIM companies to prepare for early adoption.
It is also inevitable that subsidiaries and associates of listed companies will need to supply consolidation information based on IFRSs, and this will inevitably lead to unlisted companies wanting to report under IFRSs. Initially, these companies will have the option to choose whether to use FRSs or IFRSs. But having made a decision, they cannot switch between the two in case they gain advantages from such a policy. I expect to see hundreds of thousands of these unquoted SMEs deciding voluntarily to adopt IFRS in the next 3-4 years.
At the small and medium-sized company level, there are 2 things taking place.

- The IASB is slowly developing rules specifically for this sector. This is still in the discussion stages, however indications are that there will be a single cut-down IFRS for SMEs (rather like the one-stop shop Financial Reporting Standard for Smaller Entities that the UK now has). But the decision over which countries’ SMEs apply IFRSs will lie with each national government. The IASB does not have a policing or enforcement role.

- The UK’s Accounting Standards Board is writing and revising its standards to converge more and more with IFRS rules. In December 2004 the ASB issued 6 new accounting standards that are all in line with IFRSs. Five of the standards superceded existing requirements, but FRS 26 introduces, for the first time, requirements for the measurement of financial instruments in the UK, which controversially implements in full the measurement and hedge accounting provisions of IAS39.