Financial reporting - Same standards, same difference

FDs have a choice over international accounting standards; either they can stand on the sidelines and wait to see what is decided, or they can try and influence the process which will determine how the figures in their reports and accounts will look by 2005.

The European Commission recommendation that all EU-listed companies prepare their consolidated financial statements in accordance with IASs by 2005 has focused accounting minds in a lot of countries on the first-time application of IASs. As the International Accounting Standards Board rather modestly admits: “Conversion to IASs is a major exercise faced by a large number of companies using diverse national reporting frameworks.” British-based FDs can probably take some cold comfort from the fact that many FDs across the EU are facing a greater uphill struggle to comply with IASs than they are.

Not only do many FDs face a huge task, they don’t even know what that task is. Sir David Tweedie, chairman of the IASB, says: “Certain things are going to happen instantly. We are going to cut out the options that currently exist in the standards.”

After that the IASB has to decide which accounting standard to go with: in reality non-controversial standards will stay as they are, weaker standards will be jettisoned either in favour of the US version or, if the IASB doesn’t like the look of them, then they’ll have to write their own. Alan Cook, technical director of the UK Accounting Standards Board knows that the IASB has a lot of work to do. “The first thing to understand about international accounting standards is that most of them are going to have to change,” he says.

While it may be tempting to think that 2005 seems a long way off, most FDs driven by budget and planning cycles know that four years away means now. Clearly, accounting standards change all the time but companies are used to evolutionary change with a new standard here and a revised disclosure there.

However, timetables are already looking tight. To be ready to implement in 2005, companies need to prepare comparatives for 2004. To know what standards they are going to be adhering to (even if not necessarily going public) in 2004, they need to know by 2003. And 2003 is a mere 15 months away. Indeed, a survey of FDs by PricewaterhouseCoopers showed that nearly half of them thought that planning to meet a deadline of 2005 should start by 2002 at the latest.

Timetables set by regulators and politicians have been put back before, but it would be foolish to bank on delay. Mark Vaessen, the partner in charge of IAS Advisory Services at KPMG, says: “The UK is in quite good shape. But that shouldn’t lure FDs into thinking that they don’t have to do anything, because that’s not true. It is important for FDs to look at the requirements of IASs and assess the likely impact – and do that urgently.” Vaessen thinks preliminary work is necessary even if IASs are still evolving. There is a difference between monitoring and implementing.

For years, the IAS setting process has been happening off stage while the main focus has been on the national standard setters. That situation is currently being swiftly reversed. FDs of listed companies and those who prepare consolidated accounts need to watch carefully how the convergence to one single set of standards is going to be achieved. There are no prizes for guessing that somebody somewhere along the line is going to get upset.

As Cook says: “We aren’t going to win every battle. The IASB are open for a reasonable debate but there are a number of major issues on which there isn’t agreement over the way to go.” Expect British FDs to get upset over issues such as: deferred tax – where the UK standard is still out of line with international practice: business combinations where merger accounting looks likely to be prohibited; the goodwill standard so long in coming is also under threat; the UK impairment standard is pretty much a one-off; the income statement where through FRED 22 the UK’s ASB is leading where others may not be prepared to go; and the tricky subject of share options.

Desmond McCann, the partner in charge of implementation of IASs at PwC offers some advice: “FDs need to start thinking actively about what the impact on them might be. What will be the impact of the changes on their earning stream and therefore on the value of their company?” he says.

FDs can expect some help from the UK standard setters. The ASB’s Cook says: “However enthusiastic FDs are about harmonisation, no one is going to thank us for saying that overnight we are going to move into line.

If a UK Financial Reporting Standard isn’t in line with an international one then as they go through we will go through the process of adopting them into UK GAAP. We wouldn’t create unnecessary work by forcing them to make changes twice.”

As well as being concerned over what’s in the standards, FDs may well start to question how those application of those standards are going to be policed. It is clear that the IASB has no intention of policing adherence to their output in the same way that, for example, the ASB’s sister body, the Financial Reporting Review Panel, does in the UK. Countries are at different stages in monitoring compliance with accounting standards: Germany for instance is understood to have been examining the UK FRRP model. But even that regulation is reactive.

The responsibility looks set to fall on the stock exchanges across the world and the auditing firms. For IASs to work there has to be a similar level of auditing worldwide. The International Federation of Accountants (IFAC) and the big firms are aware of this issue. McCann says that it is not in the interest of his firm to let inconsistency rule. “We as a firm will want standards applied consistently. It is not attractive for us to have one interpretation in France, and another in Germany. We are building mechanisms to ensure that our clients can apply standards consistently,” he says.

While the large audit firms and IFAC may be pledging to do their bit it will be interesting to see what the London Stock Exchange, through its umbrella body IOSCO, will do to monitor standards. After all, it is IOSCO that has been so snippy about the lack of accounting harmonisation.

If the standard setters deliver the universal standards, will the regulators deliver the regulation? Howard Davies, chairman of the Financial Services Authority, is understood to be pressing hard on this point. The last thing well regulated regimes want is the emergence of a regulation gap.

A more immediate puzzle for FDs is what the transitional rules are going to be. Talking to all the players involved just draws a blank. What people do know is that FDs should be looking to their accounting and information systems to ensure that they have the current and historic data available should they find themselves facing extra or revised disclosure – on items such as derivatives and pensions, for example.

An even greater challenge would be to dig back into the archives to restate the figures for those mergers that were accounted under the merger method and subsequently need to be reshown under the acquisition accounting.

Now is the time to test that pretty enterprise resource planning system which came with fancy promises and an equivalent price tag. KPMG’s Vaessen reckons companies could find that there is as much impact on their systems as on their financial statements. If the FD is tempted to keep this away from the rest of the board then perhaps he or she should think again.

With the involvement of the stock exchange regulators, this is one accounting issue the City will pick up on.

Do you want to be sat across from some analyst as he or she asks about your company’s readiness for the introduction of IASs if you haven’t quite got around to briefing your chief executive on the issue? Analysts are easily confused. It would be a pity if your share price wobbled because analysts couldn’t grasp what the effect of international GAAP would be on your figures compared to UK GAAP.

PwC is planning to organise a conference later this year for FDs and CFOs of large European companies on the subject of IASs. McCann says that the purpose of the conference is to allow CFOs to explain which standards they think IASB needs to fix and also to find out what concerns they have as the 2005 deadline looms. FDs are best at dealing with their own narrow interests, may be this is one occasion when they need to look just a little further afield.