On the verge of convergence

Already, the cliches about the conversion to International Accounting Standards are beginning to mount. Comparisons have been made to the Y2K issue and, of course, people are supposedly calculating the cost faced by UK plc to fall in line. In other words, we’re at the stage where we should ask – as put by the Harry Potter character Ron Weasley on the side of London buses – ‘Is it time to panic now?’

Well, FDs never panic. But a recent survey carried out by the Institute of Chartered Accountants in England & Wales did show a lack of awareness, never mind preparedness. A third of respondents had little or no awareness of the publication of the EU Regulation mandating the adoption of IAS in 2005; two-thirds who took part in the survey were either “not very aware” or “not aware at all” of the IASB’s timetable for issuing both new and improved standards, and only 70% of respondents who said IAS was applicable to them felt they would be prepared in time for 2005. Remember, this was among chartered accountants, who you might expect to be the most with-it.

This is not a task that can be left to the FD alone. The conversion to IAS is a such a significant corporate governance issue that the whole board needs to be involved, even if responsibility for the conversion process ultimately rests with the FD.

Howsoever, an individual FD chooses to handle the process, typically large companies will create a steering committee, or working group, to manage the process. The working group is most likely to report to the board in smaller companies and audit committees in larger entities. IT will need representatives from across the key functions affected. IT, internal audit and treasury, as well as finance managers, are the functions most commonly mentioned. However, the company needs to consider the impact the conversion might have on the actual numbers reported. While many companies are reporting poor results, and while analysts are even more ready to find fault with results, companies need to understand in advance how the numbers are likely to change. In other words, corporate communications need to be involved with IAS conversion from early on.

A key problem in the conversion to IAS is the way that much remains to be decided. A number of revised and new international financial reporting standards are going to be implemented by 2004, and it is impossible to estimate the effect of these changes on company accounts.

One way to handle the conversion is to develop a rolling spreadsheet model that is refined as the process develops. This spreadsheet should be used to identify the key accounting policy changes and can be used to make an initial estimate of the financial effect on key financial indicators.

The company needs to undertake a detailed review of probable accounting policy changes required by IAS. (Every accounting firm has produced such a checklist, so there is no need to reinvent the wheel.)

At least one piece of the jigsaw has now fallen into place. The IASB has recently released IFRS1 First-time Adoption of International Financial Reporting Standards that sets out how companies should make the transition from local GAAP principles to IFRSs. IFRS1 requires an entity to comply with every IASB standard in force straightaway, with some targeted and specific exceptions. For European companies, these exemptions will focus around transitional provisions in IAS39 Financial Instruments: Recognition and Measurement on hedge accounting and derecognition.

The IASB requires a first-time adopter to recognise all assets and liabilities whose recognition is required by IFRSs, not recognise items as assets or liabilities if IFRSs do not permit such recognition, classify all recognised assets and liabilities in accordance with IFRSs, and apply IFRSs in measuring all recognised assets and liabilities.

One of the most helpful publications is a Good Practice Guideline from the ICAEW’s Faculty of Finance and Management entitled, Managing the change to IAS, priced £15.

Although the process of conversion to IAS is driven by statutory reporting requirements, in planning the conversion process, the FD should also consider if there are other benefits that can be gained at the same time, such as improving the current reporting process. Or maybe given the hectic pace, that is just one idea too far.