The European Commission has named 1 January 2005 as the day that Europe’s 7,000 stock exchange-listed companies will have to adopt international accounting standards (IASs) for their group accounts. But you knew that. For all those concerned with the introduction of IFRS, preparing for it is a work in progress that will go on well beyond the early days of next January. And most of the work falls to finance directors.
Until the end of Q1 2004, the International Accounting Standards Board (IASB) and national standard setters such as the Accounting Standards Board (ASB) in the UK bore the brunt of the work. The IASB promised a period of calm between 2004 and 2006, where adoption before 2006 would not be compulsory.
Today, however, it is the finance departments of quoted companies and their auditors that are feeling the heat most. At the same time, taking an increasing interest in the proceedings are stock market analysts.
Financial directors may have entertained the idea that by the end of Q2 2004 the IASB would have produced all of the standards in a neat package for companies to take away and implement. Such hopes have not been realised. The major political issue – IAS 39 financial instruments – is due for discussion again on 8 September by the EC’s Accounting Regulatory Committee. Some sort of opt-out (carving out some of the paragraphs of IAS 39 dealing with hedge accounting and fair value option) seems likely. Meanwhile, financial instruments disclosures are being tinkered with (through IASB’s Exposure Draft 7) and companies can either implement the revisions or wait until 2007. But apart from financial instruments, the bulk of the standards are there so FDs need to concentrate on understanding what the extant 20 International Financial Reporting Standards and revised IASs mean for their business.
In many ways, the adoption of international standards has echoes of millennium bug scaremongering – an immovable deadline that threatened disaster. We all know now that 1 January 2000 came and went with few glitches. But will the same happen in this instance? It is now a given that many companies are lagging behind in preparing for the introduction of IAS, and that could mean 2005 financial statements will be delayed.
While it is comparatively easy to follow what the IASB and the EC are doing in relation to the introduction of IAS, it is harder to say with certainty what companies should be doing and nigh on impossible to say what they actually are doing. A high-level comparison of UK GAAP and IFRS shows there are few major differences. However, a more detailed assessment tells another story. Companies need to carry out a comprehensive analysis of their transactions and exposures. There will be a major change in the format of the accounts; different accounting policies need to be formulated, and more extensive disclosure requirements.
All this adds up to a significant project for companies that will affect their reporting process and may result in changes in their accounting systems. Transition to IFRS will involve complete restatement of the opening balances and more volatile accounting measures. This increases the opportunities for both cock-up and conspiracy; in other words, innocent mistakes and deliberate misstatement.
Whatever the surveys may say this autumn on the preparedness of Europe plc/AG/SA/NV, only the FD, the auditor and the audit committee will know how ready they are. Probably most have plans in place and probably most of the key staff are undergoing some form of training. But how clear companies are on what they have to do and how much has actually been done will remain a mystery.
What can be seen is manoeuvring between the FD and the market analysts over the impact of IASs on the bottom line. In this time of mixed corporate performance and a stock market firmly in the doldrums, who can blame FDs for trying to ensure IAS doesn’t knock the share price? A survey in the summer by the ICAEW suggested that 60% of listed companies believe their key performance indicators would be affected as a result of the introduction of IAS. Inevitably, the market is trying to guess which companies and how much so some FDs have been suggesting that analysts might mark down shares.
All of that is in the future. For now, as FDs return to their desk after the summer break, they should be clear that they have to make the successful introduction of IAS into their company their top priority.