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Accounting: IFRS 9 and what it means for year-end reporting

Although finance directors don’t like talking about the
difficulty of closing year-ends, it is certain that December was tricky and
annoying in that regard. The problem falls into two categories: regulatory and
business. In terms of regulation, one of the major irritations has been the
uncertainty over the exact implementation of some of the International
Accounting Standard Board’s (IASB) financial reporting standards. It is a
changing picture and sensible FDs will be in dialogue with their auditors
looking for help to guide them through the maze.

At the G20 summits in 2009, world leaders declared that improvements needed
to be made to financial reporting; the IASB duly picked up the baton and, in
turn, its output – new standards – is being fed into the global financial
reporting system, which individual FDs, financial controllers and finance
departments are having to ensure are reflected in reports and accounts. The
reporting standard that continues to provoke most angst is, of course, the one
on financial instruments. While few mourned the passing of IAS 39, trying to
find a successor is not straightforward. In a bid to be seen to be making
improvements in as short a timeframe as possible, the IASB has divided the task
of replacing IAS 39 into various chunks.

The first part of the IASB plan to replace IAS 39 came in late November 2009,
with the release of IFRS 9, the standard housed on the classification and
measurement of financial assets. Key changes include removing the
available-for-sale and held-to-maturity classification, ending the concept of
embedded derivatives in financial instruments and no longer allowing unquoted
equity investments to be held at cost. The standard introduces a new
classification for equities – fair value through other comprehensive income. The
standard is due to become effective on 1 January 2013, but early adoption is
permitted.

IASB recognises IFRS 9 is a work in progress and is keen to move ahead with
standards on impairment, hedge accounting and derecognition, which are all
expected to be published in the second half of 2010 and become mandatory in
2013.

A key practical point is that the IASB says early adoption of IFRS 9 is
permitted. On that basis, many companies in Europe decided to go ahead with the
standard for 2009 year-ends and were working hard to make it happen when the
European Commission (EC) made the shock decision to delay its adoption. The
political ramifications of the decision – which is due to be revisited this
month – have been mulled over with the conclusion that it seems strange the EC,
which had been in the vanguard of urging the IASB to reform the accounting
standard, should appear to be faltering, especially when other territories that
use IFRS will be reporting using IFRS 9. While politicians and standard-setters
may be squaring up to one another, the big losers in the real world are those
European companies and the users of their accounts. The preparatory work to
adopt IFRS 9 simply has to be written off as wasted time: it’s back to the old
standard.

This episode has done nothing to enhance the reputation of international
accounting standards in the eyes of FDs. It raises serious questions over the
efficacy of trying to put through changes in complex accounting standards in
such a short time frame, especially if the plans of corporates can be disrupted
and undermined by a laborious approval process.

Accounting standards are not the only problem. The other headaches for FDs
and their teams is the breaking of crises such as the one at Dubai World, posing
significant problems for teams trying to close down the valuations of assets and
liabilities at year-end. The problem of trying to place some acceptable value on
holding goes further than the banks, big though those problems are, and extends
to a host of international companies that now do business in that region. You
can be sure that sceptical auditors are going to be questioning just how the
values of assets tied to the region have been reached. With the likelihood of
continued volatility, it seems likely major shocks will continue to cause
disruption to the preparation of company reports.

Ironically, when international reporting standards were introduced in 2005
many commentators and FDs were all expecting serious problems as companies threw
the switch and changed from national to international reporting. In the end, the
changeover appeared to go smoothly. We were all fooled into thinking that was a
one-off.

It is clear that companies reporting under IFRS are facing an ongoing battle
to keep up with a changing set of accounting standards, with no sign yet of the
reporting cannon settling down. You could argue that the financial crisis has
changed everything, especially for those in the financial sectors, and that FDs
have no choice but to prepare and budget for continual shifts in financial
reporting. Presumably, the standards will settle down, but that could be many
years away. Until that happens, both preparers and users of accounts may find
themselves in a perpetual state of confusion.

Peter Williams is a chartered accountant and freelance journalist

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