AS MANY FDs face a December statutory year end, we are confronted with our second least favourite subject (narrowly behind governance): statutory financial reporting. Most of us report under IFRS, and the rest of us will have to do so from January 2015.
When I qualified, the simplicity of the UK GAAP rules was supplemented by a relatively straightforward set of statements of standard accounting practice (SSAP) guidelines. Now we have to contend with IFRS as well as a wide range of non-statutory external and internal reports. The complexity would have been overwhelming for many were it not for the sophistication and capability of our IT and other systems.
FDs in listed and AIM companies are well ahead of the curve, but FDs of smaller entities and certain other enterprises are in for a shock. Bizarrely, I personally know some FDs who qualified with an examination system under IFRS, but whose day jobs are under UK GAAP.
Of course, this is not intended to be an expert analysis of IFRS (as I am a mere FD), but I cannot resist commenting on what I hear and read.
Listed companies have been required to use IFRS since January 2005, AIM companies since January 2007, and most other enterprises must do so by January 2015. The conversion calls for advance planning, new systems, restatement of comparatives, and changes to business plans. This all comes at a cost, and can create confusion within the management team. In my case, I converted several years ago, but also had to maintain a parallel set of US GAAP accounts.
Globalisation, financial scandals and the banking crisis provide a compelling case for a single-set global accounting standard although some convergence issues remain. The US, where standardisation is a hotly contested political subject, is sticking to US GAAP, a rules-based rather than principles-based system. But more than 120 countries have adopted IFRS and others have it under consideration though it is not prescriptive. I am hopeful we are close to the goal of a global accounting language, and financial regulation is in serious need of that language.
The complexity of IFRS is compounded by the involvement of BIS, IASB, ASB (now fully absorbed into the FRC) and other bodies in the consultation process. We are faced with an evolving set of standards with amendments announced even before standard adoption.
One significant and current issue is the broad area of narrative reporting. The FRC published a report in 2011 about cutting clutter in annual reports – this was a cluttered 52-page document. My view is that clutter is often caused by FDs, auditors and audit committees nervous of being accused of under-disclosure.
But I support recent proposals to replace the current business review and directors’ report with a strategic report and an annual directors’ statement. The strategic report will focus on strategy (obviously), the business model on risks and the directors on reward schemes. This will be supported by a prescribed structured directors’ statement (which should improve comparability for users) and voluntary disclosures on social and environmental matters. BIS issued a consultation paper in 2011 on narrative reporting, in response to the government’s commitment to improve the quality of social and environmental reporting while minimising the disruption caused by new rules.
Many FDs who are fully absorbed in the complexities surrounding the conversion to IFRS have become accustomed to the extent of the labyrinthine bureaucracy. However, some of us are guilty of taking insufficient interest in developments, and very few of us use our collective voice to make our views heard. Those FDs who are yet to convert to IFRS will have their work cut out on many fronts, and their jobs are about to become much more difficult.
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