How to survive in the fall-out of IFRS

Conversion to IFRS has been a relative success and worth all the pain. But there is still plenty of work to do, warns Peter Williams

‘How was it for you?’ That is the question that financial directors (FDs) must have been dying to ask each other for the past few months. And behind closed doors there have doubtless been a number of frank exchanges of experiences. How listed company FDs and their staff have coped with the transition from UK Generally Accepted Accounting Principals (GAAP) to International Financial Reporting Standards (IFRS) has garnered much attention. The move to IFRS has been a major challenge for Europe’s top companies.

Few observers can doubt that the switch has been accomplished without mishap. Companies have complied with the requirements, but the cost – in terms of late nights for the FD and finance team and extra fees for the audit firms – is beyond calculation. Some of these challenges have less to do with how companies have coped with the switch and more to do with IFRS themselves.

FDs believe that IFRS accounts are too long and too complicated. As a result of this, the Financial Reporting Review Panel (FRRP) has found that there is a tendency to use boiler plate descriptions for disclosure of accounting policies whether or not the issues described actually apply to the companies in question.

Companies can be forgiven for heaving everything but the kitchen sink into their first reports and accounts. Perhaps this year we can expect to see more judicious editing.

Now that implementation has gone ahead, the key question is how it can be improved. When Ernst & Young looked at the accounts of the 8,000 listed companies in the European Union that had implemented IFRS, it concluded that there was still a long way to go to achieve consistency and comparability in all aspects of financial reporting.

Ernst & Young highlighted three problems. First, company accounts still maintain a distinctive national flavour. IFRS’s biggest impact is on recognition, measurement and disclosure, not on presentation. Naturally, companies have gone for as little change as possible, so cross-border sectorial comparison is still difficult.

Second, IFRS is a work in progress and, without industry-related guidance, extensive judgement has had to be applied. While many would see the exercise of judgement by FDs as good, this has to be seen in the context of some accounting standards permitting alternative accounting treatments.

Finally, IFRS is more complex than most national standards. This threatens to turn financial reports into a technical compliance exercise rather than a mechanism for communica-ting a firm’s performance and finan-cial position.

One of the biggest tasks that FDs face is to personalise reporting. Descriptions of accounting policies are more useful when they identify issues relevant to a company’s individual circumstances.

If FDs should feel that regulators and politicians are ungrateful nitpickers, then they will be pleased to know that the FRRP formally recognises all the hard work necessary to make the introduction of IFRS such a success. But there is still more work to do. In terms of reporting, the risk is that key information will be lost in the sheer volume of disclosure. This could see the usefulness of accounts diminish under IFRS.

This is a task for standard setters and regulators. For FDs, IFRS the second time around has to be about sharpening up thinking in order to drive best practice.