Standards set to raise the global stakes

From Times Online, UK

September 05, 2004

Standards set to raise the global stakes
Lucinda Kemeny calculates the effect of new accounting rules that will govern financial reporting from 2005

This year's bestselling book is not likely to be by any author in the latest top 10 chart, but a group of largely middle-aged men of academic persuasion who comprise the International Accounting Standards Board. The 3,000-plus page tome they have authored will have landed on the desks of an estimated 7,000 listed companies and will have to be read by hundreds, if not thousands, of staff.

But this is no bedtime thriller that doubles as a handy doorstop, nor another level of bureaucracy that can be argued away with a few letters to local business representative. This year's top prize goes instead to a collection of detailed accounting rules that have sent the country's finance and information technology people reaching for the headache tablets. Welcome to the new world of accounting.

International Financial Reporting Standards (IFRS) has been a long time coming. Sir David Tweedie, who now runs the International Accounting Standards Board (IASB), the body which is responsible for setting global accounting standards, has been driving the process ever since his time as head of the UK Accounting Standards Board (ASB). And it has been a long and arduous process.

The goal, as he explains opposite, is to create one single set of accounting standards that can be applied anywhere in the world, saving millions for firms with more than one listing and allowing investors to compare the performance of businesses across geographic boundaries for the first time.
Yet what was once a distant dream, for big companies in Europe at least, is now less than four months away. From January 1, 2005, Europe's leading listed companies will be required to use IFRS for their financial statements. So what exactly is IFRS, and what does it mean for a company?

The IASB published 2004 International Financial Reporting Standards (International Accounting Standards Board, £54, available from www.iasb.org.uk, and also on CD-Rom), a set of accounting standards that will form the "stable platform" for international accounting from 2005. Apart from a few amendments, all of the standards that are compulsory for use next year have now been finalised.

The standards will apply to a company's consolidated financial statements and they cover everything from mergers to leasing, revenue and accounting for employee benefits.
Although Tweedie's work has ensured that Britain already had a head start, because accounting standards are already similar to IFRS in many respects, anyone brave enough to look at the detail will quickly realise that this is far more than just tinkering around the edges.

Ian Dilks, who is the PricewaterhouseCooper partner responsible for IFRS conversion services in Britain, says: "Some companies are approaching it in the same way you approach a conversion to US GAAP to support an American listing. IFRS is seen as something extra but it isn't, it is a fundamental change to the reporting standards for UK companies, and for listed companies the change takes place overnight."

Experts are keen to emphasise that the transition is not just a matter for the finance staff within an organisation, because IFRS is not just about new standards — it is also about far more disclosure than ever before.

Scott Parker, head of financial management solutions at the consultant Atos Origin, has calculated that 3.5m people could be affected across Europe as the tentacles of IFRS spread out to cover all those individuals who contribute to company accounts or rely on the accounts to make decisions.

"One large UK listed organisation has worked out that they currently have 3,500 lines of information in all their accounts. With IFRS, they have found they are going to need 6,000 lines to capture all of the additional information they are going to need to disclose."

So how up-to-speed are British businesses? Analysis conducted by both PwC and Atos does not bode well.

While PwC's assessment of the readiness of companies in 16 countries found that 90% had set up an IFRS project and had begun to process the change, only 29% were fully set up and running. More worryingly, a survey of 200 EU-listed companies sponsored by Atos found that more than 25% of UK companies did not expect to be ready by early 2005, making British firms the least prepared among the respondents.

Given the similarities between UK standards and IFRS, this result is not too surprising, but there is mounting concern that British companies may not realise the true nature of the work involved.

Ian Mackintosh, the chairman of the ASB, warns: "The UK has played a leading part in the development of international standards, so it is not surprising that in many respects international and UK standards are similar. However, there are some big differences. Also, in most cases they are expressed in different language, so companies and their advisers need to consider the context of IFRS in detail to be sure they identify all the points that affect them."

Another reason may be that although many of the standards are now in their final form, much of the media interest around IFRS has been generated by a bitter war of words between the IASB, the European Commission and many of Europe's leading banks, who have balked at the extra disclosure required. A recent consultation by the Securities and Exchange Commission into the disclosure requirements found that many large foreign banks are sweating under the pressure.
Stephen Hester, the finance director of Abbey National, wrote in his response: "The most significant impact on financial institutions such as Abbey is likely to result from the proposed amendments to IAS 32 Financial Instruments: Disclosure and Presentation, and IAS 39 Financial Instruments: Recognition and Measurement. These proposed amendments are expected to have extensive systems consequences that require the investment of significant resources to meet the deadline for producing 2004 IFRS comparatives."

The two standards were designed to make financial institutions account for their use of financial instruments such as derivatives using current market figures, but many mainly French banks have opposed this on the grounds that it would introduce too much volatility into their accounts. And the outcry has forced the IASB to agree to a rethink of part of the standard at a later date.
There is little doubt that the financial instruments sideshow has caused a great deal of confusion as to whether there is a set of usable standards available for the 2005 deadline.But away for the realm of the big boys, smaller listed companies, particularly those on the alternative investment market (AIM), the UK's most vibrant stock market, can be assured that their transition is likely to be more peaceful.

Matthew Wootton, deputy head of AIM, has just completed a consultation with AIM companies and other interested parties on the impact of IFRS. He said AIM had to maintain a careful balance of the highest reporting standards, while not damaging its popularity, and that this will be taken into careful consideration in whatever the stock exchange decides to do.