The brave new world of IFRS: IFRS have been widely accepted, and are expected to enhance international financial reporting transparency, comparability and investment patterns. This progress will not come, however, without some unintended impacts on companies, countries and capital markets
The year 2005 should be proclaimed "The Year of International Financial Reporting Standards (IFRS)." Thousands upon thousands of companies around the world are getting ready to prepare their 2005 financial statements, and at least one year of comparatives, according to a set of accounting standards they have never used before. IFRS were promulgated by the International Accounting Standards Board (IASB), headquartered in London.
A worldwide consensus has been building for many years on the need for high-quality global accounting standards that would better serve investors and facilitate more efficient allocation of capital. This is why the European Union (EU) introduced a regulation requiring all companies listed on a regulated market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRS from 2005 onwards. EU member states have the option to extend this requirement to unlisted companies and to unconsolidated financial statements.
Everywhere IFRS are being implemented, organizations are struggling to come to grips with the new system. The situation is particularly difficult in the EU, where companies are over-whelmed with a multitude of new regulatory demands coming into effect almost simultaneously--requirements under the impending Basel II Accord, a new Prospectus Directive and others resulting from the implementation of the Financial Services Action Plan. In addition, companies listed in the U.S. have to comply with the Sarbanes-Oxley Act.
Transition to IFRS--Much More Than an Accounting Issue
Implementing IFRS brings the need for change in the format of accounts, different accounting policies and more extensive disclosure requirements. In many EU countries, technical differences between local generally accepted accounting principles (GAAP) and IFRS are numerous, and the costly and resource-consuming conversion process could last up to 24 months.
Many organizations are experiencing a shortage of well-trained personnel, and there are necessary IT system changes and enhancements to be made. For many, it is not a matter of just replacing one accounting system with another, but rather the addition of a new accounting system on top of the existing one still to be used for statutory purposes.
Most companies adopt IFRS not only for the consolidated accounts, but also for internal management use in the parent and subsidiaries. Harmonization and streamlining of internal and external reporting by creating a single accounting language across the business is often listed among the most important benefits of conversion. The new accounting system may affect bonus and reward schemes, treasury options, business combinations, measurement and treatment of intangible assets, leases, financial instruments, tax liabilities and debt covenants.
Some European companies in EU member states are exempted until 2007 from adopting IFRS. This exemption is for companies that are listed in both the EU and in another non-EU jurisdiction (such as the U.S.) and that are following another internationally recognized set of accounting standards (such as U.S. GAAP).
One key challenge in adopting IFRS is their use of fair value as the primary basis of asset/liability measurement.
"The IASB advocates its fair value approach on the grounds of relevance; the board quite...