We are only a few
months away from confirmation of what will be the single biggest
shake-up to UK
financial reporting in our lifetime. UK GAAP as we know it will be
replaced by IFRS for SMEs.
ACCA Scotland will, together with Deloitte, be running
breakfast sessions on this topic in Edinburgh (Wednesday 29 September) and Aberdeen (Tuesday 5 October) to inform members
of the impact of the changes.
In the article below, Edinburgh and East of Scotland panel member Paul
Copland, a senior manager for Deloitte, discusses what happens next.
IFRS for SMEs – what happens next?
As has been
well covered in the accountancy press over the last 12 months, we are only a
few months away from confirmation of what will be the single biggest shake-up of UK financial reporting in our lifetime. UK GAAP as we know it will be withdrawn
and replaced by IFRS for SMEs.
There are many
questions companies are asking right now. What is driving this change? What
exactly is IFRS for SMEs? When does it come in? What does it mean for my
company? What should I be doing now? What
most of Europe’s capital markets, the UK’s listed groups adopted full IFRS in
2005. They were joined in 2007 by those companies on AIM and the public sector
is already well down its own route towards full IFRS adoption. IFRS is quickly becoming
the most widely recognised accounting framework in the world, with many
countries either mandating or permitting its use. Even our colleagues in the US
have started down a path that is likely to lead to their full transition towards
IFRS over the next five years, a move that would have been unimaginable a
after some of the events of the last two years, lenders, investors, analysts,
financial journalists and other commentators are increasingly looking for greater
consistency and comparability across global accounting rules. Unsurprisingly,
and not unreasonably, they wish to extend this to private companies not least
as it is not practical or sustainable to have two different overall frameworks.
IFRS for SMEs
is in some ways the IASB’s compromise solution. It puts forward a simpler and
less onerous regime which better aligns some of the current accounting rules,
whilst allowing certain opt-outs where the cost and effort of compliance with
full IFRS would be disproportionate and excessive for privately owned
principles of IFRS for SMEs are set out in one single document, as opposed to
the current maze of SSAPs, FRSs and UITF statements under UK GAAP. IFRS for
SMEs is also helpfully organised by topic and only runs to around 10% of the
length of full IFRS so it’s difficult to argue that the IASB has not listened
and simplified wherever practical and sensible to do so.
published last year require that, other than those small companies (as defined
by the Companies Act’s size criteria) which at least in the short term can
continue to follow the FRSSE, most current UK GAAP reporters are likely to have
to adopt IFRS for SMEs for their first year end accounts on or after 31 December
This is likely
to extend to certain unlisted but ‘publicly accountable’ entities forced to
adopt full IFRS, including certain investment trusts, co-operatives and credit
December 2012 may
seem like a long way out but, since comparatives will be required, this means
having a clean starting position at 1 January 2011 – just over six months away.
Since the proposals were published last year there has been a high level of
responses and public lobbying, from corporates as well as from HMRC which is itself
mandating a number of challenging changes, such as the introduction of XBRL
tagging of financial information, over a similar timescale.
There is a
current view that when the final exposure draft is published, probably in the summer
or autumn of 2010, the implementation date may slip by at least a year. Even so
we would urge companies to start thinking about the likely impacts over the
coming months. IFRS for SMEs is coming. The IASB and ASB are not likely to turn
So what are some
of the lessons learned by the thousands of companies who have already
transitioned away from UK GAAP?
Get ahead of the game early -
assess the impact during 2010
None of us
likes late surprises. The impact on no two companies is the same and therefore it
is important that you set up a team or at least allocate a senior finance team member
with primary responsibility for assessing the likely impact. If you currently
capitalise development costs, revalue your land and buildings, amortise
goodwill over 20 years or have forward currency contracts and interest rate
swaps off balance sheet then your results could be significantly affected. In
some simple cases the only change of any substance might be the need to include
a cash flow statement in your accounts. Get ahead of the game and find out
which camp you are in as early as possible so that you can start informing and
educating the various interested parties.
Understand your choices and make the right decisions
many of the rules are fairly prescriptive, IFRS for SMEs does offer a number of
choices across certain topics. If you have associates or joint ventures, for
example, you could be spoiled for choice and may be able to use the cost, fair
value or equity accounting model. IFRS for SMEs also reminds companies of the
existence of the ‘true and fair over-ride’ and that might be something to bear
in mind if you think that the proposed accounting treatment under IFRS for SMEs
simply makes no sense.
forget that there already is an option to adopt full IFRS and this remains the
case. In certain cases, for example, if an IPO is planned in the near future
this is something worth seriously considering. Where there are genuine choices
it is important to understand these, consider the pros and cons and then agree
on the route that best suits your own situation.
Document your assessment and
engage the auditors throughout
Financial Reporting Review Panel paid a lot of attention to the processes
followed by listed companies in transitioning to IFRS and we would expect the
same level of interest this time round. It is important that you clearly
document the thought process, references used, any assumptions applied and your
overall conclusions. In many cases you will want to prepare a summary paper and
have this considered and endorsed at Board level. Whilst interpretations under
IFRS have clearly settled down compared with where we were back in 2005 we would
also urge you to share your initial thoughts and conclusions with your auditors
just in case they see some things differently.
It’s not just the numbers that
well as ensuring your IT systems can accommodate the changes, don’t forget to
check whether these changes might result in a need to reset bank covenants, revise
earn-out arrangements or restructure bonus schemes where these are driven off headline
numbers that might be about to change or become more volatile.
The devil is in the detail
can often be the case. A number of listed companies were caught out by very
subtle differences in the detail or tripped up by unwelcome additional
disclosures around areas such as related party transactions, segmental
disclosures or management remuneration. Whilst there is a lot less detail to
digest under IFRS for SMEs, it’s important that you consider the disclosure
requirements and identify any potential issues or sensitivities at an early
stage so that any fallout, internally or externally, can be properly managed.
You can’t always manage the
process from the centre
though it may be, where you have diverse operations either within the UK or
beyond it is not always possible to assess the impact of the transition from your
group headquarters. Depending on the size and complexity of your group you
should look at following a fit-for-purpose approach which could range anywhere
between having a global steering group down to developing a short one-page checklist
to help flush out any obvious differences worthy of further attention. In many
cases your overseas subsidiaries will continue to have local reporting
requirements which are not yet aligned with IFRS for SMEs.
Don’t overlook the impact on
tax rules under IFRS for SMEs differ from UK GAAP in a number of areas and many
of the accounting differences could also have an impact on your tax bill as
well as your deferred tax position and overall effective rate. It is critical
that the potential tax impacts of these changes are carefully thought through, together
with any necessary changes which need to be made to your tax planning.
The IFRS for SMEs material is available to be
downloaded free of charge from the IASB website. Even if it doesn’t quite make it onto your
summer beach reading list we would urge you to track it down over the next few
months before it catches up with you.
Paul Copland FCCA