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IFRS for SMEs – what happens next?

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  UK GAAP as we know it will be withdrawn and replaced by IFRS for SMEs.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 UK GAAP as we know it will be withdrawn and replaced by IFRS for SMEs.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 happens next?

Along with 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 decade ago.

Not least 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 companies.

The accounting 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.

The proposals 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 2012. 

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 unions.

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 back now.

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
Whilst 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. 

Don’t 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
The 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 are affected
As 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
This 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
Tempting 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
The 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
Deloitte LLP

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