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Thursday, 25th April 2024 |
| Financial reporting – the European highway |
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| Time is running out on preparations for the introduction of International Financial Reporting Standards in 2005 writes Brendan Sheridan. While listed companies need to step up a gear to make the deadline, the future remains uncertain for Irish non-listed entities, as the Government has yet to decide whether to extend the application of IFRS to non-listed entities or to retain the currently adopted standards. |
The European Union (EU) has committed to the international harmonisation of financial reporting standards by mandating that EU listed companies will be required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) with effect from 1 January 2005, with some minor exceptions being deferred to 2007. The 2002 EU Regulation which prescribes this also gives individual Member States the authority to permit or require unlisted entities to prepare their financial statements in accordance with IFRS.
The EU recently endorsed all existing IFRS for use in Europe, with those relating to financial instruments including derivatives and hedging (IAS 32 & 39) being deferred until the International Accounting Standards Board (IASB) has completed its amendments to these standards. Given the planned scale of new and revised standards, endorsement will need to be a continuing process.
Convergence with or without transition
While listed companies in the EU have been given clear direction, unlisted entities in many member states are still uncertain. The Irish government is currently considering whether to extend the application of IFRS to non-listed entities or to retain the currently adopted standards.
A review carried out by Deloitte in Europe on the approach being taken to transition to IFRS across Europe shows commitment to convergence of financial reporting standards but there is some unrest about an overall transition to IFRS in 2005. The most common reason is compliance with existing legislation, particularly taxation.
A change from one body of standards to another may need consequent change in tax law that, in its own right, will take some time to introduce and implement.
And what of the impact on Irish Company law? The EU has amended the 4th and 7th Directives, which are the foundation of financial reporting company law throughout the EU, to align with IFRS. All Member States are required to make consequent amendments to their legislation by 2005.
Will convergence be achieved by 2005? The UK Authorities appear confident this can be achieved in the short term by prescribing that unlisted entities may from 2005 onwards use either IFRS or the standards currently in use, as issued by the Accounting Standards Board (ASB). In practice, there is some scepticism that consistency and compatibility between the two sets of standards can be achieved within that timeframe. Ireland has adopted the ASB standards and will be faced with the same predicament in 2005.
Ultimately, convergence of accounting standards on a global basis may be an achievable objective but time is clearly running out to achieve this in a period of little more than a year from now.
Dual standards in 2005 may be a real challenge
Many Irish listed companies have a number of subsidiary companies, both in Ireland and overseas, with management having to deal with a multiplicity of reporting standards already. Introduction of IFRS in 2005 will add to this at the group reporting level. There is likely to be a requirement for both the parent company and its subsidiaries to have the capability to produce financial information in accordance with both local standards and IFRS. This will present many challenges for companies that include ensuring that they have adequate systems in place, appropriately trained staff and effective stakeholder communication processes.
And time is running out - for listed companies with December year ends, the first financial statements required to be prepared in accordance with IFRS are those for year ended 31 December 2005 with restatement of 2004 comparatives and possibly, for US SEC foreign registrants, 2003 comparatives.
The changes being introduced in areas such as hedge accounting, derivatives, share based payments and others represent new accounting challenges for companies while there is a myriad of differences between our current standards and comparable IASB standards. Pilot conversion exercises carried out on the financial statements of a number of UK listed companies has shown major differences arising in terms of both results and net asset positions. Changes in reported amounts could have a significant impact on many issues which include banking covenants and management incentives including share-based awards. There is also the challenge of how to communicate with your stakeholders at a time when there is significant change and perhaps increased uncertainty.
Communicating with stakeholders
In recent weeks, the Committee of European Securities Regulators (CESR) has issued draft recommendations on how listed companies should communicate with stakeholders on the impact of the transition to IFRS. They recommend that companies should begin this process by inclusion of narrative comment in the 2003 annual report on where companies consider the major changes will be. In 2004, companies would have gained improved awareness and certainty of the impact of the transition process and would communicate this in their annual report. Companies will have to meet this reporting challenge in 2003 at a time when there is still uncertainty on certain standards due for completion in early 2004.
Listed companies also need to plan for increased reporting requirements in 2005. The ‘transparency’ directive issued in draft form in May 2003 is expected to be adopted for implementation in line with IFRS reporting requirements. While the directive strengthens current requirements for both annual and half-yearly reporting, the most significant proposed new requirement is quarterly reporting. While quarterly reporting is standard practice for companies reporting in accordance with US SEC requirements, it will represent a major change for many listed companies. The EU is determined to achieve the highest standards of financial reporting and corporate governance.
Europe is clearly playing its part in international harmonisation of financial reporting. In Ireland we look forward to the decision being made by the Government on whether IFRS requirements will be extended to entities other than listed companies. This may await the appointment of the Irish Accounting and Auditing Supervisory Authority (IAASA) under the relevant proposed legislation, as its functions will include advising the Minister on significant accounting matters, including the overall framework of standards. With or without transition to IFRS, it is clear that the global convergence process will ensure challenging times ahead for financial reporting by all entities. |
Brendan Sheridan is a director of Financial Reporting Services at Deloitte & Touche.
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| Article appeared in the November 2003 issue.
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