Managing the Transition to IFRS-Based Financial Reporting E-Book

Lisa Weaver

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Regulatory Reporting
• Sprache: Englisch

Seitenzahl: 596

Veröffentlichungsjahr: 2014

Beschreibung

The one-stop guide to transitioning to IFRS financial reporting

The International Financial Reporting Standards (IFRS) have already been adopted in Europe, and plans are in place to transition to IFRS reporting in the UK, India, Japan, and other major economies. The US is deliberating the nature of its convergence with IFRS and US entities will need to understand the implications of transition. This means all finance managers and financial controllers will be responsible, not only for understanding IFRS, but for making the transition and dealing with implications. Managing the Transition to IFRS-Based Financial Reporting is a one-stop resource for navigating this major change. Case studies and project management advice help move smoothly from GAAP to IFRS principles and requirements.

Managing the Transition to IFRS-Based Financial Reporting is the only book on the market that focuses on both the accounting and non-accounting implications of IFRS transition. This complete approach will guide you from the history and conceptual basis of IFRS through each stage of the transition process, ensuring expert change management and fluid communication from start to finish.

• Takes a holistic approach, covering non-accounting implications like educating and communicating IFRS requirements
• Provides case studies to illustrate best practices for moving to the new international standards
• Provides a framework for planning and executing the entire IFRS transition project

With nearly two decades of financial training experience, author Lisa Weaver is imminently qualified to deliver clear, concise, and understandable content. In addition, the reference material and other resources in Managing the Transition to IFRS-Based Financial Reporting will help you simplify the transition and take advantage of all the benefits IFRS reporting confers.

Leseprobe

This edition first published 2014 © 2014 Lisa Weaver.

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Library of Congress Cataloging-in-Publication Data

Weaver, Lisa, 1971–   Managing the transition to IFRS-based financial reporting : a practical guide to planning and implementing a transition to IFRS or national GAAP which is based on, or converged with, IFRS / Lisa Weaver.     pages cm   Includes bibliographical references and index.   ISBN 978-1-118-64374-7 (paperback) – ISBN 978-1-118-64418-8 (ebk) – ISBN 978-1-118-64412-6 (ebk) 1. Accounting–Standards. 2. Corporation reports. 3. Financial statements–Standards. I. Title.

  HF5626.W43 2014   657′.3–dc23

2014007143

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-64374-7 (paperback) ISBN 978-1-118-64418-8 (ebk) ISBN 978-1-118-64412-6 (ebk); 978-1-118-64379-2 (ebk); 978-1-118-92483-9 (ebk)

Cover design/image: Wiley

CONTENTS

List of Case Studies

Foreword

Preface

Disclaimer

Acknowledgements

About the Author

Introduction

Scope and key themes of the book

An overview of the book

Information sources

I Understanding the Framework of Performing a Transition to IFRS-Based Financial Reporting

1 International Financial Reporting in Context

1.1 The Development of International Financial Reporting

1.2 The Regulatory Framework of IFRS Today

1.3 The Current Position on International Harmonisation of Financial Reporting

1.4 The Benefits and Impact of Moving to IFRS

Conclusion

Notes

2 The Conceptual Framework of IFRS, Accounting Policies and The Presentation of Financial Statements

2.1 The Framework

2.2 Developing Accounting Policies

2.3 The Presentation of Financial Statements

2.4 Fair Presentation, Going Concern and Interim Financial Statements

Conclusion

Note

3 IFRS 1 First-time Adoption of IFRS

3.1 An Introduction to IFRS 1

3.2 The Date of Transition to IFRS and the Opening Statement of Financial Position

3.3 Presentation and Disclosure

Conclusion

Notes

II Planning and Implementing a Transition Project

4 Establishing the IFRS Transition Project

4.1 The Benefit of Experience

4.2 The Project Plan and Key Project Members

4.3 Developing the Project Plan

4.4 The Use of External Advisors

4.5 The Costs of the Transition

4.6 Preparing an action plan

Conclusion

Note

5 Assessing the Accounting Impacts of IFRS Transition

5.1 Conducting an Initial Impact Assessment

5.2 Developing IFRS Accounting Policies

5.3 Potential Changes to IFRS

Conclusion

Notes

6 Wider Transitional Issues – Systems, Internal Audit and the Audit Committee, and Commercial Implications

6.1 Systems Implications

6.2 Internal Controls, Internal Audit and the Audit Committee

6.3 Evaluating the Wider Impacts

Conclusion

Notes

7 Training, Communication and Change Management

7.1 Education and Internal Communication

7.2 External Communication and Presentation of IFRS Transition Information

7.3 The Presentation of IFRS 1 Disclosures

Conclusion

Notes

III Theway Forward – Developments in Selected Countries

8 The Transition to New UK GAAP

8.1 A Background to the Changes and Outline of the New Regime

8.2 Accounting and Wider Impacts of the Transition

8.3 Transition Planning Issues

Conclusion

Notes

9 The Way Forward – The Move Towards IFRS in the US and Selected Other Countries

9.1 The US and IFRS

9.2 IFRS in Brazil, Russia, India and China

Conclusion

Notes

Appendix 1: IASB Standards

Appendix 2: Useful Reference Material and Further Reading

IFRS standards as issued by the IASB

Appendix 3: Summary of IFRS Transition Planning Considerations

Bibliography

Index

End User License Agreement

List of Tables

Chapter 2

Table 2.1

Table 2.2

Table 2.3

Table 2.4

Table 2.5

Table 2.6

Chapter 3

Table 3.1

Table 3.2

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 4.8

Table 4.9

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Chapter 8

Table 8.1

Chapter 9

Table 9.1

List of Illustrations

Chapter 3

Figure 3.1

Identifying the date of transition to IFRS

Chapter 4

Figure 4.1

SWOT analysis of an IFRS transition

Figure 4.2

Establishing the transition project team

Figure 4.3

A high-level overview of a transition project

Figure 4.4

External auditor involvement in IFRS transition

Chapter 5

Figure 5.1

An overview of the stages in assessing and responding to accounting impacts on transition

Chapter 6

Figure 6.1

Typical stages in the IT conversion process

Chapter 7

Figure 7.1

A proposed timescale for communicating externally

Chapter 8

Figure 8.1

Reconciliations required on transition to FRS 102

Guide

Cover

Table of Contents

Foreword

Preface

Introduction

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LIST OF CASE STUDIES

Case Study 1.1 BSkyB Plc's Reconciliation of Profit on Transition to IFRS

Case Study 1.2 Centrica Plc's Reconciliation of Profit on Transition to IFRS

Case Study 1.3 BSkyB Plc's Reconciliation of Equity on Transition to IFRS

Case Study 1.4 Centrica Plc's Reconciliation of Equity on Transition to IFRS

Case Study 2.1 An Irish Company Presenting Other Comprehensive Income for the First Time

Case Study 2.2 How a UK Company Decided on the Presentation of its Financial Statements on its Transition to IFRS

Case Study 3.1 An Illustration of Accounting Policy Changes on First-time Adoption of IFRS

Case Study 3.2 An Example of Applying IFRS 1 to Accounting Estimates

Case Study 3.3 An Illustration of the Reconciliations Required by IFRS 1 with One Comparative Period Presented

Case Study 3.4 An Illustration of the Reconciliations Required by IFRS 1 with Two Comparative Periods Presented

Case Study 3.5 An Example of the Presentation of an Equity Reconciliation at the Date of Transition to IFRS

Case Study 3.6 Deciding on the Presentation of the Reconciliations and Supporting Information – An Example from a Canadian Energy Company

Case Study 4.1 A Positive Impact of Transition – Improved Dialogue with Industry Peers

Case Study 4.2 A Positive Impact of Transition – Improved Controls Over Financial Reporting

Case Study 4.3 A Positive Impact of Transition – Improved Asset Management Control in the Public Sector

Case Study 4.4 The Use of External Project Management Specialists

Case Study 4.5 An External Consultant Advising on Canadian Transitions

Case Study 4.6 An External Auditor's Involvement in Irish Companies' Transitions

Case Study 4.7 Auditor Involvement in IFRS Transition for a Small Listed UK Company

Case Study 4.8 External Auditor Involvement in the IFRS Transition of a Large Canadian Company

Case Study 5.1 An Example of an Onerous Accounting Implication of IFRS Adoption – Holiday Pay Accrual in a Public Sector Entity

Case Study 5.2 The Problem of the Lack of Documentation in Identifying the Accounting Impacts of Transition

Case Study 5.3 Problems Where Previous GAAP Did Not Require Detailed Documentation to be Maintained

Case Study 5.4 The Issue of Lease Accounting for UK Companies Moving to IFRS

Case Study 5.5 Streamlining Accounting Policies on the Transition to IFRS in a Group

Case Study 5.6 Volatility Caused by the Move to IFRS in the Oil and Gas and Airline Industries

Case Study 5.7 An External Auditor's View on Assisting with Disclosure Notes

Case Study 6.1 IT Implications of IFRS Transition for a Technical Facilities Management Company

Case Study 6.2 An External Auditor's View of the Importance of Setting the Correct Tone at the Top

Case Study 6.3 Wider Business Implications of IFRS Transition for a Systems Manufacturer Operating in the Aerospace Industry

Case Study 7.1 IFRS Training Programme Implemented in a Large Utility Company

Case Study 7.2 Difficulties in Getting the IFRS Message Across – A Public Sector Example

Case Study 7.3 Internal Communication Methods in a Global Logistics and Postal Services Company

FOREWORD

When the IASB came into existence, only a handful of countries used International Accounting Standards (IASs). The 2002 announcement by the European Commission that the new International Financial Reporting Standards (IFRSs), which incorporated the inherited IASs, should be used in the consolidated accounts of listed European companies and the Australian decision a month later to adopt the standards gave the world, for the first time, a standard setter with global reach. Within the next few years major economies such as Brazil, South Korea and Canada switched to IFRSs, while Japan allowed the standards to be used by domestic listed companies. Now over 120 countries, including two thirds of the G20 economies, require or permit the use of IFRSs.

For many countries, especially for those where financial reporting was influenced by taxation considerations or where companies sought bank loans rather than equity finance, the change was dramatic. A new objective of transparency and a fair presentation of profit or loss and financial position replaced tax minimisation or competitive secrecy as the goals of financial reporting. For companies in other countries used to reporting to equity investors, change was still substantial. Some accounting policies that had been used for decades were now banned. Other policies, while continued, had different nuances. The transition to IFRS for all companies involved careful study both of the new standards and of the transitional reliefs allowed in the first year of adoption.

Countries and companies are continuing to transition to IFRSs. As they do so they can benefit from the experiences of those that have gone before them. This book provides an important bridge for those treading that path. It provides, for the first time, a comprehensive guide to making the transition to IFRSs by addressing both the technical and commercial dimensions of the challenge in the context of the experiences of those who have already made the transition in many different parts of the world.

While the book provides useful background to the IFRS world of financial reporting, its real value is in the practical advice it offers. In particular, it shows how to apply project management principles to the transition process and uses case studies to illustrate the application of the main themes being developed. We commend the book to those setting out on the transition journey and those who wish to understand the implications of a reporting entity moving to this new global financial reporting framework.

Warren McGregor, Former Member, IASBSir David Tweedie, Former Chairman, IASBApril 2014

PREFACE

This book provides a guide on planning and implementing a change in the financial reporting framework applied in the preparation of financial statements, and specifically the move to International Financial Reporting Standards (IFRSs). The book will be of use to a wide audience who wish to understand the implications of moving to follow IFRS, or a financial reporting framework that is substantially converged with, or based on, the principles of IFRS.

While a plethora of publications exist covering the topic of IFRS and their application, there is little guidance available on the transition process itself. The professional accounting firms, of course, provide advice on planning a transition to IFRS to their clients, and have some documentation available on their websites. This is the first book to provide a comprehensive guide on planning and implementing a transition that also covers the wider commercial implications and puts the transition into a project management context.

It is anticipated that as well as preparers of the financial statements who wish to plan their transition effectively and communicate the relevant facts to external parties in an understandable way, interested readers will include investors, analysts, lenders, employees, suppliers and customers who need to understand the implications of a reporting entity moving to IFRS. The implications also need to be understood by board members, non-executive directors and other members of management within an organisation planning its transition, and this book serves as a useful source of information to this user group.

The book is also useful for students both at undergraduate and postgraduate level who wish to understand more than just the financial reporting rules and their application. The discussions in the chapters presented in this book focus on the practical implications of IFRS-based financial reporting, a topic that is very important but often overlooked by those both teaching and learning about the subject.

The content should be accessible to readers with an interest in financial reporting armed with some prior knowledge of accounting principles, but it is not necessary to have studied accounting or work in a finance function to appreciate the main themes presented and discussed. There is only one chapter that is very technical, Chapter 3, which explores the specific requirements for accounting and disclosing financial information in the first IFRS financial statements. The other chapters do cover technical issues, but in a way that a reader who has some knowledge of accounting principles will be able to digest easily. This book is therefore neither a text that will teach basic accounting nor a detailed study of IFRS requirements and their interpretation, but sits in the middle, as a text that deals more with the practical points that need to be considered when preparing to adopt IFRS.

The comments made in this book represent the author's own opinions based on personal experience and the results of research interviews and questionnaires conducted with a range of individuals who have experience with IFRS transition in many countries.

Lisa Weaver

October 2013

DISCLAIMER

This book should not be used as a substitute for obtaining professional advice and input when planning a transition to IFRS. The content of this book is generic and while suggestions are made on planning matters, readers are encouraged to contact a professionally qualified IFRS specialist to obtain advice and support specific to their circumstances.

The brief summaries of IFRS requirements and principles should be read as outline information only, and for detailed information readers should refer to the IFRSs as promulgated by the IASB, which are copyrighted by the IFRS Foundation. This book does not contain advice on accounting treatments and does not consider the particular legal or other regulatory requirements of specific countries or jurisdictions.

ACKNOWLEDGEMENTS

I would like to thank Stephen Mullaly and his colleagues at John Wiley & Sons for their interest in commissioning this work and their support during the writing process.

I would like to thank Steve Collings of Leavitt Walmsley Associates Ltd for his enthusiasm for the concept of the book, for his technical input and for his encouragement in my completing it.

I would also like to thank the individuals who gave up their time for the interviews conducted when I was researching the book. Their insights were extremely useful and without the benefit of their knowledge and experience the book would have been much harder to write. The individuals that I would like to thank include:

Mark Surridge

Fergus Condon

Tommy Doherty

Melissa Woods

Paul Gee

Lindsey Byrne

Sharon Hall

Victoria Kuklina

Deirdre Taylor, Professor of Accounting, Ryerson University

I would also like to express my gratitude to the many individuals who completed a questionnaire and survey on IFRS transition matters, and in particular to David Edgerton, Chris Boland, Winfried Alves, Alan Bermingham, Robert Mladek and Andrew Devonald for their insights and comments.

Extracts from the financial statements of Centrica plc and BskyB plc are reproduced with the permission of those companies, for which I am grateful.

I am grateful to my colleagues and friends at Aston Business School for their support and I also extend my appreciation to Jane Mulligan of NUI Galway for her help with editorial matters and to Helen Milner for input on technical details.

Finally, this book would not have been possible without the encouragement and patience of my family and friends who have been extremely supportive of my efforts during the last year, and who have reminded me of the achievement of completing this book when at times I have felt encumbered by the scale of the project.

ABOUT THE AUTHOR

Lisa Weaver is a professionally qualified accountant and a Fellow of the Institute of Chartered Accountants in England and Wales. After working in audit for several years, she moved into training and education and has lectured on financial reporting, audit and governance topics in the UK and Ireland, the Caribbean, and in Hong Kong and China. She has worked on Continuing Professional Development programmes for many companies, including multinationals, and has been involved in training and consulting for a variety of organisations implementing IFRS for the first time.

Lisa is currently a Teaching Fellow in Accounting at Aston Business School, part of Aston University in the UK, and she is also involved with developing educational materials on IFRS and related subjects. Lisa works with training providers to deliver courses to non-accountants as well as senior qualified professionals, and she contributes to the work of several professional bodies in the field of financial reporting.

INTRODUCTION

SCOPE AND KEY THEMES OF THE BOOK

The transition to International Financial Reporting Standards (IFRS) has been an increasingly significant feature of financial reporting across the globe in the last few years. At the time of writing, more than 120 countries and jurisdictions require or permit the use of IFRS, or financial reporting standards substantially based on, or converged with, IFRS, by some or all of their reporting entities. The International Accounting Standards Board (IASB), the body charged with setting IFRSs, is confident that the use of IFRS, or national accounting standards that are based on IFRS, will grow in the next decade. Hans Hoogervorst, the IASB Chair, stated recently that there is almost universal support for IFRS as the single set of global accounting standards (Hoogervorst, 2013), and organisations including the World Bank, the G20 and the International Organization of Securities Commissions (IOSCO) support the concept of harmonisation of corporate reporting.

Thousands of companies, public sector entities and other organisations have gone through a transition to IFRS-based reporting in the last decade, and many more thousands will do so in the next few years. The huge advantage that relatively late adopters of IFRS-based reporting have is that they can learn from the experience of those that have already gone through the transition. It is fair to say that for reporting entities that were early adopters, there was a significant learning curve for all involved, and one of the aims of this book is to capture some of those experiences of early adopters and explain how to capitalise on them in terms of developing an appropriate transition strategy.

In short, the book aims to show how to apply project management principles to the transition, ensuring that all possible benefits are accrued and that the transition is as smooth as possible. Poorly planned transitions can be inefficient and incur unnecessary costs, and turn into a process of survival rather than an appropriately managed business transformation.

Some transitions are very complex and take years to plan and execute. In transitions like these there may be a large number of material adjustments made to the financial statements on the first-time application of IFRS. Other transitions are much simpler and require minimal restatements of financial information. The key issue is that no two transitions are the same, even for entities of a similar size operating in the same industry, so a bespoke planning and implementation process is needed. All transitions need to be carefully planned for. The planning phase may well justify that only a small number of accounting adjustments are needed, but the time must be spent to perform that detailed impact analysis to prove that that is the case.

The transition should be approached as a significant business project, as it has potentially far-reaching consequences and is definitely not “just an accounting issue”. Many entities that have gone through transition report that they significantly underestimated the time that it would take, the amount of planning that was required, the wider implications away from the accounting function, and the importance of training and of an effective communication strategy. The transition project, therefore, needs to be viewed holistically and should involve personnel from a range of business functions. The involvement of external consultants should also be considered.

This book focuses on the requirements and principles of the IFRSs as issued by the IASB. However, it is important to note that in many jurisdictions it is not strictly the IFRSs as issued by the IASB that are required or permitted for use. In many cases, national or regional authorities make amendments to IFRSs before endorsing them for use. An example is in the European Union, where the IFRSs go through a due process of endorsement before being adopted for use in the EU, and sometimes changes are made to the standards to reflect local conditions. In other jurisdictions IFRSs are not adopted per se; instead, national financial reporting standards are converged with IFRS, so that while based on similar principles, reasonably significant differences remain between local GAAP and IFRS. Due to the generic nature of this book it is not possible to discuss the amendments made to IFRS by a multitude of local authorities or to consider the variety of local GAAPs that have been converged with IFRS. The term IFRS-based financial reporting is used to cover situations ranging from the wholesale adoption of IFRSs as issued by the IASB to the convergence of national GAAP with the principles of IFRS. In any eventuality, for reporting entities moving from previous GAAP to IFRS-based reporting, there needs to be careful planning of the transition to ensure that all impacts have been identified and appropriate decisions made.

It should be noted that not all transitions to IFRS-based financial reporting are complex or difficult. In jurisdictions where there is minimal difference between previous GAAP and IFRS there are less likely to be major adjustments to make to the financial statements or accounting systems. However, even where transitions on first glance would seem not to be problematical, there is still a need for detailed planning, particularly of accounting impacts, because unexpected transitional implications can arise. It is sometimes necessary to conduct a detailed impact assessment just to demonstrate that there are no significant impacts.

AN OVERVIEW OF THE BOOK

The book is in three parts. The first part puts IFRS into context, providing a framework for approaching a transition-planning project. The first chapter contains a discussion of the history of global financial reporting standards and the status of IFRS, the relevant regulatory framework, and the reasons behind international harmonisation, including benefits and drawbacks. The IFRS standard-setting process is summarised, and the current position of convergence around the world, focusing on major economies, is also included. A short section covers the IFRS for Small and Medium-sized Entities, which is relevant to a large number of companies.

Chapter 2 provides an introduction to the fundamental principles of IFRS in terms of the presentation of financial information and the key factors that should be considered in developing IFRS-compliant accounting policies, outlining key concepts such as the qualitative characteristics and the elements of the financial statements. This chapter looks at the key elements of financial statements and their presentation under IFRS.

The third chapter focuses on the specific requirements of IFRS 1 First-time Adoption of IFRS, a detailed accounting standard, which has to be applied in the first financial statements of a company that are prepared and presented under IFRS. This chapter provides a discussion of the measurement and presentation rules, the specific disclosure requirements for the notes to the financial statements, and the exemptions that are available in preparing the first IFRS financial statements. Case studies are used to illustrate the accounting and disclosure issues relevant to first-time adoption of IFRS. This is the most technical chapter in the book, and IFRS transition planning tips are included at regular intervals to bring the technical discussion back to the main theme of the book; in other words, how to plan and manage the transition.

The second part of the book deals with planning and executing the transition to IFRS-based financial reporting. This is a practical section containing suggestions on matters such as project management techniques, devising a communications strategy, dealing with IT changes and recruitment and training issues, as well as accounting implications. Chapter 4 contains a discussion of the potential scale of the IFRS transition project and why project management techniques need to be used to manage and coordinate the project. This chapter introduces the key concept that IFRS transition is not just an accounting issue but involves many different areas of a business, so planning and coordination is essential to ensure a smooth and cost-effective transition. This chapter outlines the main tasks in establishing the transition project and considers the personnel that are typically involved in planning and implementing IFRS transition, and how to bring the team together. The stages of the transition project are outlined, and some of the impact assessments that should be performed are introduced, such as assessing the impact on financial reporting, the need for changes in systems and controls, the non-financial aspects such as legal and stakeholder education, and how the project will be resourced. A potential action plan is suggested to show how the project can be scoped out with realistic milestones put in place.

Some companies will not have the resources to plan and implement the project in-house and will rely on external advisors such as auditors, systems designers and tax advisors. This chapter explores the ways that external advisors may be able to provide much of the resource needed to plan and carry out the IFRS transition. The problems of relying on external advisors are explored, with issues including cost, loss of control of the project, and ethical issues if the company's auditor is asked to help with the transition. The typical costs that are incurred in the transition are discussed and the importance of budgeting is emphasised. The IFRS transition project can be very costly. Chapter 4 analyses the typical costs involved and considers how best to plan for these costs based on the experience of companies that have already gone through the transition.

The next chapter discusses how organisations can determine the impact that the transition to IFRS will have on their financial statements. The accounting impact assessment is crucial to the success of the transition project and an example of a typical impact assessment is provided. The importance of performing a detailed line-by-line analysis is stressed, with guidance on how to prioritise the impacts that are identified. The matters that are typically considered in developing new accounting policies are discussed in some detail, and the issue of dealing with IFRSs that offer a choice of accounting treatment is explored. The importance of disclosure of certain items in the notes to the financial statements will also be covered, as for many companies the additional disclosure under IFRS is a significant planning issue.

Chapter 6 looks at wider implications of the transition. The move to IFRS reporting is likely to mean that changes to accounting systems will be necessary, for example to capture new information needed for disclosure, or to record entirely new balances that were not required under previous GAAP. Systems will need to be robust and controls over financial reporting information systems may need to be improved. This chapter explores systems-related planning issues and considers the role of IT specialists as well as internal audit and the audit committee. It is important that IFRS is not seen as a “one-off” project, especially if much of the work is delegated to external advisors. This chapter will discuss why it is important for the company to take ownership of the project, even if external advisors carry out much of the planning and implementation. It will also explore the ways that IFRS can become embedded, and therefore part of day-to-day operations, rather than something that has to be considered only at the year-end when the financial statements are being prepared. Many companies underestimate the wide-reaching impact that the transition to IFRS can have within a business. There will potentially be knock-on effects on procurement policies, employment benefits, contract negotiations, customer relationships, and on shareholders and other stakeholders. The IFRS transition project should include consideration of all of these issues and more, and this chapter will discuss how these impacts can be identified and planned for.

Chapter 7 deals with training, education and communication. Most stakeholders will not understand the impacts that IFRS transition will have on the financial statements that are presented. For example, IFRS transition often leads to changes in profitability, which users of the financial statements may mistake for a change caused by business practices rather than caused purely by changes in how balances and transactions are accounted for. Care must be taken to ensure that all users of the accounts have enough information to understand the impact of IFRS properly. This chapter will look at how stakeholders can be educated effectively. This chapter also examines how the first IFRS-based financial statements should be presented and explained to stakeholders, and also considers the importance of providing information to external parties throughout the transition process, leading up to the publication of the first IFRS financial statements. Using the experience of companies that have already moved to IFRS, different methods of presentation will be explored, including the use of presentations to groups of stakeholders, information packs on companies' websites, and press releases. Education and training issues are also discussed, with a key message being that IFRS skills are often in short supply, so an organisation must ensure the training needs of its staff are met, and may need to bring in external knowledge where necessary.

The third and final part of the book considers future developments in IFRS-based financial reporting in a selection of countries. Chapter 8 outlines developments in the UK and Ireland, where the implementation of “new UK GAAP” will see many companies changing their financial reporting frameworks, and with a greater emphasis on IFRS-based financial reporting even while remaining under UK GAAP. Planning points will be considered, with the key theme that the transition to new UK GAAP can be planned and approached in a similar way to a transition to IFRS. Chapter 9 looks at the move to IFRS-based financial reporting in the USA, Brazil, China, India and Russia, focusing on how these countries have markedly different approaches to the harmonisation of their financial reporting standards and yet are all, to a greater or lesser extent, converging with IFRS.

Appendices are included for ease of reference on key information. Appendix 1 is a summary of all extant IFRS and Appendix 2 contains a list of reference material, further reading and e-learning resources. Appendix 3 is a useful collation of all of the IFRS planning action points that are included in the main text, and can be used as a checklist to ensure that all major planning considerations have been factored into the transition project.

INFORMATION SOURCES

Much of the content of this book draws on the past experience of reporting entities that have gone through the transition to IFRS-based financial reporting.Their experiences give rise to valuable insights and provide learning points for entities that are yet to go through transition. Information sources that have been used to collate transition experiences include:

Academic research in connection with, for example, costs of transition, impacts on share price, comparability of information;

Professional body reports, for example, on transition issues faced in certain countries or in particular business sectors;

Company websites – many companies have placed material on IFRS transition issues on the investors' sections of their websites;

Press articles – these provide anecdotal evidence of transition issues that companies have faced.

In addition to the research based on these information sources, the author conducted face-to-face interviews with a range of individuals who have been involved with transitions in many different countries and from different perspectives. These interviews have provided themes, examples and case studies that are used in the book. In addition, a large number of other individuals provided detailed written responses to the interview questions and thought provokers that were used in the face-to-face interviews. The author's own experience of working with companies during their IFRS transitions has also provided material used in the book.

Throughout the book, and especially in the second part, case studies have been used to illustrate application of the themes being discussed. The case studies are based on the interviews conducted, and on the author's own experience. The case studies are all based on real reporting entities going through the transition to IFRS but the names of the interviewee or the reporting entity have not been included. This is largely at the request of interviewees who have provided their comments and opinions about the transitions they have been involved with but do not necessarily wish to reveal the reporting entity's identity.

Readers should note that there is much more information available on transition-related matters in certain jurisdictions than in others, and for that reason much of the discussion focuses on the situation in the EU, North America and Australia, which are the most researched areas. Wherever possible the discussions have been extended to include other jurisdictions, but unfortunately this has not often been possible. Hopefully, the lack of research and published material on transitions in other countries, especially in less developed economies, is a problem which will be corrected in the not-too-distant future, and subsequent editions of this book will be able to take discussions in a truly global direction.

In summary, the book provides an overview of how to plan and carry out a transition to IFRS-based financial reporting, and it discusses the wider implications within the organisation and to those external to it. Its content is unique in that it draws on personal experiences as well as professional and academic studies. It will help with decision making for those planning a transition, as well as providing essential information to individuals analysing financial information prepared under IFRS, and will also be useful for students of financial reporting who wish to understand the commercial implications of financial reporting matters.

IUNDERSTANDING THE FRAMEWORK OF PERFORMING A TRANSITION TO IFRS-BASED FINANCIAL REPORTING

1INTERNATIONAL FINANCIAL REPORTING IN CONTEXT

Financial reporting is essentially a method of communication whereby a reporting entity presents financial information to interested external parties. As with any communication process, there need to be in place mechanisms for ensuring that the information being communicated is understandable and pertinent to the needs of users.

It was not until the mid-twentieth century that significant thought was given to how financial reporting should be regulated. The first part of this chapter considers how the international community began to debate the benefits of international harmonisation of financial reporting standards, and the steps taken to achieve that goal.

When the move towards an international financial reporting framework gathered momentum, a new regulatory framework began to develop, leading to today's environment in which the IFRS Foundation, through the International Accounting Standards Board (IASB), aims to develop a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards. The second part of this chapter summarises the role and status of the IASB and IFRSs, including a discussion of the main features of the standard-setting process.

The final parts of this chapter look at the current state of harmonisation with IFRS around the world, and given that more and more countries are adopting or converging with IFRS (a distinction that will also be explored), there is a preliminary discussion on the main accounting impacts that may arise when a reporting entity moves to follow the requirements of IFRS. It is important to note that both the accounting and non-accounting impacts of the transition vary greatly between reporting entities, even those operating in the same industry and in the same jurisdiction, and one of the themes running through this book is that the impact of IFRS must be assessed at the level of an individual reporting entity. However, it is useful in this first chapter to look at some examples to illustrate the type of accounting impacts that can take place, and the magnitude of them, as this helps in understanding the importance of planning the transition process properly.

1.1 THE DEVELOPMENT OF INTERNATIONAL FINANCIAL REPORTING

This section explores how international financial reporting has developed in the last 60 years or so, beginning with the development of national accounting standards. As economies expanded and companies and other organisations grew in size and status, individual countries tended to develop their own accounting rules, which were entirely appropriate to their own needs but arguably became less relevant with growth in international business and cross-border investment. The response to this was a demand for an international set of financial reporting standards, and this section will describe the development of the first stage of the international financial reporting regime, namely the International Accounting Standards Committee (IASC).

1.1.1 The Initial Development of Accounting Guidance and Reasons for, and Problems Caused by, National Differences in Accounting Requirements

In the late 1940s and the 1950s there was an unprecedented increase in international trade, leading to the formation and growth of multinational corporations. During this time barriers to international trade were lessened, which encouraged direct investment overseas, with the United Kingdom and United States being major contributors to the flow of capital around the world (Camfferman and Zeff, 2007). Economies encouraged international trade through the creation of international trading blocs; for example, the European Economic Community (EEC) was created by the Treaty of Rome of 1957, and through many stages evolved into the European Union, which has played a significant part in shaping the harmonisation of financial reporting. A major objective of the EEC was to promote the flow of capital between member countries, fuelling the movement of funds, people and goods between countries.

At the same time as the increase in cross-border investing and the development of multinational organisations, different jurisdictions were creating their own local financial reporting rules. National standard-setting bodies were established to oversee the development of accounting and financial reporting rules and regulations, leading to discrepancies in the accounting treatment of transactions and balances between different jurisdictions.

Regional accountancy bodies had been established, such as the American Institute of Certified Public Accountants (AICPA), the Institute of Chartered Accountants in England and Wales (ICAEW), the Canadian Institute of Chartered Accountants (CICA) and multinational organisations such as the Confederation of Asian and Pacific Accountants (CAPA). At conferences held in the 1950s and 1960s, discussions relating to the standardisation of accounting practices took place and the first calls for a harmonisation of accounting practice were heard. There were already inconsistencies in accounting treatments in different countries. An example of an early study into this issue found that some countries were very rules-based, while others allowed more flexibility in accounting practices; factors shaping the way a country developed its own accounting standards included the influence of the political and economic structure of the country, whether inflation was an issue, the influence of taxation policy, and the organisation of accounting and audit firms within the country (Kollaritsch, 1965).

There are many reasons for national differences in financial reporting, which include:

Whether providers of finance are primarily creditors or equity holders – for example in countries such as the UK and USA, shareholders traditionally provide a significant proportion of finance, whereas in Germany, France and Spain, finance tends to be from external sources including banks or the state.

The basis of the legal system including whether law is based on a common law or a code law system – for example in China the existence of code law creates a very different framework for business activity and financial reporting than in other countries where common law prevails.

The relationship between taxable income and accounting income and how tax liabilities are determined, with this often helping to shape whether the financial reporting framework is more prescriptive or principle-based in nature – for example, in Japan a combination of code law and reporting primarily for tax reasons led to the development of a very prescriptive accounting regime.

Cultural differences, such as attitude to secrecy of financial information and language and whether there is state control or professional regulation of financial reporting – this is discussed with relevance to Islamic finance principles later in this chapter.

One of the main problems with the development of different accounting regulations in different countries is that it acts as a barrier to the movement of funds between countries. A comparison between financial statements issued in different jurisdictions becomes problematical due to a lack of consistency in preparation and disclosure requirements, hindering cross-border investment. Hence, the move to an international regulatory framework, making comparability easier, should encourage both individuals and companies to invest overseas, having confidence in their analysis of financial statements which, though prepared in a different jurisdiction, follow familiar accounting principles and disclosure requirements.

For preparers of financial statements of multinational reporting entities, the lack of consistency when not using an international set of accounting rules means that time is spent preparing multiple sets of accounts using different principles and rules, and reconciliations between the different sets of accounts may be necessary. International harmonisation should allow the accounting processes of the individual components of a group to become streamlined, improving the efficiency of the accounting function and making consolidation a smoother process. It follows that there should be a reduction in the costs of preparing the financial statements and having them audited.

There are, of course, many commentators who argue that moving to IFRS does not necessarily lead to lower costs, and indeed the costs of transition itself can be significant. Others argue against the use of a global set of financial reporting standards and that individual jurisdictions should continue to play an important role in determining the financial reporting framework. However, the pace of harmonisation has gathered momentum over the last few decades, and the rest of this section will look at the development of the international regulatory regime for financial reporting.

1.1.2 The International Accounting Standards Committee

In 1973 the International Accounting Standards Committee (IASC) was formed. As discussed in Section 1.1.1, there had been a growing opinion in the accountancy profession that an international approach should be considered in the development of accounting standards. The aim was to develop accounting standards, to be called International Accounting Standards (IAS), with a general objective of promoting international harmonisation of accounting treatments.

The IASC was based in London and in its early years was a small organisation that met several times a year. Its members were representatives of national standard setters who contributed on a part-time basis to the work of the IASC (Kirsch, 2012). The national accounting bodies of the UK and Ireland, the United States, the Netherlands, Australia, Canada, France, Germany, Mexico and Japan were invited to join the IASC (Zeff, 2012). Each member body agreed to promote the use of IAS in their countries, but it is worth noting that many countries, in particular the UK and the US, continued to invest in the development of a robust set of national accounting standards. It was mainly developing nations that adopted IAS as their own financial reporting framework.

The IASC existed for 27 years and during that period its membership grew, with representatives from countries such as South Africa and Nigeria joining the committee, increasing the geographical spread of the organisation. A major event in the development of the IASC occurred in 1987 when the International Organization of Securities Commissions (IOSCO), of which the US Securities and Exchange Commission (SEC) had recently become a member, discussed with the IASC the possibility of IOSCO endorsing IAS for use on the securities markets of its members. The IASC worked on producing a set of core standards that would be submitted to IOSCO and this was a lengthy process. The IASC's first attempt at developing a core set of standards was the “Comparability/Improvements” project, which culminated in 1993. IOSCO did not endorse the IAS standards at this time, leading to the IASC developing a revised work programme called the “Core Standards Program”.

A further driving force encouraging the IASC to develop its core standards was the increased appetite for a European capital market, the achievement of which it was believed would be helped by the use of international accounting rules. In addition, by the late 1990s the SEC had hinted that, subject to the core standards being of “high quality” and meeting certain criteria, their acceptance in US capital markets would be debated further. The SEC and AICPA were particularly critical of the many permissible accounting treatments of IAS (Kirsch, 2012), and the Core Standards Program looked closely at eliminating choice in the standards.

1.1.3 The Formation of the International Accounting Standards Board, and Endorsement of IAS by IOSCO and the EU

The membership of the IASC had grown in the 1990s, yet it was still essentially a relatively small organisation faced with an ever-increasing number of projects to deal with. The IASC issued 41 IASs during its existence, as well as numerous Standing Interpretation Committee documents, a Conceptual Framework and other guidance.

There was concern that high quality standards to meet the demands of a global set of stakeholders could not be developed realistically within the existing structure of the IASC. In particular there were calls for input from a wider geographical perspective, for more formal liaison with national standard setters, and for those appointed to deliberate and decide on financial reporting standards to have appropriate technical expertise. In May 2000 the IASC's member bodies, numbering 143 at the time (Zeff, 2012), approved the formation of the International Accounting Standards Board. The first chairman was David Tweedie, the former chair of the UK's Accounting Standards Board. Members of the IASB's board included representatives from a range of countries comprising the UK, USA, Australia, Canada, France, Germany, Japan, South Africa and Switzerland. Some of the members had a responsibility to liaise with national standard setters. The IASB was to issue accounting standards known as International Financial Reporting Standards (IFRSs) and adopted the IAS issued by the IASC.

One of the main objectives of the IASB in its early years was to agree with the US Financial Accounting Standards Board (FASB) a programme of convergence. In October 2002 the two bodies issued a Memorandum of Understanding (MoU), which became known as the Norwalk Agreement. The MoU's main objective was to start a series of projects that would ultimately remove differences between US GAAP and IFRS, a process that would involve the revision of existing standards and the development of new standards. The MoU has been revised periodically, and while there have been many success stories in terms of the alignment of US GAAP and IFRS, at the time of writing full convergence has not been achieved and remains a controversial issue.

Several key events, which were to be fundamental to the international harmonisation of financial reporting, occurred at the start of the twenty-first century. Firstly, in May 2000, at the same time as the formation of the IASB, IOSCO endorsed the core IAS standards that had been developed by the IASC, recommending that its members permit incoming multinational users to use the standards for cross-border offerings and listings. This was a big step in establishing the credibility of IAS globally and was seen as a landmark decision for improved financial reporting at an international level.

Secondly, in June 2002 the European Commission announced that as part of its strategy towards a single capital market across its member states, EU listed reporting entities would be required to prepare financial statements using IAS from 2005. This ruling resulted from a disharmony that had developed in the member states over the previous two decades when accounting rules had been based largely on the fourth and seventh directives on company law issued by the European Commission. The directives had not led to the desired accounting harmonisation across the member states, leading to discussion of whether an alternative approach to harmonisation would be preferable. The directives were legislation and therefore cumbersome to issue, amend and enforce in different countries, and the attractiveness of the IASB's perceived more flexible approach to standard setting grew. In addition, in the 1990s there was a substantial increase in the number of European companies listing on non-European stock markets, notably the New York Stock Exchange, which encouraged the European decision makers to move away from an objective of accounting harmonisation within Europe to one of embracing a more global approach to harmonisation. The EU decision was momentous, as it was the first time that there was a commitment for IAS to be adopted as the primary reporting mechanism for such a large number of reporting entities.

There was, however, a controversial part of the EU policy on adoption of IAS. Part of the EU's strategy on IAS adoption was that the IAS followed by EU listed reporting entities would be those IASs that had been reviewed and endorsed for use in the EU. This led to concerns that the EU would cherry pick from IAS and only endorse those standards that suited implementation in the EU, leaving other less appealing standards un-endorsed. This led to some problems in the transition for EU companies, which will be discussed in subsequent chapters.

1.2 THE REGULATORY FRAMEWORK OF IFRS TODAY

1.2.1 The Overall Governance Structure and Standard-setting Bodies

The key bodies in the regulatory framework of IFRS are the IFRS Foundation, the IASB, the IFRS Interpretations Committee, and the IFRS Advisory Council, as summarised below.

The IFRS Foundation is a not-for-profit, private sector organisation, operating independently with the following principal objectives:

To develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB;

To promote the use and rigorous application of those standards;

To take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and

To promote and facilitate adoption of IFRSs, being the standards and interpretations issued by the IASB, through the convergence of national accounting standards and IFRSs.

1

The Foundation's trustees oversee the standard-setting process and appoint members to the other bodies. The trustees also review the effectiveness of the regulatory framework, safeguard its independence and are tasked with raising finance for the structure. The trustees come from geographically diverse areas and a range of professional backgrounds. The key objective is to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. The Foundation wants to ensure that the standard-setting process is open and transparent, and that there is full consultation with investors, regulators, national standard setters, business leaders and the global accountancy profession.

The IASB is the independent standard-setting body tasked with developing and issuing IFRSs and the IFRS for Small and Medium-sized Entities (IFRS for SMEs). From July 2012 the IASB has 16 board members drawn from a wide geographical background, and the current Chairman is Hans Hoogervorst, who succeeded David Tweedie in July 2011. IFRS is developed via a consultation procedure known as “due process” which involves a number of stages:

Setting the agenda, planning and research

The decision as to whether an item is added to the agenda is driven by the information needs of users of financial statements, in particular investors. Matters such as the possibility of increasing convergence, whether there is existing guidance, and resource constraints are also considered. Planning involves deciding whether to conduct the project alone or to involve another standard setter, and a working group may be formed to conduct the necessary research for a larger project.

Discussion Paper

The issuance of a Discussion Paper (DP) is not a mandatory part of due process, but one will usually be issued for larger projects as a way for the IASB to obtain early feedback on the project and gauge the response of interested parties. A DP would normally include an overview of the issue, an outline of possible approaches that may be used including the IASB's views, and an invitation to comment.

Exposure Draft

An Exposure Draft (ED) is a mandatory step in due process that describes in detail a proposed accounting treatment, taking the form of a proposed accounting standard (or amendment to an existing standard). An ED will be drafted based on comments from various sources including those invited from a DP (if issued), input from IASB staff researchers, the IFRS Advisory Council, and discussions held at public meetings. As with a DP, an ED includes an invitation to comment.

IFRS

Comments on an ED are considered by the IASB and, if necessary, the ED is re-exposed. Once the IASB is satisfied that the proposed accounting treatment has been debated appropriately, based on feedback from the ED, the IFRS is drafted and a ballot held. There may be several rounds of comments before this stage is reached if the IASB wishes to re-expose the matter in a series of EDs. After an IFRS has been issued, there will be a post-implementation review, involving meetings with national standard setters and other parties. The IASB aims to understand any practical issues and impacts that may have arisen in the implementation of the new accounting requirements.

The implication of the due process involved in developing or revising IFRSs is that for preparers of financial statements, including those planning a transition to IFRS, they should bear in mind that potential changes to existing accounting rules may influence the selection and development of accounting policies. It is therefore crucial to have an understanding not only of the existing IFRS requirements, but also the changes that may take place over the next few years, as indicated by the existence of DPs and EDs.

The IFRS Interpretations Committee (formerly known as IFRIC) is the IASB's interpretative body. The Committee looks into issues relating to existing IFRS, such as matters that arise on their practical application, and produces interpretations known as IFRICs, often on specific and specialised matters. The IASB approves the Committee's interpretations. The Committee comprises 14 members drawn from a variety of professional backgrounds and geographical areas.

The IFRS Advisory Council is not itself a standard-setting body. It provides advice to the trustees of the Foundation and to the standard-setting bodies and reflects the views of a wide range of interested parties including academics, investor groups, auditors, professional bodies, analysts and preparers of financial statements. The members are appointed by the trustees.

1.2.2 IASB Standards

At the time of writing there are 13 IFRSs issued by the IASB, as well as 27 IASs, which were issued by the IASC and remain effective. There are also many Interpretations and SIC documents which form part of IFRS. Appendix 1 sets out a list of all issued standards and documents.