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Candidates - Guides
Significant Changes in Financial Reporting
Monday, August 30, 2010
The publication of the IFRS for SMEs in June 2009 marked the start of a significant change in Financial Reporting in Ireland. The IFRS was designed to provide a standalone, simplified and more understandable set of principles and rules by which the average non publically accountable entity could abide. It is only 200 pages in length compared to the 2,500 pages in the full IFRS.
The major changes which the document will bring include the following:
- Considerable reduction in disclosure compared to full IFRS (c80%).
- Simplification of some of the measurement rules such as the abolition of the revaluation model for property, plant and equipment, the compulsory write off of all research and development expenditure and the prohibition of the possibility of capitalising borrowing costs. In addition goodwill will be permitted to be amortised and there are considerable savings in calculating the defined benefit pension obligation in some circumstances. Companies will also not have to move any non current assets held for resale from non current to current assets on the statement of financial Position when they intend to sell those assets.
- The removal of certain IFRSs which are not applicable to non listed companies e.g. earnings per share, interim reporting and segmentation.
Whilst many of the rules in the IFRS are quite similar to UK/Irish Gaap there is still a considerable amount of training to be undertaken by Irish Chartered Accountants before they apply the new standard. The language also is quite different (e.g. inventories rather than stocks, the introduction of cash equivalents in the cash flow statement etc). There will also be major changes in the layout and the titles of the primary statements with the introduction of a Statement of Changes in Equity, a Statement of Income and Retained Earnings, a Statement of Comprehensive Income and a Statement of Financial Position.
Although a number of countries such as South Africa have already adopted the standard without any amendments the Accounting Standards Board (ASB) decided to issue a Consultation Paper in August 2009 to discuss the future of Financial Reporting in these islands. The ASB are in the process of trying to iron out some of the practical issues that will arise on its adoption in these islands. However, any substantive changes to the document are likely to be minimal in the interests of global harmonisation but there are Issues still to be resolved.
The first problem is the definition of public accountability. At present credit unions, for example, would not be allowed to adopt the IFRS as they would constitute publically accountable bodies as they hold assets in a fiduciary capacity yet can be quite small in terms of their turnover and net assets. There is a possibility that some relief may come their way by tweaking the definition.
There are also issues regarding subsidiaries of listed companies. There is a possibility that they may have to follow full IFRS in terms of recognition and measurement of assets and liabilities so as to avoid problems on consolidation at head office but they may be offered considerable reduction in the amount of disclosure required. Under the existing IFRS for SME they would be allowed to adopt the standard but it does lead to totally different profit and net assets figures. Another problem is the very small company which has been preparing its financial statements under the Financial Reporting Standard for Smaller Entities (FRSSE). That document is only 90 pages long and exempts small entities from preparing cash flow statements and consolidation. That would not be permitted under the new IFRS and it has been argued, therefore, imposes a considerable additional burden on those companies if they have to move up to a higher level of reporting. The ASB are therefore currently considering the possibility of retaining that document, even if only for a few years, to allow an easier transition for those companies towards the new IFRS.
The ASB will be publishing an exposure draft later this year after reviewing all the comment letters to their Consultation Paper and after extensive public meetings over the Summer with constituents. Although originally designed to go 'live' on the 1st January 2012 that has tentatively be postponed by one year. However, within the next two years, probably for years commencing 1st January 2013, all non listed companies in Ireland (with the exception of financial institutions) will switch over from adopting Irish Gaap to using this new IFRS in the preparation of their annual financial statements. It will also mean the production of two sets of accounts for years ended from 31st December 2012 in order to provide comparative information. Preparers will also have to ensure that their opening Statement of Financial Position (balance sheet) is restated at the date of transition from Irish Gaap to the IFRS i.e. 1st January 2012 under the IFRS. That is only 15 months away. It is therefore very important for preparers of financial statements, their auditors and users to be up to speed on the likely changes that this will entail.
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