PwC IFRS blog

The IFRS journey – where did we come from?

For those of us who have been working with IFRS on a day to day basis, particularly in Europe, 2005 seems a long way back in the past.

But a recent wide-ranging study of IFRS implementation by European companies in 2005 provides some useful reminders of why we got here. The Institute of Chartered Accountants in England and Wales (ICAEW) has just published its report, conducted for the European Commission. It looks at the consolidated financial statements of 200 EU publicly traded companies, and surveyed over 350 investors, preparers and auditors across 25 member states.

Key findings included:
• There is widespread agreement that IFRS has made financial statements easier to compare across countries, and across industry sectors.
• The majority of investors, preparers and auditors (63%, 60% and 80% respectively) consider that IFRS has improved the quality of financial statements.
• There is evidence that IFRS is influencing the investment decisions of investors and internal management reporting within companies.
• The reviews of individual companies’ financial statements demonstrated a high level of compliance with IFRS.

Overall, the message is that IFRS generally has been seen as a positive development for EU financial reporting. 

That is not to say that problem areas were not identified and, of course, some teething problems would be expected in the first year of application. A few individual standards came up for criticism, including IAS 39, and there were worries about the increasing complexity of standards and the pace of development of new requirements.

The IASB has reacted to some of these concerns – for example by giving a moratorium on new standards until 2009 and providing longer lead-times before standards become effective.

We know from the current difficulties with the endorsement of new standards in Europe that some aspects of IFRS, and indeed the standard setting process itself, are being questioned by some. But taken together, the results of this survey provide a timely reminder of why we embarked on the IFRS journey: to bring increased comparability and consistency to reporting in support of a single capital market. The road back to different national GAAPs with all that entails is not an enticing one from where I’m sitting.

Do you think a single set of accounting standards for the world is a journey that we should continue? Do we have a realistic chance of completing that journey and meeting the objectives that we set ourselves at the outset in Europe?

Please share your thoughts by email or by commenting here.

Credit crunch has accounting bite

Whatever your role, the significant volatility in financial markets across the globe has been hard to ignore over the last few months. What started as rising defaults in the US sub-prime markets, has led to a broader ‘credit crunch’ and many of us around the world are feeling the impact of a widespread shortage of liquidity and a widening of credit spreads.

I have been thinking in particular about the impact this might have on accounting issues as our clients plan for their year-end reporting. The impact on fair values, for example, cannot be ignored and is bound to impact the debate on whether fair values in accounting are perceived to be a good or bad thing. The issues go deeper than the large gains and losses that banks and others have been experiencing, for example finance departments everywhere might be asking:

• How can you establish the fair value of financial instruments if there are no longer active markets?
• Should development projects be curtailed, and might this result in the impairment of an intangible asset?
• Will goodwill or intangible assets need to be impaired?
• Will key assumptions have to be adjusted for a decrease in future growth and an increase in discount rates?
• Are more sensitivity disclosures needed in an environment where ‘reduced headroom’ is likely?

Your group treasurer may be also worrying about the hedge positions that he has carefully set up. For example, a designated hedged risk might no longer match the hedging instrument when the two have different credit spreads. Changes in credit spreads might also mean that embedded derivatives that were previously considered immaterial could now become material.

You will be facing a significant challenge to communicate the effects of all of this to the market at a time when the new disclosure standard for financial instruments (IFRS 7) asks you to disclose information about financial risks ‘through the eyes of management’. This might be an intensely personal experience for your group treasurer since it will require public reporting of the amounts used in your internal treasury systems for identifying financial risks and measuring the related financial positions. With our experience of the past few months, companies will need to be prepared for potentially difficult lines of questioning at investor meetings, particularly where the new disclosures highlight areas that you manage differently to other companies.

I am very interested to know what accounting issues the current environment raises for you. Please do share your thoughts by email or by commenting here.

Richard

A welcome from Richard Keys

It’s a great pleasure to follow in the blogging footsteps of Ian Wright who is retiring from PwC and moving on to pastures new at the UK Financial Reporting Council. We wish him well in the new roles.

I am PwC’s global chief accountant leading a global team of accounting consultants focused on the challenges of implementing and applying International Financial Reporting Standards. I look forward to continuing this blog’s tradition of keeping you up speed on hot topics in financial reporting and the reporting issues that company management need to think about.

We need a lively debate on the emerging issues to help ensure that your different perspectives on the impact of proposed changes are properly considered before new standards are implemented. I’ll be giving my views, and I’d be interested to hear your feedback.

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Richard