Current proposals from the Accounting Standards Board (ASB) in the UK, would see Irish and UK GAAP as we currently know it cease to exist by 2012 and be replaced by the IASB’s IFRS for SMEs for a large number of private entities.
The proposals would introduce the following three-tier reporting structure as the future of UK and Irish GAAP;
Tier One
All Irish and UK entities that are ‘Publicly Accountable’ would use EU adopted full IFRS, for their consolidated and individual accounts. All listed companies would be deemed to be publicly accountable, however the definition of ‘public accountability’ would also typically include banks/deposit-takers, insurance entities, many investment funds and credit unions;
Tier Two
All Irish and UK non-publicly accountable companies above the small threshold would use the IASB’s (International Accounting Standards Board) recently issued IFRS for SMEs;
Tier Three
Small companies that are not publicly accountable would use the ASB’s FRSSE (Financial Reporting Standard for Smaller Entities). Within the three-tier structure entities would have the option to ‘opt up ‘ to a higher level. Tier three entities could elect to prepare their financial statements using FRSSE, IFRS for SMEs or full IFRS. Tier two entities could elect to prepare their financial statements using IFRS for SMEs or full IFRS.
Who is the standard intended to apply to?
The proposals would mean that a number of private companies in Ireland that are considered to be publicly accountable, and therefore included in Tier One, would be faced with transitioning their financial statements to full IFRS.
Under the proposals an entity is deemed to be publicly accountable if;
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Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market; or
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It is a deposit-taking entity and/or holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities broker/dealer, mutual funds or investment banks.
The proposed structure doesn’t contain a size threshold in the definition of ‘public accountability’, therefore a number of companies such as credit unions and investment funds that currently use Irish GAAP may have to prepare their financial statements in accordance with full IFRS.
A significant number of Irish private entities (including subsidiaries of listed companies) would fall into Tier Two of the proposed three tier structure, which would see them transitioning to the IASB’s IFRS for SMEs by 2012.
The name IFRS for SMEs is somewhat misleading. A number of private companies with multi-billion Euro balance sheets that aren’t publicly accountable could potentially use the IFRS for SMEs to prepare their financial statements.
What does the standard mean for Irish private companies?
For many private entities in Ireland adoption of the IFRS for SMEs would present a challenge. Compared to Irish GAAP there is potentially a number of measurement differences and additional disclosure requirements. As was the case when “full” IFRS was introduced in 2005, the effect on tax and distributable profits will be among the main issues that companies need to consider.
Preparing financial statements in accordance with the IFRS for SMEs would see a large number of Irish entities coming to terms with a very different ‘look and feel’ for their financial statements.
For these companies, we set out overleaf a summary some of the key differences between existing Irish GAAP and the proposed new approach based on the IFRS for SMEs.
However, this is not the only option. An alternative is to adopt full IFRS. This may seem less obvious but it is worth considering, especially in the following cases:
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Subsidiaries that are consolidated into financial statements prepared in accordance with full IFRS. If implemented as currently drafted the ASB’s proposals would not allow subsidiaries to combine the full IFRS accounting measurements with SME disclosure reductions. As a result some subsidiaries might choose to adopt full IFRS in their individual financial statements so they can use measurements consistent with those used for group reporting and thereby avoid preparing two sets of numbers.
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Companies that want to retain certain treatments or options. The simplifications of the IFRS for SMEs are helpful overall, but they preclude certain treatments that companies might want to use. Examples are capitalisation of borrowing costs and development expenditure, and the measurement of property, plant and equipment at fair value are not allowed as accounting policy options in the IFRS for SMEs.
What do Irish private campanies need to do ?
With the ASB’s consultation paper on the future of UK and Irish GAAP recently issued it would be prudent for companies to consider how the proposals may impact their financial statements and to perhaps get involved in the ASB’s consultation process. The ASB has asked for comments on its proposal by 1 February 2010.
Companies should start planning and working on the basis that the ASB will require adoption of IFRS in Ireland, either full IFRS or based on the SME standard, by 2012. The year 2012 may seem a long way off but companies should start thinking about this now. The opening balance sheet for December year-ends will be as at 1 January 2011, which means that related conversion decisions need to be made in 2010.
To discuss the impact that these developments may have on your financial statements, please contact your usual PwC contact or Fiona Hackett (01 792 5413) or Irene O’Keefe (01 792 8563).
http://download.pwc.com/ie/pubs/pwc_comparison_of_irish_gaap_and_ifrs_for_smes_2009.pdf
Price Waterhouse Coopers
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