IFRS – How we got here

The vast majority of Irish companies still currently prepare their financial statements in accordance with Irish GAAP (Generally Accepted Accounting Practice). Generally speaking, Irish GAAP is identical to UK GAAP and thus there has always been a comparability of information contained within financial statements across the two jurisdictions.

The introduction and purpose of IFRS (International Financial Reporting Standards) is to effectively provide this level of transparency and comparability on a global basis. IFRS has been available for use by all Irish companies since its introduction into Irish Law in 2005. However Irish GAAP has remained the firm choice of Irish businesses to date for the following reasons:

• Firstly, only companies that have “public accountability” such as listed companies, banks and credit unions, insurance companies, securities brokers and pension funds are required to comply with IFRS. IFRS is optional for all other companies.
  
• The second reason is born of the first in that the fear of the unknown and the better the devil you know attitude has kept the incumbent Irish GAAP in play.
  
• Lastly, there is a perception (and not unfounded) that a very significant level of disclosure and work is required in adopting IFRS.

Recently, the Accounting Standards Board (“ASB”) which is responsible for Irish GAAP, has announced a proposal to almost completely replace Irish GAAP with IFRS. In fact the only part of Irish GAAP that will remain is the Financial Reporting Standard for Smaller Entities (FRSSE) which is not widely used by Irish companies. The proposed changes by the ASB therefore effectively signals the need for nearly all Irish companies to make the change whether they want to or not. However, the good news is that the proposal recommends that a more manageable version of IFRS, called “IFRS for Small and Medium-sized Entities – SMEs” which, once enacted, will be available to all companies that do not have “public accountability”.

IFRS – The time to prepare is now

It is expected that all Irish companies will now have to adopt IFRS by 2012, either in its full format or the proposed SME version. Many may think that this still affords two more years before they have to put any thought into the switchover, but one must remember that financial information for 2011 will be presented in an IFRS format as it will form part of the 2012 financial statements. It is therefore imperative that all companies start to give due consideration to this issue in 2010 (As your closing position in 2010 will be your opening position in 2011).

It is safe to say that conversion to either full IFRS or the SME version will require a significant amount of work for most businesses and therefore companies should now start to take the following steps:

Conduct and IFRS skills and needs analysis

Companies should make an honest assessment of their current knowledge level of IFRS – and then determine what level of training they need to bridge any gaps that exist.

It is also important to note that while one would expect the finance team of a company to be fully briefed on IFRS, other key management will need to understand the potential impacts for them – What is the impact on how our company will report financial information?
There are definitely qualitative as well and quantitative aspects to consider.

Many training bodies are offering courses in IFRS which range from diploma type courses to half day headline sessions that should be considered. For complex policy or presentation issues companies will have to consider how prepared their external accountants are, and whether they are best placed, to assist them with their preparations i.e. training requirements, accounting policy considerations etc…

Review Management Information Systems

Businesses should consider whether changes to their accounting and reporting systems are necessary to produce and output information in an IFRS format. Hopefully this will only require the tweaking of existing systems but in some instances it may be necessary to upgrade or replace existing systems which will take time to implement.

Consider the impact on Financial Statements

In 2012, there is no doubt that your financial statements will appear materially different. For a start you will not have a profit and loss account, but instead an Income Statement which is different in presentation to current practice as is the Balance Sheet.

But while some changes will be aesthetic, the majority of work will go into revising accounting treatments and policies, together with preparing the significant disclosures required to comply with IFRS principles. Given that material accounting adjustments may be required in adopting IFRS which will impact on indicators such as reported profitability, management must consider the impact for the readers of their financial statements (Shareholders, financiers and others) and act accordingly.

Conclusion

With the timeline for convergence now destined to be 2012, and with the potential changes far-reaching, companies are well advised to begin now in order to make the transition smoothly to ensure that they are out in front of the curve. Companies who get out in front and deal with IFRS now will fare much better in the long run from an effectiveness and cost-efficiency standpoint.

David McGarry is Audit Director at FGS. For more information, log on to www.fgspartnership.com or call the Audit & Advisory team at FGS on 01 408 6913.