The Science of Compliance: The Task of Adjusting to IFRS May Seem a Major Burden from Where Most of Us Are Standing, Writes Chris Field, but It's a Golden Opportunity to Rethink Business Performance Management Systems
Field, Chris, Financial Management (UK)
It's fair to say that most finance professionals are facing significant costs in terms of time and resources to comply with regulations such as international financial reporting standards (IFRS), Sarbanes-Oxley and Basel II. The effort to tackle IFRS often involves teams drawn from many departments, all trying to establish systems to meet standards that stabilised barely three months ago. Even so, they take effect from 1 January 2005, which drives the need for immediate action.
It would be easy to see the requirement to address IFRS as a burden, but that would overlook the benefits they should bring. The main objectives of IFRS are to:
* develop a single set of high-quality enforceable global accounting standards;
* provide transparent and comparable high-quality information in financial statements;
* help capital markets to make economic decisions;
* achieve convergence of national and international accounting standards.
Firms that report under IFRS should see benefits including reductions in their cost of capital, greater transparency and comparability of financial information and savings on their accounts preparation costs. But one of the biggest advantages of IFRS is arguably also one of their major drawbacks. The transparency may well offer competitors insights into your business that they could use to their advantage.
IFRS feature many differences from UK Gaap, under which most British firms currently file their statements. The most important changes are financial statement presentation, segmental reporting and multiple reporting requirements. Financial statement presentation allows firms to present key statements in very different ways to improve the value of the information they provide. For example, the income statement may be presented by "nature of expense", rather than "chart of accounts". The balance sheet has risen in status, and there are even more significant changes in terms of the calculation of items such as goodwill, asset and stock valuations. For instance, the fact that internally created brands will no longer be capitalised could wipe millions off balance sheet values.
Segmental reporting recommends that most of the income statement, and key figures from the balance sheet, are analysed by line or type of business, although organisations can opt for geographical analysis. Clearly, this method will divulge far more detail than the analysis of revenue and profit by country, which was previously reported. Competitors will be able to see the profit margins of the component parts of a business, and it will reveal low-performing segments ms well as profitable ones. In addition, if a firm uses geography as its prime reporting segment, it must then use line of business as the secondary segment, which also requires analysis of sales and net assets at cost and carrying value. …