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Assignment re International Corporate Reporting
Finance and Business :
The Transform Group is an ambitious large privately owned UK company that is seeking a listing on the UK Stock Exchange to further its expansion plans. It currently has four subsidiaries two of which have non-controlling interests. A significant amount of its non-current assets are in the form of intangibles, including but not exclusively goodwill. Currently the Group prepares its consolidated financial statements under UK GAAP. As part of the listing process, the Group is aware that it needs to adopt IFRS for listing purpose and comply with the requirements of IFRS 1 “First-time Adoption of International Financial Reporting Standards”. The Group intends that its first financial statement is to be prepared under IFRSs and to be used for listing will be for the year ending 31 December .
You have been approached by the Transform Group to advise them of the issues and processes involved in the above listing processes.
Requirements
Write a memorandum to the Board of Transform to cover the following areas:
a) The benefits of adopting IFRS for reporting purposes compared to the use of “local” GAAP and the processes (and their timing) the company will need to implement to its accounting systems to enable the transition.
b) The general principles of the process of transition to IFRS as required by IFRS 1.
c) Going forward, describe three areas of accounting where the company will find significant differences between the treatment that was required under UK rules and those that will now be required under IFRS rules and the comparative effect that this will have on the financial statements.
Please Note:
 Reference to the academic literature must be made in your answer
 All parts carry equal marks
Max 2,500 words
Part a) requires a discussion of the perceived benefit of the adoption of IFRS together with the practical issues relating to an entity’s accounting systems that need to be considered before implementation.
Part b) considers the major requirements of asset and liability recognition / derecognition and measurement principles together with the details financial statements that should be presented on the adoption of IFRS 1.
Part c) requires students to describe three areas of accounting, related to transactions or events that Transform is likely to encounter, where their treatment under IFRS rules will have a significant difference on the financial statements than it would have done had UK rules continued to apply
Well researched answer will contain references to professional journal articles and technical IFRS literature.
Recommended Readings
Main books:
Melville, A (2009) International Financial Reporting (e-book), (2nd Edition), Harlow New York, Financial Times Prentice Hall.
Roberts, C. Weetman, P. Gordon, P. (2008) International Corporate Reporting, (4th Edition), Harlow New York Times Prentice Hall
Nobes, C. parker, R. (2009) Comparative International Accounting, Harlow New York Times Prentice Hall
Mirza, A. Holt, G. (2010) Practical Implementation Guide and Workbook for IFRS, (3rd Edition), Chichester, Wiley.
Alfredson, K. (2009) Applying International Financial Reporting Standards (2nd Edition) Chichester, Wiley.
KPMG article Managing the transition to IFRS
Useful websites include
Websites:
www.iasplus.com
www.pwcglobal.com
www.iasb.org.uk
www.accaglobal.com
Marking Criteria
Students will be assessed using the following criteria:
1. Introduction quality
2. Articulation of reporting writing
3. Development of the scenario / argument
Paragraphs should be consistently well developed, and provide examples that develop points.
4. Use of examples
5. Transitions
There should be strong and consistent transition between points in essay; strong flow
6. Coherence
Paragraphs should work to support the essay and be linked.
7. Conclusion
Conclusion should be beyond a summary of what was written in the body of the essay.
Important Notes
Harvard Style Referencing e.g. alphabetical order
Provide a critique and analysis/overview of your opinion.
Notes that will be helpful:
— Change to IFRS “ Why?
— Requirement of the law
 Adoption of IFRSs in Europe Effective in 2005
 In June 2002, the European Union adopted an IAS* Regulation requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards.
 * IAS (International Auditing Standard)
— Change to IFRS “ Why?
 The European IAS regulation applies the 27 EU Member States + the three members of the European Economic Area (EEA) “ Iceland, Liechtenstein, and Norway.
How this affect the UK?
 The United Kingdom is an EU Member State. Consequently, UK companies listed in an EU/EEA securities market (main market / full listed) follow IFRSs since 2005.
— Change to IFRS – UK
UK Companies Not Subject to the EU IAS Regulation
I. AIM (Alternative Investment Market)
 Companies with securities admitted to trading on the Alternative Investment Market (AIM) of the London stock exchange are not subject to the EU IAS Regulation.
 The AIM has adopted a rule that will require AIM companies to submit IFRS financial statements starting in 2007.
— Change to IFRS – UK
— II. UK unlisted companies other than small companies (large + medium size of companies)
 FRSs (Financial Reporting Standards) issued by the ASB (UK Accounting Standards Board)
 SSAPs (Statements of Standard Accounting Practice) adopted by the ASB
 UITF Abstracts issued by the Urgent Issues Task Force (UITF) of the ASB
 FREDs (Financial Reporting Exposure Drafts) issued by the ASB.
— Change to IFRS – UK
— III. UK small Unlisted Entities
 Small companies may elect to report under the Financial Reporting Standard for Smaller Entities (FRSSE), which gives exemptions from applying all other accounting standards.
— FRSSE
Updated June 2008
—
— Change to IFRS – UK
— Background to FRSSE
The FRSSE brings together the relevant accounting requirements and disclosures from the other FRSs, SSAPs, UITF Abstracts and FREDs, simplified and modified as appropriate for smaller entities.
— The FRSSE is a standard that may be applied by companies qualify as small under the Companies Act it encompasses most companies with an annual turnover of up to £6.5 million.
— Find out UK companies size criteria for large and medium size
—
Change to IFRS “ the increased information disclosure brings benefit
The purpose of disclosure to users is to help them to estimate the amount, timing, and certainty of future cashflows
Increased information disclosure benefits users by reducing the likelihood that they will misallocate their capital “ reduce the risk.
Information disclosure helps users understand the risk of a prospective investment, and potentially lower the average cost of capital
— Change to IFRS “ the increased information disclosure brings benefit
lower risk » lower expected return » lower cost on capital
— Lower capital costs promote investment, which can stimulate productivity and economic growth.
— Information disclosure would improves the effectiveness of the investment process.
— A more liquid market assists the effective allocation of capital by allowing users to reallocate their capital quickly
— Change to IFRS – Costs to the Financial Statement preparer
Increased information disclosure brings number of benefits, but there are costs to the preparers.
The main costs to the preparer of financial statements are as follows:
(a) the cost of developing and disseminating information
include those of gathering, creating and auditing the information.
— Change to IFRS – Costs to the Financial Statement preparer
Additional costs to the preparers include training costs, changes to systems (for example on moving to IFRS), and the more complex and the greater the information provided, the more it will cost the company
(b) the cost of possible litigation attributable to information disclosure,
Although litigation costs are known to arise from information disclosure
Fuller disclosure could lead to lower costs of litigation as the stock market would have more realistic expectations of the company™s prospects
— Change to IFRS – Costs to the Financial Statement preparer
(c) the cost of competitive disadvantage attributable to disclosure.
— Disclosure could weaken a company™s ability to generate future cash flows by aiding its competitors.
(d) Other potential cost to the preparer
— Companies bargain with suppliers and with customers, and information disclosure could give those parties an advantage in negotiations.
— Change to IFRS “ further benefits
§ Accessibility to Capital
§ The accounting standards created under an unified international framework would build credibility and confidence in the capital marketplace to the benefit of both users and companies.
§ It would improve the comparability of information across companies and national boundaries.
§ It would create credibility in financial statements.
§ It would help to increase the credibility in financial statements.
— Change to IFRS “ further benefits
§ Competitive Disadvantage/Multiple GAAPS
§ Business Effectiveness
§ Benchmarking / Comparability
§ The list is not exhaustive
— Change to IFRS “ problem may come with it?
— Before considering what the problems may come with the change, let™s have a look at what else and who else would or could have influences on the standard setter “ IASB.
— A global presence requires a global mind-set
— Political System
— The type of system and the level of involvement in business regulation
— Democratic
— State Control
— Accounting Regulation
— How stable is the political system
— What is the philosophy of the government
— Complexity (eg, derivatives)
— Derivatives can be used for speculating purposes (“bets”) or to hedge (“insurance”).
— A common example, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies
— Inflation
— Hyperinflation
— Business organisation/ inflation
— Industrial structure
— An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry)
— The most influential analytical model for assessing the nature of competition in an industry is Michael Porter’s Five Forces Model.
— Business organisation/ inflation
— Legal system
— Code law v common law
— Code law- regulation/rules /procedures
— Mandate acceptable behaviour
— Common law-
— prohibit undesirable behaviour
— Judges/courts
Statute law / regulatory law / constitutional law “ less details
— Tax System
— Tax rules v accounting rules
— Taxable base compare to the accounts profit
— I. Quasi-dependent
— Taxable profit is principally based on the legal entity statutory accounts, with a number of adjustments provided in the tax law.
— Tax System
— I. Quasi-dependent
— Belgium
— China
— Cyprus
— France
— Greece
— Jordan
— Mongolia
— Portugal
— Tax System
— I. Quasi-dependent
— Saudi Arabia
— South Africa
— UK
— Zambia
¦¦
— Tax System
— II. Independent approach
— Prepare independent set of “tax accounts” based on local GAAP
— Malaysia
— Nigeria
— III. Dependent
— Adopt IFRS at an entity level for tax purpose
— Accounting profession
— Size
— Role in regulation
— Ethics (ACCA Code of conduct)
— Society™s attitude to profession
— People & Culture
— People
— Regulators
— Accountants
— Values and beliefs “ culture
— Cultures
— Country
— Collective not individual
— Group differentiation
— Smaller groups in society
Subculture
— Further lectures on culture v accounting system (Wk 8 & Wk 9)
Change to IFRS “ Problems
— Training availabilities
— Culture and local industry
— Conflict of local GAAPS
— SME™s and private limited companies
— Timing of the move
— Problems of interpretation including language
— Tax driven nature of accounting regimes
— The list is not exhaustive
— Change to IFRS “ solutions
— Promote training
— Consultation-government/regulatory bodies/preparers/users
— Coordination between all parties
— Always have to know local conditions
— No easy solution if any
— The list is not exhaustive
— Working Relationships with Domestic Standard Setters
— (a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards.
— (b) to promote the use and application of those standards
— (c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and
— (d) to bring about convergence of national accounting standards and IFRSs to high quality solutions.
— Key organisation involved
— European Financial Reporting and Advisory Group- EU insists on their input/advice
— Accounting Regulatory Committee must approve a standard and once approved cannot be amended by states
— Key organisation involved
— Federation des Experts Comptables Europeen (FEE)
— FEE is the representative organisation for the accountancy profession in Europe, based in Brussels
— International Federation of Accountants (IFAC)
— Headoffice based in New York
— Enforcement
— Local enforcement mechanism
— Eg, For countries with a tradition of reliance on laws and regulations (rather than standards) for the fixing of accounting and auditing requirements, specific issues arise.
— Rather than giving authority to a continuing process of standard-setting, new statutory measures are required whenever a new international standard is enacted, or an existing international standard is amended.
— Big 4 play important roles
— Enforcement
— IAASB- International Auditing and Assurance Standard Board “ Reporting on the compliance with IFRS
IAASB is the standard setter for ISA [International auditing standards]
— Local interpretations not allowed must use IFRIC.
— Change to IFRS “ other points
— Fair value accounting (IFRS 13 “ Fair Value Measurement)
— ˜Principles v rules based™ approach
— Affects not only numbers but business.
— Manage the change to IFRS – a project management
— IFRS v UK GAAP
— Format/terminology
— UK standards with no equivalent IFRS
— IFRS with no equivalent UK standard
— IFRS not tested in the same way as UK GAAP
— IFRS v UK GAAP “ going concern
— IAS 1 “ Presentation of financial statement
 An entity preparing IFRS financial statements is presumed to be a going concern.
 If management has significant concerns about the entity’s ability to continue as a going concern, the uncertainties must be disclosed.
 If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures.
— IFRS v UK GAAP “ going concern
— FRS 18 “ Accounting Policy
— An entity should prepare its financial statement on a going concern basis, unless:
 the entity is being liquidated or has ceased trading, or
 the directors either intend to liquidate the entity or to cease trading, or have no realistic alternative but to do so.
— IFRS v UK GAAP “ Substance over form
— IASB conceptual framework
— Reliability
— Faithful representation, including completeness and substance over form
— The staff recommended that faithful representation continue to be identified as a key quality (or subquality) of accounting information, a quality that includes completeness and leaves no room for representations that subordinate substance to form.
— IFRS v UK GAAP “ Substance over form
— The Board generally expressed support for the direction taken by the staff on this issue. A number of Board members expressed their support to eliminate the term ‘substance over legal form’ from the Framework as it has the same meaning as faithful representation
— Hence there is no separate standard in IFRS re Substance over form, the concept has been built in individual standard
— IFRS v UK GAAP “ Substance over form
— FRS 5 the substance of transaction
 General principles on:
— Consignment stock
— Sale and Repurchase agreement
— Factoring of debts
— Securitised assets
— Loan transfer
— IFRS v UK GAAP “ More differences
— Format – Cash flow (IAS 7 v FRS 1)
— Employee benefits (IAS 19 v FRS 17)
 INL covers all employee benefits, UK address post retirement
 Full vs partial consolidation for Group Accounting
 “ IFRS 3 v FRS 7, etc (Gross up , including minority interest so, can be mistaken by the users sometime) impression
 IFRS v UK GAAP “ More differences
— Development costs
 IAS 38 vs FRS10, SSAP 13 “ UK allows choice on capitalisation of development costs
 Investment property
 IAS 40 vs SSAP 19 – Treatment on revaluation
The list is not exhaustive
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