Download the full PDF version of the IFRS accounting update* (PDF - 292kb)
This is the first of an occasional series aimed at companies either with securities already traded on one of the UK Capital Markets, or contemplating admission to trading, and their advisers.
This first issue deals with the forthcoming changes to IFRS which may affect issuers either as part of continuing reporting obligations or in preparing for admission.
By its nature, this publication is for guidance only and cannot substitute for detailed research or advice on the applicability of the standards and interpretations to an entity's own individual or group circumstances.
Introduction
International Financial Reporting Standard ("IFRS") and International Financial Reporting Interpretations Committee ("IFRIC") update
Over two years ago, in July 2006, the International Accounting Standards Board ("IASB") announced a moratorium on requiring any new standards to apply for accounting periods commencing before 1 January 2009. At the time, the intention was to accommodate the time required for implementation and provide a period of stability for companies who had been required to adopt IFRS1 for the first time in financial statements commencing on or after 1 January 2005, with AIM having required IFRS for accounting periods commencing on or after 1 January 2007.
As 1 January 2009 approaches, the IASB has only issued one entirely new standard applicable from that date, but that masks the number of changes which will become effective then or shortly thereafter. In May, the IASB completed its first annual improvements project, resulting in changes to no fewer than 20 existing standards. On top of all this, other existing standards are to change, either by amendment or the issue of revised standards, arising from ongoing issues identified. Part 1 of this briefing deals with changes to IFRSs.
The moratorium did not extend to new interpretation statements issued by the International Financial Reporting Interpretations Committee, ("IFRIC") and a number of interpretations have been issued which will be effective for periods commencing on or after 1 January 2008,or later, and these are covered in part 2 of this briefing.
All in all, the past two years or so have been a busy time for the IASB and IFRIC, and as a result, 1 January 2009 represents the largest volume change to financial reporting since IFRS was required to be adopted in the first place, under the European Union ("EU") Directive.
As such, it is time for companies who breathed a sigh of relief at the time of the moratorium to take a deep new breath and prepare for the changes which are expected to apply from next year. Companies whose shares are traded on a Recognised Investment Exchange, such as the Main Market of the London Stock Exchange and so adopted IFRS during or before 2005 have enjoyed a longer period to adjust than other exchange regulated markets such as AIM, many of whose issuers have only reported under IFRS for the first time for periods commencing on or after 1 January 2007, and so have had a shorter period of respite, although some may feel they have had no respite at all.
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Some readers, especially those contemplating admission to a market, may wonder why we refer to changes which are expected to apply.
For those that don't know, this is due to the European Union's "two tier" adoption process whereby under the EU Directive, IFRS are not simply those standards and interpretations issued by the IASB or IFRIC, but comprise only those which have also been endorsed by the European Financial Reporting Advisory Group (EFRAG), and so are adopted for use in the EU.
This creates a period of hiatus for companies trying to assess the impact of the changes, because although it is usually expected that EFRAG will formally adopt the new standards and improvements, until the formalities are completed, they are not strictly permitted under the rules of the various European stock exchanges and bourses.
Having said that, there is a history of debate on some of the more controversial changes which has delayed adoption; for example IAS39 was not adopted in full in the first round of endorsement (and one part still remains unendorsed) and IFRS8 was only adopted in November 2007, a full year after its issue.
At the time of writing, most of the final submissions are not expected to be considered until EFRAG's meeting in October 2008 with endorsement in Q1 of 2009 at the earliest.
As ever, even after endorsement, it is not a simple matter of applying the IFRS from the effective date because in most cases early adoption is permitted. Companies should consider whether they ought to early adopt (subject to EU endorsement, of course) or indeed whether their peer group has early adopted, given that comparability of financial reporting is another important factor in this decision.
Perhaps the most important aspect to bear in mind with endorsement is that it does not alter the effective date of the underlying standard. Therefore companies are likely to have to gather the information to apply the standard from the earliest applicable date (unless of course it has early adopted) which is especially important for those standards and interpretations requiring restatement of comparatives or retrospective application.
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In October 2008 the IASB took a step unprecedented in recent times when it issued amendments to IFRS7 and IAS39 in direct response to the current economic climate without the usual period of consultation. This was supported by EFRAG who also immediately endorsed the change, again without the usual consultation. The changes are included below, but essentially permitted reclassification of certain financial assets previously prohibited under IFRS, but permitted under US GAAP thereby removing a difference between the two.
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The "Quick Check" table (as seen in the downloadable document) sets out the known changes as at 30 November 2008. Unless otherwise stated, early adoption is permitted, although companies should be aware that transitional arrangements might apply in some cases and certain requirements are interlinked such that early adoption requires the related amendment to the other standard(s) to be early adopted at the same time.
Of all the changes in IFRSs included in this briefing, only IFRS8 has so far been endorsed by EFRAG along with the October 2008 changes to IFRS7 and IAS39 referred to above, although a number have now been voted on and adoption is expected by the end of 2008 or in the first quarter of 2009.
The good news is that a large number of the changes are prospective, but where there is a major change which applies retrospectively, this will require the restatement of comparatives, where applicable, and so companies may need to gather the information for both the old and new accounting requirements. However, in practical terms much of this information would have to be collated anyway to comply with the mandatory disclosure of the impact of standards and interpretations issued but not yet effective, in accordance with IAS8.
Interpretation Statements (IFRIC)
As if the changes to standards were not enough on their own, there are also a number of new IFRIC interpretation statements. The "Quick Check" (as seen in the downloadable document) shows the subject matter with a summary of the main changes available on the IFRICs table.
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The IASB and IFRIC remain busy and already have a number of matters under consideration, ranging from discussion papers, to exposure drafts for standards and new interpretations.
Most of this is being conducted with FASB as part of the memorandum of understanding which underpins the overall convergence project between international and US standards.
Amongst the current issues are an 8 phase project addressing the Conceptual Framework, and the Exposure Draft for the 2008 Improvement Project which was published in August 2008 with amendments proposed to eight current standards.
However to list all the matters which are the subject of current proposals or are under discussion would turn this already lengthy briefing into a book. Suffice to say that as these develop into final standards, amendments to standards and interpretation statements, they will result in future issues of this publication.
For those who are interested, however, it is worth looking at the IASB website at
http://www.iasb.org/Home.htm (external link).
Of more current interest may be the progress of endorsement by the EU, and this is available from the EFRAG website at
http://www.efrag.org/content/default.asp?id=4090 (external link).
Download the full PDF version of the IFRS accounting update* (PDF - 292kb)
*For an accessible version of the PDF please contact us.