Bridging GAAP in accounting


INNOVATION PROFILE/PwC:THE INTRODUCTION of a new accounting standard may not appear at first sight to be the most interesting event on the business calendar over the next few years. But the impending replacement of the Generally Applied Accounting Principles (GAAP) for Ireland and the UK with a single accounting standard – Financial Reporting Standard (FRS) 102 – will make Ireland a more attractive location for inward investment whilst also assisting Irish firms trading internationally. It will also introduce enhanced levels of transparency and consistency in financial reporting by companies, thereby increasing overall business confidence.

The new standard has been in development for a long period, says PwC assurance partner Irene O’Keeffe. “There has been a global move for consistency in reporting standards for many years and in 2005 all stock exchange listed companies moved to the International Financial Reporting Standard (IFRS). The UK Accounting Standards Body (ASB) has been working on bringing financial reporting standards for other companies up to date since then. In some cases they are dealing with standards that are more than 25 years old and the current standards haven’t kept pace.”

The ASB has essentially been working on a balancing exercise which would lead to the creation of a new set of standards for companies not listed on the stock exchange which conform to IFRS but are proportionate to the size of the company involved. The full IFRS standard would be onerous for a small company with just a few employees but there must still be a minimum standard in place.

“What the ASB has come up with is a compromise solution,” says Fiona Hackett, senior manager in PwC’s Accounting Consulting Services and a member of Chartered Accountants Ireland’s accounting committee. “In a way you could call it IFRS-lite. The new FRS102 is within the IFRS umbrella and will be globally recognised as being fit for purpose and high quality. This is good news for investors, shareholders and other stakeholders.”

The current proposals from the ASB certainly score on simplicity as well. They advocate replacing the current Irish and UK GAAP, which is about 2,500 pages long, with a single accounting standard which runs to around 250 pages. This new FRS 102 standard is largely based on the International Accounting Standards Board’s IFRS for SMEs.

The new standard can be used by all Irish and UK entities that are not already legally required to comply with IFRS. “Allowing this wide scope of companies that can use FRS 102 is a sensible direction for the ASB which should not impede the quality of financial reporting, while providing a welcome relief for many businesses in this economic climate, given the time and cost burden of producing accounts under full IFRS,” says Hackett.

This is good news for smaller Irish companies and more good news for Ireland comes with the proposals for subsidiary companies. “The original proposals from the ASB did not contain any financial reporting concessions for subsidiaries,” says Hackett. “However, throughout the entire process of overhauling Irish and UK GAAP the ASB has consistently received feedback from listed groups that they would like an option of an accounting framework that allows their subsidiaries to use IFRS in their statutory accounts for recognition and measurement purposes but without being obliged to comply with the extensive disclosure requirements of IFRS.”

The ASB has responded positively to this feedback and developed a reduced disclosure framework. “The reduced disclosure framework means that many subsidiary companies will be able to avail of a number of exemptions from the detailed disclosure requirements of IFRS where equivalent disclosures are included in the consolidated financial statements of its parent. This will see subsidiaries of IFRS groups able to use a version of IFRS and thus align the numbers reported in their group reporting forms with their statutory accounts,” she adds.

O’Keeffe explains why this is important to Ireland. “The Irish-based subsidiary of a French or US company which already uses IFRS will not have to prepare accounts to the full IFRS standard as long as the information is already in the group accounts. This will eliminate a lot of cost and duplication and help make Ireland more attractive for inward investment.”

O’Keeffe also notes, however, that subsidiaries will need to watch developments in respect of IFRS adoption in the US. The timelines for adoption of IFRS chosen by a US parent may impact on the option chosen by the subsidiary.

Greater international standardisation will also assist Irish companies. “Where Irish companies are trading with firms in other countries or seeking to expand overseas the increased consistency will be very helpful,” says Hackett. “It means that they will have a much clearer understanding of the companies and systems they are dealing with.”

There are also wider benefits for lenders, investors and others. “There is a lot more disclosure particularly in the areas of risk and key judgements and estimates,” O’Keeffe notes. “The accounts have to describe what risks there are to the business in the future. They also have to show how judgements and estimates with regard to things like stock valuations have been arrived at. This is very important. At present, the commentary in accounts can be very similar from year to year and therefore not particularly informative. This won’t be the case anymore. In future they will have to look back on what actually happened during the course of the previous year. They will not be as much of a box filling exercise in future – a lot more information will have to go in.”

Customers and members of financial institutions such as credit unions will also benefit. “They will have to disclose a lot more information on their loan receivables,” says Hackett. “They will also have to give much more information on risk. This additional transparency will build confidence in the future.”

The finalised new standard is expected to be published at the end of this year and to come into force in 2015. “For most SMEs with fairly straightforward businesses there won’t be much noticeable differences,” she adds. “They might see a bit more disclosure but there will be no difference in the numbers. However, even for smaller companies there is a need to start planning ahead now. While the new standard will come into force in 2015 that means that the 2014 numbers will be covered by it – that’s not much more than a year away.”

O’Keeffe advises companies to start preparing immediately and to talk to their auditors and advisors about the impact of the changes. “Larger companies should appoint a project manager to take responsibility for it. They have choices within the rules and they need to decide what the right ones are for them. There may also be systems changes required. Smaller companies should talk to their auditors and advisers who can guide them in what they have to do to prepare and have the right information and numbers when the time comes. Also, where a company is considering an IPO they need to decide on whether to move over to full IFRS straight away.”

Finally, Hackett believes that the new standard should be seen as an opportunity rather than additional obligations. “Don’t be afraid of the change,” she advises. “There are people out there to help. Companies should see this as an opportunity to improve their financial reporting. The better the quality of information you have the better you can run your company and banks and investors will have more faith in you as well. It is good for business.”