Raising standards

New standards in accounting and finance could put Ireland ahead of the crowd and mark it out as a best practice jurisdiction - but we need to get it done and make the process as smooth as possible, writes FIONA REDDAN

UP TO 90 per cent of Irish companies will face major changes in how they prepare their financial reports if new accounting standards are implemented as proposed.

The new proposals, from the Accounting Standards Board (ASB), will see Irish Generally Accepted Accounting Principles (Gaap) becoming redundant and almost every Irish company using International Financial Reporting Standards (IFRS), from 2012 when “IFRS for SMEs” is introduced.

The wholesale move to international standards, as proposed, will signal major changes for the majority of Irish companies.

While the name “IFRS for SMEs” may lead you to think that it is only appropriate for small and medium-sized companies, the scope of the new standards is far wider than you might think.

“The name is misleading. Really it should be called ‘IFRS for non-publicly accountable entities’, which means any company that’s not listed or which has a fiduciary capacity or public interest,” says Glenn Gillard, accounting technical partner at Deloitte.

Under the proposals, there will be three tiers of application of IFRS. Tier One will include all Irish companies that are “publicly accountable”, such as listed companies, as well as banks, insurance entities, many investment funds and credit unions. The second tier of companies will use the new IFRS for SMEs standard, while the final tier will apply to small companies that use the ASB’s Financial Reporting Standard for Smaller Entities (FRSSE), although this may be temporary as there are plans to review the FRSSE in the future – to either dispense with it in totality or make it more compliant with the international framework.

Within this structure, companies will have the option to “opt up” and report at a higher level.

Up until now, only publicly-listed companies have had to use full IFRS when preparing acounts, and, while applying IFRS has been open to everyone, only few have chosen to “opt up”.

Instead, Irish companies that don’t have equity or debt publicly listed tend to prepare their accounts using Irish Gaap, which are identical to UK Gaap.

For these companies, the new proposals will mean a lot of work to get accounts into the shape needed in order to meet the new standards and to have comparability. For those private companies that are already complying with full IFRS, however, the proposals may be a pleasant surprise, as they provide exemptions that mean they won’t have to comply with the full IFRS as it applies for public companies.

Moreover, large, unquoted Irish groups with crossborder financing and operations will be able to use IFRS for SMEs without having to meet the rigours of full IFRS.

Another advantage of the new standards is that it will mean a consistent international approach.

“Conversion to the new standard will involve a significant amount of work for a large number of private companies in Ireland, but should lead to enhanced cross-border comparability as well as consistency of accounting frameworks within multi-national groups,” says Irene O’Keeffe, IFRS for SMEs partner with Pricewaterhouse- Coopers.

For companies that hope to go public some day, IFRS for SMEs will provide a useful platform to enter public capital markets, where full IFRS will be required. Moreover, as Gillard points out, having internationally comparable reporting standards will help Irish companies when dealing with new customers and suppliers, or when raising finance.

Another advantage of IFRS for SMEs, which Gillard refers to as a “one-stop shop set of standards”, is that it simplifies the more complex full IFRS and involves significantly reduced disclosure requirements.

As O’Keeffe highlights, full IFRS spans some 2,800 pages and would be far too onerous for a smaller company. IFRS for SMEs on the other hand is just 230 pages long, and has simplified certain areas.

This means that many subsidiaries of Irish quoted companies will be able to use an accounting framework that is similar to the full IFRS used by their parents, but with greatly reduced disclosure requirements.

For example, under full IFRS, goodwill has to be tested for impairment on an annual basis, which can be a complicated process.

This requirement does not form part of IFRS for SMEs however – instead it states that goodwill can be amortised over its estimated useful life or 10 years, whichever is longest.

Moreover, O’Keeffe points out that the new financial reporting standard will lead to a greater number of intangible assets, such as customer relationships and customer contracts being recognised in business combinations, when compared to accounting for acquisitions under Irish GAAP.

Although 2012 may seem a long way off, given that firms will have to have comparable accounts for 2011, companies will need to start getting ready and making related conversion decisions during 2010.

Given that the new standards may require some legislative change before they can be introduced in Ireland, Gillard says that there is a potential competitive advantage for Ireland if it adopts the standards quickly – a move that would also establish it as a best practice jurisdiction.

“Companies need to take the time to stand back, think ‘what is the impact on my company’, and keep abreast of the consultation process,” advises O’Keeffe.

Gillard agrees, saying that companies should be on a “watching brief” for the next couple of months, keeping an eye on any developments that may impact on them.

One sector that needs to be more pro-active however, is that of the servicers of international funds and debt vehicles listed and domiciled in Ireland.

The introduction of a new regime for private and nonpublicly accountable companies means that companies coming under the full IFRS brief will need to report accordingly.

If funds and debt vehicles have to apply full IFRS, it would mean that the burden of financial reporting would become very high for them, says Gillard, and he points to the fact that institutions such as the Irish Funds Industry Association and the Irish Banking Federation have already become involved in the consultation debate.

This consultation process runs until February 1st 2010, and comments can be submitted to the ASB ahead of this date.