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Since 1930s the United State statutory the first GAAP (Generally Accepted Accounting Principles), the United Kingdom, Canada, Australia and New Zealand start to emphasize on this area and produce their own GAAPs (George, 2010). Due to a slow development of the financial reporting, the UK officially produced accounting standards committee from 1969 and was called for short in ASC (the former called ASSC) and ASB in 1970 and 1990 separately (ibid). There are 14 FRSs (Financial Reporting Standards) in all that ASB has already statutory from late 1980s (Ian, 2007). With the trend of European economic integration and global globalization in the 21st century, a new accounting standard need to be portrayed vividly and IFRS (International Financial Reporting Standards) which recent applying almost all the listed company and large private company in the UK was came out at the right time. In this essay, the main purpose will introduce the IFRS first and then evaluation its development and influence in the UK private sector entities.
A better understanding of IFRS
All the listed EU companies required to adopt IFRS which proposed by International Accounting Standard Board (IASB) in their consolidated from 2005 (Ball, 2006). There is no straightforward answer this decision throw a bomb into the capital markets in the EU include United Kingdom. Most directors of listed UK companies consider both the uncertain difference between UK GAAP and IFRS, and the limited time of preparation before 2005 continued to choose UK GAAP for their consolidated group accounts at the beginning (Christensen, 2007). Then under the pressure of the gradually mature and uniform conversion of the listed EU companies and the EU migration, more and more investors signify somewhat comfortable and understood with the application of IFRS in the UK (ibid, 2007). There are nearly 10 years from the EU first time adopted the regulation about IFRS in 2002, the IFRS moved a huge step towards the global acceptation. By engage investors, regulators, business leaders and the profession at every stage of the process; collaborative efforts with the worldwide standard-setting community, the IFRS become the regard as the global accounting language during this achieved traction. For example, PwC and the EVCA suggest that many investors require IFRS information for their reporting in order to measure the project and purposes, therefore the use of IFRS in the capital markets become gradually common (Horton,2009). This in turn, the situation of such likes PWC and EVCA also anticipate the IFRS stimulate the other companies expected to imitate at some point.
For now there are 5 years that the listed UK companies have already issued the principle IFRS, it seems likely the existed challenges when complying with IFRS in accordance of converged UK GAAP standards need to be resolved by those financial community like IASB and ASB (Beattie, 2007). The commercial impact of IFRS was essential to understand during this period. The main four aspects of this area would be produced by following section and they are drove people's attention immediately after the transition. These influences should be 1) merger & acquisitions: with the situation merger become more and more popular way for listed companies to achieve their profits, the IFRS 3 "Business Combinations" which "requires companies to value the intangible assets acquired through business combinations separately from goodwill" become one of the key areas difficulty to complete; 2) share-based payments: recent research shows about 80% listed companies pay their management by share-based payment. It means that would be a significant influence for some companies to apply IFRS 2 "Share-based payment" which requires "recognize for fair value of share options as an expense in the income statement" (Brian, 2007); 3) segmental reporting: IAS 14 requires "detailed disclosure of turnover, profits and assets split between both business and geographical segments" means the companies would deal with certain level disclosure of their commercial information with no exception; 4) deferred tax: IFRS 3 which has some difference with FRS 19 and requires "listed companies to recognize the deferred tax liability on the intangible assets recognized" would lead to different result when present UK GAAP would not require this principle (ASB Consults on IFRS for SMEs, 2007).
The benefits of adopting IFRS for listed UK companies
Since the listed UK companies start to embed IFRS, it is essential to considered how many long-term benefits that would be brought by this convert.
There are four benefits should be discussed more detail by following section.
Firstly, according to a survey of FTSE 350 companies show easy to comparable and consistent the financial information is the most frequently mentioned benefit for converting the IFRS (Paananen, 2008). Globalization economic might be one of the reasons that some investors or preparers require more uniform financial reporting framework in these multi-organization. Therefore, they can make decisions or run their business by bringing standardization to the content if the listed company in the UK and have subsidiaries in the EU. Under that situation the management should supervise the financial function better by adopting IFRS to conform different GAAPs.
Moreover, with the increasing number of large private company started to used new standard reporting, some medium or other type of non-public accountable company which still hesitate about the change usually produced manual adjustments to convert to IFRS. Those management also understand the finance information apply IFRS could have higher change to forecasting and budgeting an appropriate and expectation stage of markets (Jeanjean, 2008). So completely conversion might reduce complexity of reconciliations and avoid the risk of make mistake during this process.
Thirdly, Christensen et.al (2010) researched of 193 listed companies senior finance executives indicates there are over 75% of respondents hoped their financial term would pay more attention on decision-support and focus less on transaction process. Because the manual reconciliations mentioned above, many UK companies feel non-efficiently to accumulate and compare the financial information without implementing IFRS when they into the EU markets. Due to achieve the maximize benefits for the management, adaption for IFRS lead the consolidation process upgrade information and system more efficiently in the whole multiple GAAPs markets.
Last but not least, Christopher (2008) pointed out there are 41% of UK senior finance executives thought the most obstacle for producing appropriate financial management should be the organizational complexity. Irene (2009) also agreed that the adoption to IFRS can be used as a chance to companies to revisit their tax strategies and legal structures. This adjustment would give a fresh air for the CEO of companies who in a competitive organization and help they to identify cost efficiencies (ICAEW, 2009).
Evaluation the challenges of company adoption IFRS
Goodwill as the difference between M&A cost and its net output value should be amortized or recognized in limited period after merger under the UK GAAP. However, company just requires to evaluation the goodwill every year and some goodwill would not recognize in the reporting after depletion (Hamberg, 2009). This of change of goodwill affects the both balance sheet and income statement in a enterprise.
The accounting and assessment of intangible assets also changed from UK GAAP to IFRS. An example of the Vodafone Co. which a large famous telecommunication group in the UK suffered great impact under this principle after they embedding the IFRS in 2006 (Keynes, 2006). The IFRS required Vodafone to recognize the all capital value which the company purchased in higher tangible asset price in Europe during the late 1990s into the market value. The loss from asset devaluation was accumulated up to $235.15 million because Vodafone consider the competition and monitoring environment of purchased company in Italian and German. However, this huge loss from asset devaluation just a book loses, not in practice and Vodafone still keep a great cash flow and profit (Watson,2002).
Listed group in the UK have already issued their financial statements in accordance with IFRS since 2005 and measurement in fair value (Beattie, 2008). The problem that the UK private sectors faced when dealing with fair value produce include five areas. Firstly, the fair value calculation requires the higher level quality of accountant. Due to the complexity of this calculation which especially in the areas of business combinations, intangible assets and assets depreciation, the accountant should be required high professional knowledge, take FTSE 100 as an example, they fist adopted IFRS at 1st April 2005 and their financial reporting changing summarize shows although the company give their advanced employees training about convert IFRS timely and cooperated with professional audit accounting company, the problem of facing lack of the qualified personnel still existed (Keynes, 2006). In additional, the fair value also influences the operation performance and accounting information quality (ibid, 2006). Keynes (2006) also argued the "accrued revenue" principle in IFRS which allow the unrealized profit also access into the income statement impact the calculation of liabilities. At the meantime, the measure of enterprise value also in accordance the frequency of profit and loss.
The feature of the conversion from UK GAAP to IFRS inevitable
The UK Accounting Standards Board (ASB) provides the proposals about UK about apply the International Financial Reporting Standards (IFRS) to the base of UK accounting future (Christensen, 2010). The proposals intend to apply either at the beginning on or after 1 January 2010. The ASB also points out there are three-tier in the reporting structure. The contents relevant with this essay include Tier1: Listed companies should follow the EU-adopted IFRS and Tier2: all other private entities standards to follow the IFRS for SMEs (ibid, 2010).
The new standard which is called IFRS for SMEs issued in July 2009 by the International Accounting Standards Board (IASB). As used for not only to SMEs but all non-publicly accountable, IFRS for SMEs is a simplified IFRS without some different in measurement and Disclosure requirements (Beisland, 2009).
The influence of private entities in the UK adoption from UK GAAP move to full IFRS or IFRS for SMEs will relay on different sectors which related to the size and the complexity of company. This essay would mention three main aspects of the impact to prepare. First of all, measurement differences: the cash flow in the cash taxes payable may change, distributable reserves may be reduced, the bank covenants may be broken and need to rearrangement. The second should be choice of GAAP, the company would suffer disadvantages when embarking on improper balance sheet standard.
In conclusion, the adoption of IFRS could reduce capital cost, have easy cross-border transaction and promote process the uniform of EU capital markets. For both listed companies and multinational corporations, embedding IFRS would simplify the corporate accountancy and reduce the complexity for consistent monitoring different GAAPs financial information if the company has subsidiaries in other countries. Thus, the conversion of IFRS for listed companies should be disclosure accounting information much timely and accurately for investors in order to enhance the fiscal transparency, block the exaggerated vulnerabilities and compare different companies in same area easily. Objectively speaking, this transition of financial standard would not influence the cash flow immediately or impact the potential business performance for the enterprise. However, the distribution system might be affected indirectly because the method of calculation such like deferred tax, merger & acquisitions, share-based payment and segment reporting etc. is changed and also lead to the change of balance sheet and income statement (Beisland, 2009). Therefore, due to the future policy about IFRS in the UK, the private company in the UK should fully consider what kind of information would deliver by those changes during the financial decision making.