Urge to converge

As the global convergence movement gathers pace, there are more changes in store for the preparers of accounts in the UK. The focus will now fall upon smaller, private companies, as IFRS for private entities makes its way onto the statute books. Christian Doherty reports

Last year saw the introduction of International Financial Reporting Standards (IFRS) for newly listed AIM companies, and that's set to be extended to private entities with turnovers of more than £5.6m. Smaller companies will continue to report under Financial Reporting Standards for Smaller Entities (FRSSE), but it seems inevitable that even the smallest private companies will need to migrate to the new international standards in the coming years. Confused yet?

Professor Robin Jarvis, head of ACCA's Small Business Unit, says that while the details are still unclear, the roadmap for convergence is taking shape. 'I think the future looks like this: you could apply IFRS for private entities to those FRSSE-type small companies. On top of that, it looks as if the International Accounting Standards Board (IASB) will be applying IFRS for private entities to all unlisted companies, with the exception of smaller ones that will continue with FRSSE. As the UK converges with IFRS, it's likely that FRSSE will be affected, so eventually you'll have IFRS right the way through.'

So what will this mean for preparers of the accounts? And has the convergence movement - dedicated to harmonising all financial reporting across countries, sectors and size - reached its logical conclusion?

Bumpy ride

One finance director who is ahead of the curve is Jim Buckle, FD of Lovefilm, the fast-growing online DVD rental service. The firm's private equity backers were keen for the FD to push through IFRS conversion in order to be ready for an exit. So Buckle began in 2006 and had just put the finishing touches to his second set of IFRS-compatible results. And his verdict? 'To my mind, the complexity involved for the value you gain is questionable. The biggest challenge for us was probably the fact that, even though we're a pretty small VC-backed company, we had quite a few complications in the area of acquisitions,' he says. 'Things may have moved on now, but it was a struggle to work out, along with our advisers, what we should be disclosing and how we should be accounting for various things.'

Buckle is forthright in the demands placed on his team by IFRS. 'It does add to the workload, certainly. It probably took up one person's time for a good couple of months. If you look at a company such as this, where we'll turn over probably £75m across five countries, we only have five qualified staff, including me. It's not like we have a wealth of qualified accountants who can spend a whole year going through this line by line. People have to focus on the business. There would still be lots to do without IFRS, but I think the whole financial reporting environment has got more complex over the years.'

Of course, it's not just finance directors in private companies who need to rise to the challenge of IFRS. Brian Shearer, a partner at Grant Thornton, says that while the standards are well written, preparers and practitioners should brace themselves for some confusion. 'From the IASB side, well, I think they've done a jolly good job, given that  trying to please everyone was an impossible task,' Shearer says.

'But from the perspective of our clients, the main issue we've seen is the terminology. At the moment, people know things by certain names. Now, under IFRS, they say much the same things, but in different places and with new emphasis, so it can be difficult to get your head around the terminology, especially in financial instruments and deferred tax. That's what people struggle with, the way it's written.'

However, Shearer is at pains to point out that while the new standards will take some getting used to, FDs in particular should be equipped to overcome the changes. The key is resourcing. 'If FDs are worried about the migration to IFRS, then there is one thing to bear in mind. SMEs will depend very much on their software provider. Whereas a technical partner might look at the standards in a certain way, the preparers may simply put the numbers into the software and it should spit out the accounts. After that, the FD can go and see their technical partner at the auditors to check out any anomalies.'

Ready, steady…

It's an approach - getting systems right and only using advisers for the tricky bits - that another FD we spoke with will pursue. Marie Wold, chief financial officer of OnRelay, a small R&D-driven telecoms company, believes the IFRS debate is simple: it's going to happen, and if you're properly prepared then it should be a simple process. 'I don't expect it to be on my desk for too long,' she says. 'After all, it's not rocket science. Assuming your accounts are in order, to go back three years and get them in shape, for a qualified accountant, is not a huge project.'

A recent ACCA field test revealed that only five out of 20 businesses surveyed encountered any significant problems with the move to IFRS. But Wold takes issue with the findings 'The survey says that of the 25 companies they asked, only five expect a major impact on their business arising from the transition to IFRS. I would hazard a guess that the five were high-tech companies. I don't know that for sure, but we're expecting an impact on the R&D issue and how it's accounted for.'

Wold points to the confusion over the tax credits as a key issue to her business. But given that the finer points of IFRS for private entities are yet to be confirmed, we're still in a period of uncertainty.

Paul Pascan, who heads up the technical accounting division at FD Solutions, a company providing FD-level advice to smaller companies, agrees that with the right resourcing, IFRS migration shouldn't cause SMEs too many sleepless nights. 'There's really not a huge difference between this and UK GAAP, so it should be relatively easy,' he says. 'My advice to anyone facing this would be to turn existing accounts into an IFRS format to see how they would look. Once that initial shock is out the way, you'll see that 90% of this new standard is identical and that the outstanding issues more likely will be in investments and derivatives rather than any central problem with IFRS.'

Pascal accepts that the new standards will require some changes in approach, but to his mind most of these will occur on the margins. 'Looking at the accounts in the IFRS format will explain a lot and the remaining 10% of issues will largely be taken up with fair value issues, and you can explain that away. Looked at that way, I would agree with ACCA's findings that it's entirely manageable given the right resources.'

Costly expertise

But what of the traditional cry from accounts preparers, that convergence is simply another excuse for advisers to charge more fees? Wold, for one, is resolute that given time to prepare, the advisory fees incurred can be kept to a minimum. 'We do expect that advisory fees will go up,' she admits. 'But we've obtained a number of quotes from firms to do this and the range has been vast. This has been around in the UK for a while, and AIM required it of its new listings last year, so there is expertise there, and it's not a black art that only a few can practise. I think some of the initial thoughts and the supply and demand has distorted it, but there are enough people out there to get this done.'

Professor Jarvis is also confident that practitioners will be ready to help preparers of accounts on the technical aspects of convergence. 'I think it will work well, where preparers will research the standards as they need to, and then when something tricky comes up they can get professional help.'

So with the profession and the preparers getting up to speed, it seems the challenge of IFRS is only just beginning.

The field test

Twenty-five UK SMEs participated in an ACCA field test to examine how they would find the transition to new international accounting standards using draft guidelines issued by the International Accounting Standards Board (IASB) in February 2007.

In 20 out of 25 cases, the preparation of the new SME financial statements was considered to raise none or only minor issues.

The SMEs found only a few differences between their current reporting methods and the new IFRS, including goodwill amortisation, the need to prepare consolidated accounts, restating investments to fair value and government grants. The SMEs were unsure about requirements concerning financial instruments and how fair value should be used and noted that they would feel more at ease with the availability of IT software and examples of accounting treatment.

Professor Robin Jarvis, head of ACCA's Small Business Unit, says: 'Completing and filing full accounts is a highly specialised job, even under current regulations. In general, the field testers felt at ease with UK adoption of an IFRS for SMEs if and when it is introduced.

'The reality of the testing proves that the future will not be as tangled up in red tape as believed by some commentators.'

The results of the field test have been submitted to the IASB, which is considering whether to simplify IFRS for SMEs in advance of introducing the standard in 2009.

Christian Doherty is a freelance journalist.