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Library of Congress Cataloging-in-Publication Data

Weaver, Lisa, 1971–
  Managing the transition to IFRS-based financial reporting : a practical guide to planning and implementing a transition to IFRS or national GAAP which is based on, or converged with, IFRS / Lisa Weaver.
    pages cm
  Includes bibliographical references and index.
  ISBN 978-1-118-64374-7 (paperback) – ISBN 978-1-118-64418-8 (ebk) – ISBN 978-1-118-64412-6 (ebk)
1. Accounting–Standards. 2. Corporation reports. 3. Financial statements–Standards. I. Title.

  HF5626.W43 2014
  657′.3–dc23

2014007143

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-64374-7 (paperback) ISBN 978-1-118-64418-8 (ebk)
ISBN 978-1-118-64412-6 (ebk); 978-1-118-64379-2 (ebk); 978-1-118-92483-9 (ebk)

Cover design/image: Wiley

CONTENTS

List of Case Studies

Foreword

Preface

Disclaimer

Acknowledgements

About the Author

Introduction

Scope and key themes of the book

An overview of the book

Information sources

I Understanding the Framework of Performing a Transition to IFRS-Based Financial Reporting

1 International Financial Reporting in Context

1.1 The Development of International Financial Reporting

1.2 The Regulatory Framework of IFRS Today

1.3 The Current Position on International Harmonisation of Financial Reporting

1.4 The Benefits and Impact of Moving to IFRS

Conclusion

Notes

2 The Conceptual Framework of IFRS, Accounting Policies and The Presentation of Financial Statements

2.1 The Framework

2.2 Developing Accounting Policies

2.3 The Presentation of Financial Statements

2.4 Fair Presentation, Going Concern and Interim Financial Statements

Conclusion

Note

3 IFRS 1 First-time Adoption of IFRS

3.1 An Introduction to IFRS 1

3.2 The Date of Transition to IFRS and the Opening Statement of Financial Position

3.3 Presentation and Disclosure

Conclusion

Notes

II Planning and Implementing a Transition Project

4 Establishing the IFRS Transition Project

4.1 The Benefit of Experience

4.2 The Project Plan and Key Project Members

4.3 Developing the Project Plan

4.4 The Use of External Advisors

4.5 The Costs of the Transition

4.6 Preparing an action plan

Conclusion

Note

5 Assessing the Accounting Impacts of IFRS Transition

5.1 Conducting an Initial Impact Assessment

5.2 Developing IFRS Accounting Policies

5.3 Potential Changes to IFRS

Conclusion

Notes

6 Wider Transitional Issues – Systems, Internal Audit and the Audit Committee, and Commercial Implications

6.1 Systems Implications

6.2 Internal Controls, Internal Audit and the Audit Committee

6.3 Evaluating the Wider Impacts

Conclusion

Notes

7 Training, Communication and Change Management

7.1 Education and Internal Communication

7.2 External Communication and Presentation of IFRS Transition Information

7.3 The Presentation of IFRS 1 Disclosures

Conclusion

Notes

III Theway Forward – Developments in Selected Countries

8 The Transition to New UK GAAP

8.1 A Background to the Changes and Outline of the New Regime

8.2 Accounting and Wider Impacts of the Transition

8.3 Transition Planning Issues

Conclusion

Notes

9 The Way Forward – The Move Towards IFRS in the US and Selected Other Countries

9.1 The US and IFRS

9.2 IFRS in Brazil, Russia, India and China

Conclusion

Notes

Appendix 1: IASB Standards

Appendix 2: Useful Reference Material and Further Reading

IFRS standards as issued by the IASB

Appendix 3: Summary of IFRS Transition Planning Considerations

Bibliography

Index

End User License Agreement

List of Tables

Chapter 2

Table 2.1

Table 2.2

Table 2.3

Table 2.4

Table 2.5

Table 2.6

Chapter 3

Table 3.1

Table 3.2

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 4.8

Table 4.9

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Chapter 8

Table 8.1

Chapter 9

Table 9.1

List of Illustrations

Chapter 3

Figure 3.1 Identifying the date of transition to IFRS

Chapter 4

Figure 4.1 SWOT analysis of an IFRS transition

Figure 4.2 Establishing the transition project team

Figure 4.3 A high-level overview of a transition project

Figure 4.4 External auditor involvement in IFRS transition

Chapter 5

Figure 5.1 An overview of the stages in assessing and responding to accounting impacts on transition

Chapter 6

Figure 6.1 Typical stages in the IT conversion process

Chapter 7

Figure 7.1 A proposed timescale for communicating externally

Chapter 8

Figure 8.1 Reconciliations required on transition to FRS 102

Guide

Cover

Table of Contents

Foreword

Preface

Introduction

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LIST OF CASE STUDIES

Case Study 1.1 BSkyB Plc's Reconciliation of Profit on Transition to IFRS

Case Study 1.2 Centrica Plc's Reconciliation of Profit on Transition to IFRS

Case Study 1.3 BSkyB Plc's Reconciliation of Equity on Transition to IFRS

Case Study 1.4 Centrica Plc's Reconciliation of Equity on Transition to IFRS

Case Study 2.1 An Irish Company Presenting Other Comprehensive Income for the First Time

Case Study 2.2 How a UK Company Decided on the Presentation of its Financial Statements on its Transition to IFRS

Case Study 3.1 An Illustration of Accounting Policy Changes on First-time Adoption of IFRS

Case Study 3.2 An Example of Applying IFRS 1 to Accounting Estimates

Case Study 3.3 An Illustration of the Reconciliations Required by IFRS 1 with One Comparative Period Presented

Case Study 3.4 An Illustration of the Reconciliations Required by IFRS 1 with Two Comparative Periods Presented

Case Study 3.5 An Example of the Presentation of an Equity Reconciliation at the Date of Transition to IFRS

Case Study 3.6 Deciding on the Presentation of the Reconciliations and Supporting Information – An Example from a Canadian Energy Company

Case Study 4.1 A Positive Impact of Transition – Improved Dialogue with Industry Peers

Case Study 4.2 A Positive Impact of Transition – Improved Controls Over Financial Reporting

Case Study 4.3 A Positive Impact of Transition – Improved Asset Management Control in the Public Sector

Case Study 4.4 The Use of External Project Management Specialists

Case Study 4.5 An External Consultant Advising on Canadian Transitions

Case Study 4.6 An External Auditor's Involvement in Irish Companies' Transitions

Case Study 4.7 Auditor Involvement in IFRS Transition for a Small Listed UK Company

Case Study 4.8 External Auditor Involvement in the IFRS Transition of a Large Canadian Company

Case Study 5.1 An Example of an Onerous Accounting Implication of IFRS Adoption – Holiday Pay Accrual in a Public Sector Entity

Case Study 5.2 The Problem of the Lack of Documentation in Identifying the Accounting Impacts of Transition

Case Study 5.3 Problems Where Previous GAAP Did Not Require Detailed Documentation to be Maintained

Case Study 5.4 The Issue of Lease Accounting for UK Companies Moving to IFRS

Case Study 5.5 Streamlining Accounting Policies on the Transition to IFRS in a Group

Case Study 5.6 Volatility Caused by the Move to IFRS in the Oil and Gas and Airline Industries

Case Study 5.7 An External Auditor's View on Assisting with Disclosure Notes

Case Study 6.1 IT Implications of IFRS Transition for a Technical Facilities Management Company

Case Study 6.2 An External Auditor's View of the Importance of Setting the Correct Tone at the Top

Case Study 6.3 Wider Business Implications of IFRS Transition for a Systems Manufacturer Operating in the Aerospace Industry

Case Study 7.1 IFRS Training Programme Implemented in a Large Utility Company

Case Study 7.2 Difficulties in Getting the IFRS Message Across – A Public Sector Example

Case Study 7.3 Internal Communication Methods in a Global Logistics and Postal Services Company

FOREWORD

When the IASB came into existence, only a handful of countries used International Accounting Standards (IASs). The 2002 announcement by the European Commission that the new International Financial Reporting Standards (IFRSs), which incorporated the inherited IASs, should be used in the consolidated accounts of listed European companies and the Australian decision a month later to adopt the standards gave the world, for the first time, a standard setter with global reach. Within the next few years major economies such as Brazil, South Korea and Canada switched to IFRSs, while Japan allowed the standards to be used by domestic listed companies. Now over 120 countries, including two thirds of the G20 economies, require or permit the use of IFRSs.

For many countries, especially for those where financial reporting was influenced by taxation considerations or where companies sought bank loans rather than equity finance, the change was dramatic. A new objective of transparency and a fair presentation of profit or loss and financial position replaced tax minimisation or competitive secrecy as the goals of financial reporting. For companies in other countries used to reporting to equity investors, change was still substantial. Some accounting policies that had been used for decades were now banned. Other policies, while continued, had different nuances. The transition to IFRS for all companies involved careful study both of the new standards and of the transitional reliefs allowed in the first year of adoption.

Countries and companies are continuing to transition to IFRSs. As they do so they can benefit from the experiences of those that have gone before them. This book provides an important bridge for those treading that path. It provides, for the first time, a comprehensive guide to making the transition to IFRSs by addressing both the technical and commercial dimensions of the challenge in the context of the experiences of those who have already made the transition in many different parts of the world.

While the book provides useful background to the IFRS world of financial reporting, its real value is in the practical advice it offers. In particular, it shows how to apply project management principles to the transition process and uses case studies to illustrate the application of the main themes being developed. We commend the book to those setting out on the transition journey and those who wish to understand the implications of a reporting entity moving to this new global financial reporting framework.

Warren McGregor, Former Member, IASB
Sir David Tweedie, Former Chairman, IASB
April 2014

PREFACE

This book provides a guide on planning and implementing a change in the financial reporting framework applied in the preparation of financial statements, and specifically the move to International Financial Reporting Standards (IFRSs). The book will be of use to a wide audience who wish to understand the implications of moving to follow IFRS, or a financial reporting framework that is substantially converged with, or based on, the principles of IFRS.

While a plethora of publications exist covering the topic of IFRS and their application, there is little guidance available on the transition process itself. The professional accounting firms, of course, provide advice on planning a transition to IFRS to their clients, and have some documentation available on their websites. This is the first book to provide a comprehensive guide on planning and implementing a transition that also covers the wider commercial implications and puts the transition into a project management context.

It is anticipated that as well as preparers of the financial statements who wish to plan their transition effectively and communicate the relevant facts to external parties in an understandable way, interested readers will include investors, analysts, lenders, employees, suppliers and customers who need to understand the implications of a reporting entity moving to IFRS. The implications also need to be understood by board members, non-executive directors and other members of management within an organisation planning its transition, and this book serves as a useful source of information to this user group.

The book is also useful for students both at undergraduate and postgraduate level who wish to understand more than just the financial reporting rules and their application. The discussions in the chapters presented in this book focus on the practical implications of IFRS-based financial reporting, a topic that is very important but often overlooked by those both teaching and learning about the subject.

The content should be accessible to readers with an interest in financial reporting armed with some prior knowledge of accounting principles, but it is not necessary to have studied accounting or work in a finance function to appreciate the main themes presented and discussed. There is only one chapter that is very technical, Chapter 3, which explores the specific requirements for accounting and disclosing financial information in the first IFRS financial statements. The other chapters do cover technical issues, but in a way that a reader who has some knowledge of accounting principles will be able to digest easily. This book is therefore neither a text that will teach basic accounting nor a detailed study of IFRS requirements and their interpretation, but sits in the middle, as a text that deals more with the practical points that need to be considered when preparing to adopt IFRS.

The comments made in this book represent the author's own opinions based on personal experience and the results of research interviews and questionnaires conducted with a range of individuals who have experience with IFRS transition in many countries.

Lisa Weaver

October 2013

DISCLAIMER

This book should not be used as a substitute for obtaining professional advice and input when planning a transition to IFRS. The content of this book is generic and while suggestions are made on planning matters, readers are encouraged to contact a professionally qualified IFRS specialist to obtain advice and support specific to their circumstances.

The brief summaries of IFRS requirements and principles should be read as outline information only, and for detailed information readers should refer to the IFRSs as promulgated by the IASB, which are copyrighted by the IFRS Foundation. This book does not contain advice on accounting treatments and does not consider the particular legal or other regulatory requirements of specific countries or jurisdictions.

ACKNOWLEDGEMENTS

I would like to thank Stephen Mullaly and his colleagues at John Wiley & Sons for their interest in commissioning this work and their support during the writing process.

I would like to thank Steve Collings of Leavitt Walmsley Associates Ltd for his enthusiasm for the concept of the book, for his technical input and for his encouragement in my completing it.

I would also like to thank the individuals who gave up their time for the interviews conducted when I was researching the book. Their insights were extremely useful and without the benefit of their knowledge and experience the book would have been much harder to write. The individuals that I would like to thank include:

Mark Surridge

Fergus Condon

Tommy Doherty

Melissa Woods

Paul Gee

Lindsey Byrne

Sharon Hall

Victoria Kuklina

Deirdre Taylor, Professor of Accounting, Ryerson University

I would also like to express my gratitude to the many individuals who completed a questionnaire and survey on IFRS transition matters, and in particular to David Edgerton, Chris Boland, Winfried Alves, Alan Bermingham, Robert Mladek and Andrew Devonald for their insights and comments.

Extracts from the financial statements of Centrica plc and BskyB plc are reproduced with the permission of those companies, for which I am grateful.

I am grateful to my colleagues and friends at Aston Business School for their support and I also extend my appreciation to Jane Mulligan of NUI Galway for her help with editorial matters and to Helen Milner for input on technical details.

Finally, this book would not have been possible without the encouragement and patience of my family and friends who have been extremely supportive of my efforts during the last year, and who have reminded me of the achievement of completing this book when at times I have felt encumbered by the scale of the project.

ABOUT THE AUTHOR

Lisa Weaver is a professionally qualified accountant and a Fellow of the Institute of Chartered Accountants in England and Wales. After working in audit for several years, she moved into training and education and has lectured on financial reporting, audit and governance topics in the UK and Ireland, the Caribbean, and in Hong Kong and China. She has worked on Continuing Professional Development programmes for many companies, including multinationals, and has been involved in training and consulting for a variety of organisations implementing IFRS for the first time.

Lisa is currently a Teaching Fellow in Accounting at Aston Business School, part of Aston University in the UK, and she is also involved with developing educational materials on IFRS and related subjects. Lisa works with training providers to deliver courses to non-accountants as well as senior qualified professionals, and she contributes to the work of several professional bodies in the field of financial reporting.

INTRODUCTION

SCOPE AND KEY THEMES OF THE BOOK

The transition to International Financial Reporting Standards (IFRS) has been an increasingly significant feature of financial reporting across the globe in the last few years. At the time of writing, more than 120 countries and jurisdictions require or permit the use of IFRS, or financial reporting standards substantially based on, or converged with, IFRS, by some or all of their reporting entities. The International Accounting Standards Board (IASB), the body charged with setting IFRSs, is confident that the use of IFRS, or national accounting standards that are based on IFRS, will grow in the next decade. Hans Hoogervorst, the IASB Chair, stated recently that there is almost universal support for IFRS as the single set of global accounting standards (Hoogervorst, 2013), and organisations including the World Bank, the G20 and the International Organization of Securities Commissions (IOSCO) support the concept of harmonisation of corporate reporting.

Thousands of companies, public sector entities and other organisations have gone through a transition to IFRS-based reporting in the last decade, and many more thousands will do so in the next few years. The huge advantage that relatively late adopters of IFRS-based reporting have is that they can learn from the experience of those that have already gone through the transition. It is fair to say that for reporting entities that were early adopters, there was a significant learning curve for all involved, and one of the aims of this book is to capture some of those experiences of early adopters and explain how to capitalise on them in terms of developing an appropriate transition strategy.

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