• What is IFRS for SMEs?  
• How will my company be impacted?
• How can your voice be heard on these developments?

Proposals from the UK Accounting Standards Board (ASB) signal the end of the road for UK GAAP. A consultation paper, issued in August 2009, proposes to base the future of UK accounting on International Financial Reporting Standards (IFRS).

The ASB is proposing that accounting in the UK should take the form of a three-tier reporting structure:

Companies currently reporting under UK GAAP would need to adopt either full IFRS or IFRS for SMEs in years from 1 January 2012. This means that a company with a December year end will need an opening balance sheet under IFRS at 1 January 2011.

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What is IFRS for SMEs?

IFRS for SMEs is a new standard published in July 2009 by the International Accounting Standards Board (IASB) for non-publicly accountable companies (‘small and medium-sized’ does not follow the size of the company). Publicly accountable companies (such as deposit-taking institutions) will need to apply EU-adopted IFRS. For public benefit entities (not-for-profit entities), the ASB is proposing to replace UK GAAP reporting with a modified IFRS for SMEs.

This new standard is a simplified version of EU-adopted IFRS developed with the intention of better meeting the needs of private and smaller companies. IFRS for SMEs is a simplified IFRS, but it has some different measurement requirements, for example:

• Goodwill and intangible assets are amortised over 10 years where an entity is unable to make a reliable estimate of the useful life.
• There is an option to carry investments in associates and joint ventures at cost.

Disclosure requirements are also less onerous than under IFRS.

The IASB has indicated that there will be no amendments to the standard over the next two years. Therefore, we suggest that companies start to plan for the impact of the change now.

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How will my company be impacted?

The impact of a move from UK GAAP to full IFRS or IFRS for SMEs will depend on a number of factors, such as the size and complexity of your company or organisation. But there are three key areas of impact to consider and plan for now:

• Measurement differences: The adoption of a new set of standards may result in measurement differences in your financial statements that could impact:
  • Cash flow: cash taxes payable may change
  • Distributable reserves: these may be reduced
  • Banking covenants: the measurement differences and potential changes in the balance sheet presentation may lead to a breach of bank covenants and the need to speak to your bank early to renegotiate existing arrangements.

• Choice of GAAP: There are advantages and disadvantages for different companies in using the new standard, as opposed to full IFRS, and these need to be properly considered before embarking on any conversion.

• Volume of work: For larger businesses with complex structures or many UK subsidiaries, or for companies adopting IFRS for the first time, there will be a substantial amount of work to convert the accounting records and supporting systems, as well as to prepare the financial statements.

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How can your voice be heard on these developments?

The ASB’s consultation paper ‘Policy proposal: the future of UK GAAP’ is open for comment until 1 February 2010. To make your voice heard, you can respond to the ASB.

Contact us for an initial discussion or to learn more about how we can help your organisation understand the implications of a conversion to IFRS.

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