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It is now two years since UK quoted companies began reporting the affects of the adoption of IFRS. Now comes the turn of AIM companies and they can learn the lessons of those that have gone before them. AIM companies are required to comply with IFRS for periods commencing on or after 1 January 2007 and are encouraged to adopt early. From our experience it is easy for companies to underestimate the complexity of the new requirements and the effect they will have.
It is essential that finance directors understand the commercial impact of IFRS on their business and are able to communicate this in a timely, unambiguous manner to analysts and investors. It is also important that they identify the key areas and address these as soon as possible.
AIM companies should seek advice from their advisors however under ethical rules auditors are prohibited from providing accounting services to their audit clients. haysmacintyre has the necessary experience and expertise to assist you through the transition to IFRS so please contact us.
Commercially, there are four main areas that companies should look at immediately: mergers & acquisition activity, share-based payments, deferred tax and segmental reporting.
Mergers & acquisitions
Companies have seen mergers and acquisitions as being one of the key areas affected. Many listed companies achieve their growth through acquisition strategies and therefore it is no surprise that this is one of the most important areas to consider. IFRS 3 “Business Combinations” can be a complicated and difficult standard to implement. IFRS 3 requires companies to value the intangible assets acquired through business combinations separately from goodwill. – please see our IFRS 3 fact sheet for more information.
Share-based payments
Over 80 per cent of AIM companies reward management through share-based payments. Therefore IFRS 2 “Share-based payment” may well have a significant and unpredictable impact on companies’ profits. IFRS 2 requires companies to recognise the fair value of share options as an expense in their profit and loss account. For some companies the impact can be significant and again this can be a complicated and difficult standard to implement – please see our IFRS 2 fact sheet for more information.
Segmental reporting
IFRS can also have a material effect on segmental reporting. IAS 14 requires detailed disclosure of turnover, profits and assets split between both business and geographical segments. There are no exemptions and it is no longer possibly to omit the disclosure because it would be seriously prejudicial to the entity’s interests. Some companies have therefore felt a significant level of concern with regards to the disclosure of potentially commercially sensitive information.
Deferred tax
The IFRS standard on tax can lead to potentially large deferred tax liabilities, or assets, that would not be required under present UK GAAP and is a complex area to deal with. IAS 12 has some notable differences from FRS 19 and in conjunction with IFRS 3 results in a significantly different approach. For example, companies are required to recognise a deferred tax liability on the intangible assets recognised under IFRS 3.
The effects
A recent survey by Liverpool University showed that the average overall impact of IFRS adoption was to inflate post-tax profits by 39%. The biggest effects are due to a small number of standards. The largest is IFRS 3 “Business Combinations”, due to the treatment of Goodwill. Under IFRS goodwill is not amortised but is tested for impairment on an annual basis.
The other significant standards were IAS 40 “Investment properties” and IAS 12 “Income taxes”. IAS 40 allows gains to be recognised in the profit and loss account instead of through reserves and IAS 12 requires the recognition of deferred tax on such gains.
Companies have shown an average reduction in net assets of 23%, however this reduction is mainly due to the adoption of IAS 19 by companies that had yet to adopt FRS 17. Excluding IAS 19 the only standards that had a material effect on net assets were again IFRS 3 and IAS 12.
To summarise, the impact to financial statements can be significant, however it is also important to consider the impact on the workload of companies’ finance teams. Some of the new requirements are complex and time consuming to adopt and finance directors should not underestimate the amount of work required. Please contact us if you would like any further information.
For more information
Please contact Anna Garvey at haysmacintyre.
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