Companies at risk of non-compliance with reporting standards

For many companies, both here in South Africa and in Europe, the implementation of International Financial Reporting Standards (IFRS) in 2005 was a testing and time-consuming process. Partly as a result of this, the International Accounting Standards Board (IASB) issued a moratorium on new standards or interpretations becoming effective before 2009.

The IASB’s stable period for the application of new guidance is now over. Consequently, companies face a wave of new or revised standards and interpretations becoming effective at the same time; the risk of non-compliance with accounting requirements is at its highest since 2005.

These changes affect many different areas of accounting, including the presentation of financial statements, M&A transactions, segment reporting, share-based payment plans and customer loyalty programmes. The changes represent over 500 pages of new or revised guidance, including changes to about 30 standards; they consist of a number of revisions to basic principles but also many small changes. The majority of amendments and revisions issued became effective on 1 January 2009, with other significant changes being effective from 1 July 2009 and beyond; some require retrospective application, others are prospective changes.

Companies need to assess the impact of the new requirements now, both on their financial reporting and associated business processes. Failure to assess and plan for these changes could lead to problems when it comes to year end reporting, increasing the pressure on already-tight reporting deadlines and the potential for non-compliance with standards.

Rather than this being a once-off impact, the pace of change in IFRS is actually increasing. As a result of the global financial crisis, the IASB has come under increased pressure to simplify and clarify reporting requirements. In particular, the IASB has accelerated its projects on consolidation and financial instruments, the outcome of which could have significant implications for all entities reporting under both IFRS and SA statements.

Companies should be encouraged to input into the development of IFRS. The IASB welcomes comments on draft standards and follows due process to ensure that time is allowed to receive and consider responses to proposed changes. By responding to requests for input, companies and industry groups have the opportunity to influence the development of standards.

With 16 more new, revised or amended standards expected to be issued by the IASB before the end of next year, many companies will look to their auditors or other accounting firms for assistance in understanding the resulting changes. However, the responsibility for the information disclosed and format of presentation will always rest with the company’s directors. In fact, the recently released Draft Code of Governance Principles for South Africa (King III) confirms that the board has a duty to identify the standards applicable to the company and should ensure processes are in place to ensure that it is timeously informed of any changes to those standards.

With so many changes in the pipeline, and an increasing onus on individual director responsibility, the question of compliance with financial reporting standards is not something that should be left to chance.