IFRS moratorium does not mean companies can rest on their laurels
The adoption of International Financial Reporting Standards (IFRS) in 2005 by listed companies in South Africa and throughout the European Union, and its incorporation into the national accounting standards of other countries such as Australia, was a major step forward in the comparability of financial reporting.
Partly because companies had to implement so many changes to comply with IFRS, and because there are instances of different interpretations regarding their application, the International Accounting Standards Board (IASB) announced in July 2006 a moratorium on the effective dates of new IFRS and major amendments to existing standards.
According to Sarah Ford, National Accounting Partner at Ernst & Young, while the board will still issue new standards, such as IFRS 8 Operating Segments, these do not have to be applied until 1 January 2009- giving companies a valuable chance to catch up and fully embed IFRS in their financial reporting systems.
"While companies listed on the JSE had to have implemented IFRS last year, this does not mean that such companies can now rest on their laurels just because they have now reported in the new format for the first time," she says.
Ford says that the moratorium provides companies with at least two opportunities. The first is that it is vital that companies embed IFRS principles into their financial reporting systems in order to ensure that these are producing the required information, particularly since there will be further changes that will become effective in 2009. She says, "Due to the number of changes and a certain amount of resistance from some South African listed companies to fully embrace the new standards in 2005 some companies might not have embedded IFRS fully into their accounting systems."
Ford urges all listed companies- as well as the unlisted ones that have ambitions to grow in the future to ensure that their IT systems are capable of producing the information needed for IFRS reporting, since, she says, the standards are here to stay. "The moratorium offers businesses the perfect opportunity to change both their systems and the attitude of employees to the new systems, and resistance to change must be managed closely if the application of these standards is to be successful."
Another reason to upgrade IT systems she says, is that companies will have to adopt IFRS 7, Financial Instruments: Disclosures, for accounting periods beginning on or after 1 January 2007 because this new standard is not part of the 2009 moratorium. IFRS 7 requires more disclosures than its predecessor IAS 32, many of which are not derived straight from the general ledger or trial balance. Ford says that practically it will not be feasible for companies to do "work-arounds" in order to meet the IFRS 7 disclosure requirements on an on-going basis.
In addition there is an opportunity for companies to use the moratorium's period of stability to improve the quality of their financial statements. Ford says, one of the great benefits of so many companies globally reporting in IFRS is that there should be greater consistency in accounting recognition and measurement and it should enable easier comparison of the financial statements of, say a South African retailer with an Australian retailer. However IFRS best practice has yet to sufficiently evolve internationally such that there is consistency, meaning an acceptable interpretation to the same fact pattern, irrespective of where the company is located. Ford recommends that during the moratorium, preparers of financial statements compare their accounting policies to other companies in their industry elsewhere in the world to determine how consistent they are. Where they find differences they should discuss these with their auditors and consider raising these application issues with the IASBs interpretation body- the International Financial Reporting Interpretations Committee (IFRIC).
She adds: "As preparers of financial statements companies should be looking to continually improve their financial statement disclosures. While there may be a moratorium, this does not mean that they should allow their financial statements to remain static". While the quality of financial statements of South African listed companies has improved dramatically over the last seven years Ford says that the number of listed companies globally now preparing financial statements in IFRS gives an opportunity for further improvement by comparing them to their global counterparts.
It is not just companies reporting in IFRS that are affected Ford points out, those reporting in terms of South African Statements of Generally Accepted Accounting Practice (SA GAAP) are in the same position because of the alignment of SA GAAP with IFRS.
"It is particularly crucial that companies use the extra time granted by the moratorium, because the requirements of IFRS are that much more onerous and complex than before. The ultimate aim is to achieve the globally consistent application of IFRS and to overcome the different interpretations that currently exist. Using the time granted by the moratorium wisely will ensure globally consistent application of IFRS by 2009 and improve the quality of financial reporting," she concludes.
