International Accounting Standards - Implementation for the UK Small and Medium Enterprises - Term Paper Example

The implementation of international accounting standards (IAS's) has been an issue of much debate since the 1960's, but has come to the fore in recent years, after the 2002 decision of the EU to make the adoption of IAS's compulsory for listed companies from the 1st of January 2005, when compiling consolidated financial statements. The Accounting standards board (ASB), has already declared its intention of replacing UK GAAP with IAS's and making them compulsory for all UK companies no matter what size, thus the benefits and costs of these standards are of high importance to the UK. The decision of the EU has been widely acclaimed as being beneficial to the UK, the ICAEW stated that: "As markets converge and geographical borders no longer present the same trade barriers increasingly there is a need for globally accepted accounting standards. Business needs them, investors are demanding them and accountants are under an obligation to ensure delivery." (http://www.icaew.co.uk/pressoffice/index.cfmAUB=TB2I_25468,MNXI_25468) Here the need for their implementation in the view of the largest professional body of accountants in the UK is expressed as being primarily for the progression of trade, as recent technological advancements in technology has resulted in a break down of previous trade barriers and we are now expected to compete in a world market. Groom (2001), saw the importance of international standards as being a key part of his 5 legged stool of trust, ensuring that investors in capital markets retain confidence and invest. This confidence has become core to the survival of these markets, especially in the light of recent high profile collapses such as Enron in the US and One.Tel in Australia. Since the 2002 decision of the EU the interest in the implications of IAS's and their implementation, along with their costs and benefits, has risen. The core of this debate and the ultimate benefit of International standards to the UK as a whole will be discussed in the remainder of this text with specific focus upon the benefits and costs to both quoted and non-quoted companies. Currently there is significant concern in the UK that there is a lack of awareness relating to these standards and how to implement them, especially with Small and medium unlisted enterprises. It is this lack of awareness which is likely to cause considerable increases to costs required to implement the standards when the ASB does converge, as this is no small task and requires a planned strategy. It is hard to actually assess the cost which has already been incurred by listed companies since the 1st of January implementation date, as a full year of trading has not quite been completed and therefore there has been limited analysis as yet, therefore the bulk of this analysis has to be based upon theories and analyses undertaken before implementation in the EU and is therefore, to some extent theoretical. The costs of implementing these standards have been widely discussed and most of these will affect both quoted and non-quoted companies, however they will differ in their extent. The bulk of these costs will be incurred in the education of the users of these financial statements; any stakeholder of the business for which the financial statements are being prepared, will be effected to some extent, and will need to be educated in order for the company to survive the change. Stakeholders are extremely influential and include banks and lenders, auditors and shareholders, a business needs to educate these people on the change and its impact upon their financial statements, and in this education other costs will be incurred. Gerhardy points out that banks and lenders will require reclassification of debt and equity, leading to dividend payout issues, and the reclassification of debts will lead to renegotiation costs with lenders, this will lead to strategy issues and a need for good communication of the effects IFRS will have on business with the shareholders, all of which will result in significant cost to all companies. All of this will have a huge impact upon the accounting profession, creating considerable cost, especially in the training of staff, as there are relatively few accountants with IAS experience, and thus not only do they come at a high cost, but this has also created a need for many firms to employ external experts to fill the gap. Many of the large non- quoted companies have already employed those with existing knowledge, leaving the non-quoted companies to find external experts and support, which Gerhardy states will need to include actuaries and valuation experts to report on: "pension valuation, testing impairment of goodwill, deferred taxation and the classification of financial instruments." (http://www.ssn.flinders.edu.au/commerce/researchpapers/05-4.pdf, pg 15) It does not end here, there will be need to train staff on the new standards, and their potential costs and benefits, in order to bring these into the business strategy of the company, and to avoid possible legislative action in the future. All of this will take a lot of company time and resources, and ultimately hit unlisted companies, with a smaller resource base very hard. Although Gerhardy was looking at the impact upon Australia when he wrote these assessments, the costs which he discusses are applicable worldwide, and are added to by the fact, that although countries such as China and Russia have signed up to these standards, the US and Canada are yet to join them. Thus any business operating in these countries still has to compile two sets of financial statements in order to satisfy entry into the US stock exchange. This is a cost uniquely applicable to quoted companies, however it is a large one which is not to be overlooked and does not help when assessing the benefits of international harmonization, many of which cannot be achieved without world wide support and compliance with the standards. The benefits have been mainly assessed as being increased comparability across the world, resulting in improved access to financial capital and more efficient capital markets, by improving the quality of, and creating one set of guidelines for, the completion of financial statements. It is aimed at reducing costs for multinational enterprises by replacing the need for a new set of financial statements for each market the company is operating in, and increasing comparability, not only with other companies operating in the same market, but between branches of their company. To compare one overseas subsidiary with another will become easy, and thus decrease costs incurred to state each subsidiaries performance in the same financial terms and allow assessments of control. It is said that the main benefactor of these standards will be governments involved, mainly due to the decreased costs associated with maintaining national standard setting boards, this may not be so beneficial in the UK as there is currently no talk of reducing the role played by the ASB. The benefit to the accounting profession will occur in the increased transferability of their staff, allowing simpler completion of consolidated accounts for multinationals, and making assessments of subsidiary performance and takeover bids easier. However all of these benefits can be said to be limited, the benefits associated with comparability will not be realized unless all countries participate with compliance, and the same can be said for the benefits associated with this such as comparison between subsidiaries and takeover assessments. The accounting profession will be able to develop services which are available in multiple markets, which could be seen as a benefit to them, however ultimately services and products which are currently differentiated from competitors by market e.g. audits, will become standard to all companies, and thus the only way they will be able to differentiate will become on price. This will increase competition on the basis of price and result in reduced costs to the consumers, both quoted and non- quoted companies, therefore not benefiting the profession but benefiting UK business outside of the accounting profession. It can be seen that the costs appear to outweigh the benefits especially when looking at non quoted companies who will ultimately hardly benefit at all, even if the standards were adopted worldwide. The main benefit to them would be the increased competition in the accountancy industry, resulting in reduced accountancy costs to them, however this may also cause smaller sole trader accountancy firms to go out of business and eventually lead to a monopoly of larger firms and thus create higher costs again. All in all there appears to be a high cost for these companies, which with the high cost in time and resource may result in many going bust. The quoted companies are currently benefiting relatively little due to the high cost of implementation and strategy, this is only creating small benefits which are yet to be realized in comparison within the EU. The UK could benefit from a worldwide implementation; however the current situation has only created limited benefits within the EU. It seems that many companies will not see this as a beneficial factor when faced with the high cost associated with their implementation, and so far this has purely been limited to consolidated accounts and not primary accounts. An accurate analysis of the costs and benefits throughout the UK and the ultimate benefit to the Uk as a whole is as yet hard to assess due to the infancy of these standards, in years to come the steps taken by the EU may be praised as revolutionary and have created a more stable economic outlook for the Uk, but that has yet to be seen. Total word count including quotes = 1522 References (1) http://www.icaew.co.uk/pressoffice/index.cfmAUB=TB2I_25468,MNXI_25468 Global Markets and the Need for International Accounting Standards A Policy Briefing from the Institute of Chartered Accountants (2) http://www.ssn.flinders.edu.au/commerce/researchpapers/05-4.pdf Gerhardy, Peter G. "A Review of the Costs and Benefits of Australian Adoption of IFRS" Bibliography BOOKS: 1. Alexander, D., A. Britton and A. Jorissen, (2005), INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS, (2nd edition), Thomson 2. Barry J. Epstein and Abbas Ali Mirza, Wiley IAS 2003, INTERPRETATION AND APPLICATION OF INTERNATIONAL ACCOUNTING STANDARDS 3. Berry Elliott and Jamie Elliott, FINANCIAL ACCOUNTING AND REPORTING (9th edition), Prentice Hall 4. Ernst & Young, INTERNATIONAL GAAP 2005, Butterworths DOCUMENTS: 1. "IFRS IN YOUR POCKET" by Deloitte ARTICLES: 1. L.Fisher (2005) "IFRS suprises persist" 2.B.Shearer (2005) "In support of a GAAP gap" INTERNET: (1) http://www.icaew.co.uk/pressoffice/index.cfmAUB=TB2I_57399,MNXI_57399 29 september 2003, "Unlisted companies unaware of how international accounting standards will effect them" (2) http://www.icaew.co.uk/index.cfmAUB=TB2I_25593,MNXI_27030 (3) http://www.icaew.co.uk/index.cfmAUB=TB2I_25594|MNXI_25594 Knowledge Guide to International Accounting Standards (4) http://www.icaew.co.uk/pressoffice/index.cfmAUB=TB2I_25468,MNXI_25468 Global Markets and the Need for International Accounting Standards A Policy Briefing from the Institute of Chartered Accountants (5) http://www.icaew.co.uk/index.cfmAUB=TB2I_26060 Groom, 2001, "International standards speech" (6) http://www.ssn.flinders.edu.au/commerce/researchpapers/05-4.pdf Gerhardy, Peter G. "A Review of the Costs and Benefits of Australian Adoption of IFRS" (7) http://www.pwc.com/images/tech/ifrs.pdf (8) http://business.timesonline.co.uk/article/0,,16649-1245750,00.html Accountancy, 2005; 136 (1345) (9) http://www.kpmg.co.uk/pubs/ias_comp_ukusgaap.pdf Read More