Issues and Processes Involved in Listing of an Organization in the UK Stock Exchange - Coursework Example

International Corporate Reporting Name Institution Date MEMO To: The Board of Transform From: xxxxxxxxxxxxxxxxxxx Date: 29 Feb 2012 RE: The issues and processes involved in listing of an organization in UK Stock Exchange Following the need to expand Transform Group to a public owned company, it is essential to list the company in UK Stock exchange so as to further the expansion plans. Even though the group is currently ensuring that its strong financial statements are in line with UK Generally Accepted Accounting Principles (GAAP), there are a number of issues and processes that Transform Group needs to fulfill as part of the listing processes. The group, therefore, as part of the listing process should adopt International Finance Reporting Standards (IFRS) and comply with its requirements. Adoption of IFRS has varying impacts on different organizations. Therefore, as part of the issues and processes involved in the listing process, it is essential for transform’s board to know the benefits of implementing IFRS as compared to GAAP application, the processes the organization will have to introduce in its accounting systems so as to allow the transition, the general principles of transition’s process to IFRS as required by IFRS 1, areas of accounting that the organization will realize significant difference between the required treatment under UK rules and those that will be needed after adopting IFRS rules. The board is also expected to know the comparative impact that the adoption of IFRS will have on the company’s financial statements. a) The benefits of adopting IFRS as compared to the use of local GAAP The use of IFRS for reporting purposes as compared to the adaptation of local GAAP has several benefits to an organization. The adoption of IFRS does always provide an enterprise with a better access to global capital, funding and investment opportunities (KPMG, 2007). As compared to organizations that follows local GAAP principles, many investors and financiers, both local and international, are always willing to invest in organizations that comply with IFRS. Roberts, Weetman and Gordon, (2008), highlights that, the acceptance of IFRS acts as a basis of harmonization financial statements. January 2005 created a significant stage in the initiative towards financial harmonization through the adoption of financial reporting standards (IFRS). In this particular year listed companies that are member states of the EU were obligated to apply IFRS in their financial statements, in place of the standards applied in their countries (Roberts, Weetman and Gordon, 2008).Therefore by adopting IFRS, Transform Group will be able to attract and access more capital, funds and investment opportunities around the world and also the EU. The adoption of IFRS is also more cost effective for accounting profession since it does not require keeping of separate and isolated set of accounting standards, as it is the case when using UK GAAP. By adopting IFRS an organization can develop financial outcomes that are more clear and consistent, thus allowing the interested groups to use the outcomes internationally. However, in the short run, the adoption normally implies the use of critical judgment and provision of many disclosures. The standards in IFRS are usually comprehensive and principles-based. These standards do always have little bright lines and their adoption needs greater utilization of professional judgment than UK GAAP. International Finance Reporting Standards (IFRS) have several accounting policy options than UK GAAP. Therefore, the adoption of IFRS by Transform Group will be of beneficial, since by concentrating on its various accounting policy options, the Group will be able to produce valuable results in the long run (KPMG 2007). Different from UK GAAP, the adoption of IFRS is more likely to display promising impact on Transform Groups’ financial measures. The change to international financial reporting standards will not seriously affect the profitability of the Group. The adoption of international finance reporting standards will enable Transform Group to portray higher values on several profitability measures, such as net profit margin (NPM), operating profit margin (OPM) and earnings per share (EPS). Different from UK GAAP, the high profits that the Group will experience under IFRS will enable it to provide shareholders with huge dividends. The fair value orientation that Transform Group will experience when using IFRSs can result to higher market to book value ratio (MVBV). Changing of the organization accounts from UK GAAP-based to IFRS-based together with the global dimension and the utilization of IFRSs as a generally accepted financial reporting language will reinforce the growth prospects of the organization. Adoption of IFRSs will make Transform Group to portray very high leverage measures, which are long-term liabilities to capital utilized, total liabilities to funds of shareholders and interest cover. The enhanced quality of international financial reporting will improve the credibility of financial statements of an organization. It will also provides lenders with a lot of confidence and information regarding organization’s ability to timely attain financial obligation, thus leading to better terms of borrowing (Iatridis, 2010). Adoption of IFRSs will minimize information asymmetry and consequently eases communication among managers, lenders, shareholders and other interested groups, thus resulting into reduced agency costs. Lower information asymmetry will also result to lower equity’s costs and debt financing. The benefits of adopting IFRSs incorporate higher comparability, reduced transaction costs and enhanced global investment. Adoption of IFRSs will also assist Transform Group in developing knowledgeable financial decisions and in forecasting the group’s future financial progress. The use of IFRSs will enable Transform Group to be more transparent and able to display accounting of high quality. Therefore, adoptions of IFRSs do always minimize manipulation of earnings and increase in stock market effectiveness. The adoption of IFRS also positively affects the Group’s stock returns and financial performance measures that are stock related (Alfredson, 2009). IFRSs adoption increases transparency, comparability and disclosure. The introduction of IFRSs will reinforce Transform Group’s stock market liquidity. This therefore can result to lower capital and transaction costs, enhanced market value and improved reputation. The improved disclosure needs and quality of financial reporting that arise from IFRSs means that the implementation of IFRSs will provide a positive signal to organizations as information asymmetry and costs of agency tend to reduce. It therefore seems that organization that adopts IFRSs will display lower possibility for earnings management. Reduced subjectivity will result to less opportunity to affect reported bonuses and earnings. Implementation of IFRSs in Countries, such as UK, that has powerful investor protection systems tend to reduce the costs of implementation due to lower level of earnings management. Managers do always find it hard to forge the reported accounting numbers (Melville, 2009). b) The general principles of process of transition to IFRS as required by IFRS 1 In order to enjoy the above stated benefits, Transform Group needs to introduce a number of processes in its accounting system so as to ease its transition from local GAAP to IFRS. The Group needs to significantly change the format of financial statements and the disclosures needed. This move is essential since the implementation of IFRS will change the acknowledgement criteria for many assets and liabilities (Thornton, 2010). The organization is also expected to develop an Action Plan for implementation and establishment of an IFRS implementation team. Development of implementation action plan is essential since it will assist in overseeing the transition process. Establishment of IFRS implementation team will assist the organization in employing efficient workforce that will successfully undertake the transition process. The Deloitte Guide to IFRS 1 (2009) proposes that the general principle as required by IFRS 1 needs to be applied retrospectively. This means that the application of IFRS is effective at the date of the company’s first IFRS financial statement. In practice this basically implies that when a company is adopting the IFRS for the period ending 31 December 2011, the company has to utilize every IFRS at a retrospective date to the 2012 and 2011 reporting periods. According to Deloitte Guide to IFRS (2009), this general principle therefore results to a complete application of IFRS, as though the company had an entity accounting framework since its inception. Transform Group needs to change its taxation system so as to ease the transition from local GAAP to IFRS. Changing from UK GAAP to IFRS will call for changes in cash tax, which is changing the timing and quantity of cash tax payable. The organization is also expected to change its tax accounting calculations and processes so as to display the variations in differed tax calculations under IFRS as compared to the prevailing UK GAAP. As part of introduce new process in accounting system of Transform Group, Transfer pricing such as advanced pricing agreements should be up dated so as to ease the transition process. During the transition process there are a number of general principles as required by IFRS1that Transform Group needs to follow. IFRS1, which is first-time adoption of international financial reporting standards do always set out principles that an organization needs to adhere with when adopting IFRSs for the first time. When changing from the prevailing local GAAP to IFRSs at the period of first-time adoption, an organization needs to derecognize some local GAAP assets and liabilities that previously existed (Thornton, 2010). An organization needs to do away with previous GAAP liabilities and assets from opening balance sheet if and only if the assets and liabilities do not qualify to be recognized under IFRS, for instance, IAS 38 does not allow acknowledgement of expenditure on the following items as intangible asset: Training Advertising and promotion Research Start-up, pre-opening and pre-operating costs Moving and relocation As a general principle when adopting IFRSs for the first time, an organization is required to eliminate these items in the opening IFRS balance sheet if only it has recognized them under local GAAP as assets. In case, under local GAAP, an organization had permitted accumulation of liabilities for general reserves, future operating losses and restructurings that are not in line with the conditions for acknowledgement, they are supposed to be eliminated in the IFRS opening balance sheet. If an organization’s previous GAAP had permitted acknowledgment of contingent assets as described under IAS 37.10, they are also supposed to be eliminated in the IFRS opening balance sheet. Another general principle as required by IFRS1 when adopting IFRSs for the first time relates to acknowledgment of some liabilities and assets that are not recognized in the local GAAP. An organization needs to acknowledge all liabilities and assets that are supposed to be recognized by IFRS even if the items were not acknowledged when using local GAAP. For instance, IAS 39 demands acknowledgement of every derivative financial liabilities and assets, incorporating embedded derivatives. These, in most cases, are usually avoided under several local GAAPs. Under IAS 19, an employer is expected to acknowledge a liability when a worker has given service so as to be paid the benefits in future (Thornton, 2010). The benefits are not simply post-employment benefits, but are also obligations for life and medical insurance, termination benefits, vacations and deferred compensation. IAS 37 demands acknowledgement of provisions as liabilities. Deferred tax liabilities and assets need also to be acknowledged in conformity with IAS12. As a general principle when adopting IFRS for the first time an organization need to undertake reclassification. It needs to reclassify the prevailing GAAP opening balance sheet items into the required IFRS classification. For instance, IAS 10 does not allow categorization of dividends proposed or declared after the balance sheet date as liability. In case this kind of liability was acknowledged under the prevailing GAAP, it should be reversed in the opening balance sheet of IFRS. If under the previous GAAP, treasury stock was permitted to be reported as an asset, it will be expected to be reclassified as equity’s component under IFRS (Mirza & Holt, 2010). Adjustments are necessary when moving from the prevailing GAAP to IFRSs at the period of first time adoption. These adjustments need to be acknowledged directly within retained earnings. When preparing estimates for IFRS at the period of transition to IFRSs retrospectively, an organization needs to utilize the inputs and allegations that had been applied to determine the prevailing GAAP estimates as per the period. An organization should not be allowed to utilize information that avail itself only after the prevailing GAAP estimates were created except to rectify an error. It is a general principle for many organizations to add new areas of disclosure that were not requirements when using the local GAAP. The disclosures that were needed when using local GAAP should also be widened. The areas of disclosure that may be required to be added include segment information, discontinuing operations, earnings per share, fair values of every financial tools and contingencies. In case a first-time implementer needs to disclose chosen financial information for dates before the period of opening IFRS balance sheet, it is not expected to comply with IFRS information. Conforming therefore to IFRS financial information is optional. In case an organization choose to present the financial information that was previously selected by basing on the prevailing GAAP rather than IFRS, it needs to quickly label the information as not conforming to IFRS. It also needs to disclose the nature of essential changes that can make the information to conform to IFRS (Mirza & Holt, 2010). According to IFRS1requirement, disclosures need to describe how the move from the prevailing local GAAP to IFRS affects organization’s reported financial position, financial performance and cash flows. This incorporate reconciliation, both at the opening of IFRS balance sheet and end of previous yearly period reported under GAAP, of reported equity under the prevailing GAAP to cash under IFRS, reconciliations of all comprehensive income for the previous yearly period reported under the prevailing GAAP to overall comprehensive income under IFRSs for similar period and proper description if an organization has decided to employ all the precise acknowledgement and measurement exemptions allowed under IFRS1. c) Areas of accounting that will realize significant differences and the comparative effects that it will have on financial statements. There are three major areas of accounting that Transform Group will realize significant difference between the required treatment under UK rules and those needed after adopting IFRS rules. These three major areas include financial, management and cost accounting. Financial accounting concerns with preparation of financial reports that informs investors, tax authorities and creditors about the company’s performance. This area of accounting will experience a significance difference after adopting IFRS rules since Transform Group will be required to do away with local way of preparing financial reports and adopt international way of reporting as stated under IFRSs. The need to do away with local standards and adopt international standards is simply due to the fact that the Group is planning to expand its operations and attract all the interested groups around the world. Therefore since financial accounting concerns with provision of information to external parties, it will have to change after adopting IFRSs, thus enabling Transform Group to prepare and deliver financial reports that meets international standards. The financial statements therefore will have to significantly change so as to meet international standards (Nobes & parker, 2009). Management accounting concerns with preparation of management accounts and reports that offers precise and periodic statistical and financial information that managers need to utilize so as to make their daily and short-term decisions. Different from financial accounting, management accounting provides weekly or monthly reports to company’s internal audiences. The audiences include department managers and chief executive officers. The reports, provided under management accounting, will experience a significant difference after adopting IFRS since the company will have to significantly change how they prepare cash flows, sales revenue, outstanding debts, accounts receivable and accounts payable (Nobes & parker, 2009). Transform Group will have to do away with the required UK rules of preparing management accounting and adopt the IFRS rules so as to enter into UK stock exchange and expand its growth. Therefore after adopting the IFRS the financial statements will have to change to a more detailed one. Cost accounting refers to process of determining and collecting product or activity’s cost. It is accounting process for incurrence and control cost. Cost accounting entails analysis, interpretation and categorization of costs. It can be looked at as accounting system that gives information pertaining ascertainment and management of products’ costs. Transform Group will realize significant difference on its cost accounting after adopting IFRSs since this area of accounting is normally used in measuring the organization’s operating efficiency. This area of accounting normally aims at giving cost data, statement and reports so as to facilitate managerial decision making. The adoption of IFRS will ensure that all costs incurred by the firm are included in the financial statements (Nobes & parker, 2009). In conclusion, it is evident from the discussion that adoption of IFRSs is beneficial to the company as compared to local GAAP. It is therefore very essential for Transform Group to adopt these international standards so as to expand its business and competitively engage in UK stock exchange. It is also evident from the discussion that there are several principles as required by IFRS1 that an organization needs to follow when transiting to IFRS. Transform group is expected to change its financial statements and taxation during the transition. It also needs to undertake reclassification. Three major areas of accounting that Transform Group will realize significant difference between the required treatment under UK rules and those needed after adopting IFRS rules are financial, management and cost accounting. References Deloitte Guide to IFRS 1, 2009, First –time Adoption of International Financial Reporting Standards. Guide for IFRS 1. Retrieved From< www.iasplus.com> KPMG, 2007, Managing the Transition to IFRS: The Journey to 2011. Iatridis G, 2010, IFRS Adoption and Financial Statement Effects: The UK Case. International Research Journal of Finance and Economics. EuroJournals Publishing, Inc. Thornton G, 2012, How will moving from UK GAAP to the IFRS for SMEs from 2012 impact on my company’s accounts? Retrieved from < www.grant-thornton.co.uk > 25th Feb. 2012. Roberts C, & Gordon P, 2008, International Corporate Reporting, (4th Edition), Harlow New York Times Prentice Hall Melville A, 2009, International Financial Reporting (e-book), (2nd Edition), Harlow New York, Financial Times Prentice Hall. Nobes C & parker R, 2009, Comparative International Accounting, Harlow New York Times Prentice Hall Mirza A, & Holt G, 2010, Practical Implementation Guide and Workbook for IFRS, (3rd Edition), Chichester, Wiley. Alfredson K, 2009, Applying International Financial Reporting Standards (2nd Edition) Chichester, Wiley. Read More