By Marcus Leach
Senior finance executives remain significantly unprepared for a raft of fundamental changes to financial reporting standards both in the UK and across the world, according to a survey from Ernst & Young.
Financial reporters in companies across the UK are being forced to implement new standards that will impact everything from procurement and corporate transactions, to covenants and employee bonus schemes.
The survey, which canvassed the views finance executives from 600 companies across the UK, found a lack of preparedness and also concern about these changes; including convergence with US generally accepted accounting practice (GAAP), lease reporting and revenue recognition.
The survey found that over two-thirds (69%) of finance executives supported the move away from UK GAAP in subsidiary accounts because of the benefits of globally consistent reporting. However, more than half (54%) have yet to embark on an impact assessment, while 61% had not started assessing the tax implications of these changes.
Impact on businesses of new requirements
The survey also highlighted the challenges of meeting new requirements and their impact on businesses. Almost 40% were concerned about the need to adopt new systems, processes and controls to calculate and record financial impacts of changes to lease reporting.
Further concerns around lease reporting included the impact on financial ratios and KPIs, the effect on profit measures in employee bonus schemes, and the potential effect on future procurement decisions.
Overall, 45% felt that the International Accounting Standards Board (IASB) should take a step back and reassess the usefulness of current standards, before embarking on any more projects.
“We are experiencing a big bang of regulation that will transform how companies analyse and report their financial information and make decisions," Andrew Davies, Ernst and Young partner and leader of Financial Accounting Advisory Services said.
"Taken together, these will have a fundamental impact both on the measurement of company performance and how practical decisions are made.
“The large number of companies yet to embark on any assessment of their future accounting is a concern. Early planning can ensure optimal decisions are made which are essential in order to future-proof the business.
“This is seen for example when implementing new systems, considering group reorganisations or negotiating covenants, as well as for complex groups with large numbers of subsidiaries where there may be benefits from rationalising the group structure prior to conversion. Those that fail to plan early could be underestimating the range of factors that need to be addressed and managed.”
Challenges of the financial reporting agenda ahead
UK and Irish GAAP — Support for moving to a framework based on International Financial Reporting Standards remains strong. The survey found 69% of finance executives thought the move was appropriate because of the benefits of globally consistent reporting. However although 32% are in the process of assessing its impact, 54% have yet to embark on any impact assessment. The ASB has tentatively decided to defer the mandatory effective date of the framework to 1 January 2015.
Leasing — Completion of the leasing convergence project is planned for 2012. One in five highlight the impact on financial ratios and KPIs, including profit measures in employee bonus schemes and covenant ratios, as some of the most troublesome areas. Some executives also have concerns about the potential impact of procurement decisions, for example whether to lease or buy, and about the resource requirements of implementation.
Revenue recognition — The revenue recognition project is due for completion in 2012. The new standard for revenue recognition could have a significant impact on financial reporters. Many finance executives feel most uncomfortable about the amended timing of revenue recognition (41%), followed by measurement of revenue (19%) and disclosures required (25%).
Financial instruments and impairment — Although certain sections of IFRS 9 on financial instruments have been issued, the European Commission’s current position is that endorsement will only be considered once all parts of the financial instruments package are complete. However, high profile business leaders are calling for EU endorsement to be brought forward, while another concern is that IFRS 9 currently differs from the model being introduced in the US.
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