IFRS - What to look forward to in 2006

The biggest issue facing companies at the moment is not future developments but applying the existing standards and interpretations in practice. Andrew Vials takes stock as IFRS enters its second year.

Andrew Vials, a technical partner at KPMG.

Many companies will be in the midst of preparing their 2005 financial statements and for listed companies this means grappling with International Financial Reporting Standards (IFRS) for the first time in a full set of annual accounts.

The challenge of converting to IFRS has been significant, probably much more difficult than most people in the UK originally estimated. Many of the underlying principles might be the same but there are a number of significant areas of divergence and in many cases it really is a case of 'the devil is in the detail'.

Endorsement time lag

On top of this, the amount of new material produced by the International Accounting Standards Board (IASB) recently and the inevitable time lag in introducing that material in Europe as a result of the endorsement mechanism has meant that companies are having to deal with some important issues late in the day.

Once this is all out of the way and the 2005 financials are put to bed, what new challenges will companies have to face in 2006? The answer in terms of new material which must be implemented in 2006 is actually very little. New standards currently on the books are

IFRS 6, Exploration for and Evaluation of Mineral Resources, which has a fairly limited application, and IFRS 7, Financial Instruments: Disclosures.

This standard will bring significant changes to disclosures on financial instruments and consequential risk exposures for all entities but is not actually mandatory until 2007. It is available, however, for early adoption, although at the time of writing it has not yet been endorsed.

In addition, there are a number of IFRIC interpretations (IFRIC is the interpretative arm of the IASB) on what some might say are fairly obscure topics which, subject to endorsement in Europe, will apply for the first time in 2006. A table of these appears at the bottom of this article, together with the relevant endorsement status.


Perhaps one worthy of particular mention is IFRIC 6. This provides guidance on accounting for liabilities for waste management and recycling costs for electrical and electronic equipment ('WEEE') which arise as a result of the recent European directive. This directive has yet to be implemented in the UK but there are a number of potential accounting consequences for both producers and users of commercial WEEE in terms of providing for the recycling costs.

A number of recent amendments have been made to

IAS 39 on financial instruments by the IASB which will also come into force for 2006, although again they (subject to any outstanding endorsements) were available for early adoption in 2005. These are also noted in the table below. Perhaps the most important of these is the 'fair value option' which restricts the optional designation of financial assets and financial liabilities at fair value through the profit and loss account to certain specific situations. Although it now allows for certain liabilities to be fair valued, something which Europe was previously blocking, it does restrict the previous complete free choice on designating any financial assets at fair value. Little by way of major changes

So, as can be seen from the above, there is little new by way of major changes in 2006 and many will be thankful for that. However, there will of course still be activity in terms of new proposals/exposure drafts for future consideration.

During 2006, joint projects with the US Financial Accounting Standards Board (FASB) are expected to yield important discussion papers on performance reporting and revenue recognition. These are likely to require significant attention to ensure that the resulting IFRSs properly facilitate communication with the capital markets of financial performance.

In addition, IFRS-US GAAP convergence projects should result in new proposals on income taxes, segmental reporting and the capitalisation of borrowing costs.

Other key IASB projects likely to result in new proposals in 2006 include a discussion paper on insurance accounting, new proposals on emission rights that may significantly change government grant accounting, and consolidation issues (including special purpose entities).

Conceptual framework

And don't forget to watch out for proposals on the IASB's conceptual framework - while these may seem esoteric, they will form the basis for future standards. For example, the first proposals, published in November 2005 (comments due 19 May 2006), explain why fair value is the most appropriate measurement basis on initial recognition for all assets and liabilities.

Further proposals are expected to follow in what will be a piecemeal rewrite of the framework.

Closely related to financial reporting standards is the management commentary.

With the mandatory operating and financial review (OFR) topically shelved by chancellor Gordon Brown, the IASB published in November 2005 a discussion paper (comments due 28 April 2006) that proposes a mandatory management commentary.

From the perspective of standard-setting, last but not least is IFRIC - with five draft interpretations outstanding, including three on service concessions, and coupled with a significant increase in staffing levels, the quantum of interpretative activity may increase in 2006.

Alternative performance measures

There is also one other recent development in financial reporting that may have far-reaching implications. These are the recommendations of the Committee of European Securities Regulators (CESR) on alternative performance measures (APMs), or non-GAAP measures. This is not something new in a UK context. The Financial Services Authority (FSA) and the Auditing Practices Board have issued guidance on this in the past. However, the CESR recommendations, while founded on the same general principles, concentrate more on the definition of an APM and what to do if one is disclosed.

Perhaps the most significant recommendation in a UK context is that the presentation of APMs should be less prominent than defined/GAAP measures.

This is a notable change from the current UK position and it will be interesting to see what happens in practice, as this can be a very sensitive area, particularly for auditors. To date auditors have been the main policemen of the existing guidance and there has been little, if any, FSA intervention.

At the time of writing, the FSA has yet to comment on the CESR recommendations in a UK context, though it is expected to do so soon.

When directors consider it appropriate to show adjusted measures, in order to present what they consider to be more meaningful information, it is difficult for the auditors to second guess this view. If the FSA really wants to see these new recommendations bite then it will have to flex its muscles more than has hitherto been the case.

To go back to the beginning, the biggest issue facing companies at the moment is not future developments but applying the existing standards and interpretations in practice. A period of stability is desperately required to facilitate a proper bedding down of the new financial reporting requirements and to achieve consistency of application in the marketplace.

It is encouraging to note that recent messages from the IASB acknowledge the need to strike a proper balance between making progress on its convergence project with US GAAP and the demand for stability. We would certainly echo this sentiment.


Title Subject IASB mandatory for accounting periods or starting on after Endorsed or when endorsement expected
IFRIC 4 Determining whether an Arrangement Contains a Lease 1 Jan 2006 Yes
IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds 1 Jan 2006 Yes
IFRIC 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment 1 Dec 2005 Q1, 2006
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies 1 Mar 2006 Unknown
IFRIC 8 Scope of IFRS 2 1 May 2006 Unknown
Amendment to IAS 21 Net Investment in a Foreign Operation 1 Jan 2006 Unknown
Amendment to IAS 39 The Fair Value Option 1 Jan 2006 Yes
Amendment to IAS 39 Cash Flow Hedge Accounting of Forecast Intragroup Transactions 1 Jan 2006 Yes
Amendment to IAS 39 and IFRS 4 Financial Guarantee Contracts 1 Jan 2006 Q1, 2006

Note that while all of the above interpretations and amendments are available for early adoption, adopting a new or amended standard or interpretation that has not been endorsed by the EU will in some cases give rise to additional technical complexities.

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