University of Economics, Prague. Transition to IFRS (IFRS 1)

Transcription

1 University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Transition to IFRS (IFRS 1) 1FU496 Intermediate Accounting (MiFA course) David Procházka

2 Agenda Basic characteristics of transition IFRS 1: Guidance ICT support of financial statements conversion (Voluntary topic) Recommended issues for the final exam

3 1 Basic characteristics of transition IFRS 01 First-time Adoption of IFRS Companies may shift to IFRS either mandatorily, or voluntarily (see presentation Framework ) A transition to IFRS may mean a fundamental change of accounting system, as local GAAP (esp. in continental Europe) are tax-oriented, but IFRS are investors-focused In many cases, companies have to maintain both systems (IFRS and local GAAP), as different financial statements are required for different purposes (IFRS for capital markets, local GAAP for taxation) traditional one-book system has evolved into twobook system and periodical conversion from local GAAP to IFRS has to be made The conversion of financial statements can be defined as a process when an entity prepares two or more sets of financial statements for external users, each in compliance with distinct financial reporting standards Three possible dimensions of the conversion: - preparation of the first individual financial statements (opening balance sheet statement) prepared in compliance with an alternative set of financial reporting standards

4 - reporting of individual financial statements and other figures needed for consolidation or other purposes in regular intervals - consolidation of individual financial statements A cardinal practical issue: How to process the conversion technically?

5 Determination of the transition date The first date of the earliest comparative period (IFRS 1) Opening balance sheet as at the transition date Guidance in IFRS 1 Regular preparation of individual financial statements Guidance in IFRS Technical solution upon entity's choice Regular preparation of consolidated financial statements Guidance in IFRS Technical solution upon entity's choice

6 2 IFRS 1: Guidance 2.1 Date of transition to IFRS IFRS 01 First-time Adoption of IFRS Date of transition to IFRS is the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements The first IFRS financial statements is the first annual financial statements in which an entity adopts International Financial Reporting Standards, by an explicit and unreserved statement of compliance with IFRS FAMILY has been admitted for an initial public offering on 1 February 2X05. By this date, the stock exchange requires submission of IFRS financial statements for the annual period ended on 31 December 2X04. FAMILY reports two comparative periods in its previous GAAP and this policy will be held also in case of IFRS. Determine the date of transition to IFRS. FAMILY will report financial figures for years 2X04, 2X03, 2X02 in its first IFRS financial statements. Therefore, the date of transition to IFRS is 1 January 2X02.

7 2.2 The first IFRS financial statements IFRS 01 First-time Adoption of IFRS The first IFRS financial statements contain: - a complete set of financial statements (including the notes) for the actual period - a complete set of comparative information for at least one previous period - opening IFRS statement of financial position as at the transition date - reconciliation of equity in opening IFRS statement of financial position and last statement of financial position in compliance with previous set of financial statements Crucial point in the process is conversion of the last balance sheet according to local GAAP to the opening balance sheet according to IFRS Basic principle for the conversion: all different accounting treatments has to be eliminated Source of differences: - different classification of items (usually between non-current and current) - different measurement (e.g. present value not allowed under local GAAP, but required

8 in IFRS for non-current receivables/liabilities; measurement of investment property at fair value in IFRS, but historical cost under local GAAP; etc.) - elimination of items recognised only under local GAAP (e.g. certain kinds of provisions; capitalised establishment costs; capitalised research; etc.) - recognition of items required by the IFRS and not applied under local GAAP (e.g. finance leases assets and liabilities; provisions for dismantling of PPE; etc.) - deferred tax arising on the differences from the transition Except for classification issues, all differences have an impact on equity: - cumulative effect is recognised in retained earnings - reconciliation between previous GAAP and IFRS has to be disclosed so that The conversion requires a good knowledge of both sets of standards Entities have to comply with each IFRS effective at the end of its first IFRS reporting period (for some exceptions defined in IFRS 1)

9 3 ICT support of financial statements conversion (Voluntary topic) 3.1 Preparation of the first financial statements according to the IFRS The preparation for the first-time adoption of the IFRS: - establishing of general road map for the conversion (expected costs, deadlines, responsible persons, methods, controls) - introduction of basic principles on which the IFRS are based to people in charge (not only accountants, management, but also IT specialists, tax specialists, etc.) - overview of current accounting software and other information systems The analysis of local GAAP: - identification of general differences of national GAAP in comparison with the IFRS - identification of differences between entity s accounting politics under national GAAP and the IFRS - list of all differences, which are subject of conversion, structured in following groups: applied under both systems, but under different accounting methods; applied only in

10 local GAAP, but not under IFRS; applied only in the IFRS, but not under local GAAP The accounting choices: - measurement bases used in IFRS statements - accounting politics, incl. useful lives for non-current assets, measure of significance, etc. - usually prescribed by the parent company in order to hold uniform consolidation politics The formulation of data needed for the conversion: - design of the conversion bridge, which will be used for the conversion (usually usage of spreadsheets) - definition of outputs from current accounting SW for the conversion (e.g. accounts receivable dataset with amounts and due dates) - definition of external inputs (e.g. interest rates for discounting of receivables and payables, etc.)

11 The creation of a conversion bridge : - reclassification - remeasurement - recognition - calculation of deferred tax IFRS 01 First-time Adoption of IFRS The preparation of financial statements and other information The implementation of opening balance sheet into accounting SW or other IS: - relevant if dual accounting system will be used (more details further in the presentation)

12 3.2 Technical solutions of periodic financial statements conversion Conversion on financial statements level This method uses only the reclassification of items presented in statutory financial statements The main advantages of the method are: - easy and quick to implement - no specialised ICT is needed - low cost and labour burden - easy to check the correctness of adjustments The disadvantages are: - applicable only if the number of differences is very low (no measurement, recognition, accounting policies issues) - workable only for those cases when classification is the only one difference

13 3.2.2 Conversion on trial balance level IFRS 01 First-time Adoption of IFRS The list of accounts (trial balance) based on local GAAP is exported from an accounting software and then adjustments are made in spreadsheets (like Excel) The following pros can be identified: - no specialised ICT is needed (data spreadsheets are sufficient) - applicable even if the number of differences is higher The cons of this method are: - applicable for differences in recognition, not for different measurement and accounting policies - additional accounting expert for the IFRS should be employed => higher salary expenses - dependency of functionality of the conversion system on the expert - correctness and conclusiveness of the conversion bridge is complicated for auditors - the consistency of adjustments within periods and data relationships are hard to hold

14 - all records and some documents relating to the conversion are outside the accounting system Dual accounting system All transactions are recorded twice in accounting SW enabling parallel booking of transactions There are following plusses of this method: - all types of differences could be included - all adjustments are incurred directly in SW modules - customisation of accounting SW is possible and more outputs for management are available - the only viable solution if number of difference is very high - possible integration of accounting SW with consolidation reporting and other ICT systems

15 This method has following minuses: IFRS 01 First-time Adoption of IFRS - implementation of a new or an upgrade of current SW => additional costs - more transactions are recorded (more workload => additional employees => higher labour costs) - question is how to record the transactions - way of archiving of the documents is not clear-cut

16 3.3 Technical solutions of consolidation of individual financial statements General issues Main issue: How to submit individual statements to parent company? General problem of consolidation independent on the conversion process, but the technical solution of this issue is often interconnected with a method used for the periodical conversion The design of consolidation system depends on: - the size of consolidation group - the informational needs for the managing of whole concern - costs and benefits of each solution Possible technical solutions of reporting data for consolidation Separate spreadsheet tables without any links: - consolidation is made by hand or data are entered into a relatively simple system

17 - can be applied only if the structure of consolidation group is relatively simple (two or three companies, low number of intragroup transactions. etc.) - a method requiring low costs Integrated spreadsheet file with links: - consolidation is made by the merging predefined spreadsheets files filled-in by all companies - applicable if consolidation group is not to big (several companies usually not more than eight) - if there are a lot of links among files, RAM (Random Access Memory) may not be able to process the calculation and computer systems may fall down - low cost method; hard to hold inconsistency between periods; problematic for auditors to check connection between individual and consolidated statements

18 Special consolidation software: IFRS 01 First-time Adoption of IFRS - developed directly by parent company or purchased solution customised according to requirements of consolidating companies - one type of consolidation software is based on spreadsheets (usually break-down system from the top to the bottom) software typically developed internally by consolidation group, e.g. programming new functions in spreadsheet software and there integration with data warehouse - based on databases (usually sum-up system from the bottom to the top) typically stand-alone software purchased from external IT company - relatively expensive; conclusive; easy to check by auditors Integrated accounting/consolidation SW: - the highest level of integration of accounting and consolidation software - all-in-one solution, when entities keep their accounts in accounting software and parent company retrieve data directly from accounting module into consolidation module - relatively expensive solution; all advantages of keeping accounts within one system

19 4 Recommended issues for the final exam Covered by this Presentation - determination of the date of transition to IFRS - preparation of an opening balance sheet according to IFRS Not covered by this Presentation, but relevant for the topic - knowledge of all IFRS

20 David Procházka Department of Financial Accounting and Auditing Faculty of Finance and Accounting University of Economics, Prague W. Churchill Sq. 4 Prague, Czech Republic Web: <prochazd@vse.cz>