Attitude of Unlisted Companies Towards IFRS

SECTION I – INTRODUCTION

The adoption of international financial reporting standards across the European Union from 1st January 2005 is one of the biggest events in the accounting history. This is especially important after the capital markets were rocked by some big accounting frauds in recent years. In the first phase, 7000-plus listed European companies will have to implement new financial reporting standards from January 2005 (Fuller, Jan 2005).

When European Union moved towards one market across Europe, it faced the prospect of different financial reporting regimes across EU participants. To achieve true scale of financial integration, it has become necessary to adopt common financial reporting standards.

In June 2002, the European Commission adopted a regulation requiring all listed EU companies in regulated markets to prepare their financial statements in accordance with International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS). The regulation is applicable only on consolidated accounts and companies are free to choose their national GAAPs for subsidiaries and associate companies. The regulation came into force from January 2005.

Companies Act 1985 governs the use of UK GAAP by UK based companies. Similarly other EU states have their own laws for accounting standards. The EU states have now modified their national laws to include IFRS regulation to offer a common financial reporting standard. Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 has extended the application, on a non-compulsory basis, of the EU IFRS regulation to all non-charitable organisations.

In the last quarter of previous century, the world economies have moved towards globalisation. Multinational companies are manufacturing and selling across the world and many of these firms are listed at foreign stock exchanges. Globalisation of markets and establishment of multinationals led to increased desire and awareness about international markets. This was soon followed by globalisation of financial markets which increased the value of understanding of international financial results and reporting formats. Rapid improvement in communication technologies and easy access through internet has further spread the profile of international investor. Now a day international investors are not limited to some portfolio managers in big banks. International investors are now as diverse as sophisticated equity manager to a small investor in a remote town. Investors too have diversified their portfolio by international equities and bonds. This rapid globalisation has fuelled the desire to have common international standards that could be understood and followed across nations.

The ever increasing network of investors has not only opened new financing sources to countries, it has also put some pressure on the financial regulatory authorities to design and improve their financial reporting systems in a manner that is easily understood by wider audiences.

The regulatory authorities have on one hand evolve the financial reporting system to match the ever increasing demands of international investors and on the other hand make sure that companies in their countries are not faced with sudden increase in time, resources and knowledge needed to cope with new regulations. 

In 1973, 9 countries included UK formed International Accounting Standards Committee (IASC) with an aim to develop common accounting standards. The membership has now grown well over hundred countries with each country, especially bigger economies, bringing in their own perspectives of accounting standards. IASC had to deal with accounting conflictions in coming up with common acceptable accounting standards.

One would immediately think whether IASC has been successful in resolving all the conflicts with all member countries and the answer would easily be no. To fully satisfy more than hundred accounting bodies from across the world is almost an impossible task. Yet IASC has done a commendable job and from 1 January 2005, International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) is applicable in more than 90 countries. In EU, IFRS is compulsory only for listed companies.

The standards that UK listed companies will follow are not those issued directly by the International Accounting Standards Board, but are those that have been endorsed by the European Commission. EU has now endorsed IFRS, except for IFRS 6 and some of the IFRIC interpretations, and some changes in IAS 39 relating to the fair value of financial instruments (PwC, 2005a).

While the EU regulation is only enforceable on listed companies, it also says that a member state has an option to extend the use of IFRS to unlisted companies within their jurisdiction. Department of Trade and Industry (DTI), the government trade body responsible for company regulation in UK, has said that while there is no mandatory move to IFRS for unlisted companies, the unlisted companies would still be allowed to adopt IFRS over UK GAAP from 2005 onwards.

The basic aim of new financial reporting standards is same as that of existing standards – to provide information about financial performance and position of a company to different stakeholders. Internal stakeholders – management – normally have a good grip of what’s going in the business. It is external stakeholders like investors, auditors, suppliers and creditors who need to be informed in a succinct and clear manner about financial implications of business decisions.

The IFRS would aim to present a more complete picture of a business by making operating income a more encompassing number. As an example, the financial implications of stock options were kept out of income statements. Companies merely mentioned the number of stock options granted. But now onwards, companies will have to incorporate the fair costs of granting stock options in their income statements. This will allow investors to assess the true costs of executive remuneration.

Though the overall aim is same, the differences in implementation and financial reporting do occur due to social, economic and political backgrounds of different nations.

Will it be a good policy to allow two different accounting standards in UK – one standard for listed companies and another for unlisted companies. UK’s Accounting Standard Board clearly sees there is no merit in having two separate standards. ASB issued a Discussion Paper in March 2004 highlighting its strategy for convergence with IAS and says that convergence of UK accounting standards to IAS is a foregone conclusion. It has already introduced many changes in recent past to bring UK’s GAAP in line with IFRS.

Smaller companies, even listed ones, will find it difficult to cope with extra work due to IFRS. Alternative Investment Market (AIM) realises that most of its companies won’t be in a position to meet IFRS requirements soon. So it changed its regulatory status in October 2004 and is now an “exchange regulated market” and out of purview of European Commission regulation on regulated markets. Now companies listed on AIM have time until January 2007 to implement IFRS.

Accounting Standards Board is also sensitive to the needs placed on business in making a transition from UK accounting standards to IFRS. Big businesses probably have sufficient resources to cope with the change in one year. But the smaller businesses will find it difficult to make all required changes in one year. ASB has proposed a series of changes that would be implemented in 2005 and 2006 which will bring UK financial reporting standards more in line with IFRS. Thereafter ASB will carry out a series of step changes by replacing one or more UK standards. So by the end of 2005-2006, UK standards will almost be in line with IFRS and unlisted companies transition to IFRS in 2007 would be smooth.

This research analyses the attitude of unlisted companies towards IFRS. Many research and surveys have been carried out on the acceptance and readiness of listed companies for transition to IFRS. But the issue has not been explored in depth with respect to unlisted companies.

The research is based on primary and secondary data. Primary data is collected via interviews and questionnaires with companies and their auditors. A total of [34] interviews – [20] with companies and [14] with their auditors – were conducted to obtain primary data. [52] questionnaire responses by postal survey were also analysed.

The results show that there is definitely a much scope in improving International Financial Reporting Standards for unlisted companies. Respondents were concerned about the costs associated with transition to IFRS and also the additional burden that will come with regular enhanced reporting. That IFRS will help in globalisation of capital markets and probably cheaper costs of capital is not of much significance for unlisted companies registered in UK.

This research would be useful for institutes and associations framing accounting standards for unlisted companies. Mostly accounting standards have been framed with an eye for listed and large companies. But unlisted companies have much lesser resources to spend on large regulatory requirements and hence should have different reporting requirements that match the benefits obtained from such reporting.

The time limitation and resource constraint mean that the primary data via interviews and questionnaire surveys could only be collected through a limited number of respondents. It would be useful to cover a larger data base before implementing the changes. Also more users of data in unlisted companies like banks and creditors should be contacted before policy formulation.

The remaining paper is divided in the following sections. Section II is a literature review on justification and applicability of IFRS, and state of readiness in companies. Section III discusses the methodology used in this research. Section IV covers analysis of data obtained through the primary data collection and its interpretation. The paper concludes with section V.

SECTION II – LITERATURE REVIEW

In June 2000, the European Commission proposed a new directive requiring that all publicly traded companies in the member states to adopt International Accounting Standards Board (IASB) standards by no later than January 2005. On 19 July 2002, the European Parliament and the Council approved the IAS regulation (EC) 1606/2002 which said ‘For each financial year starting on or after 1 January 2005, companies governed by the law of a Member State shall prepare their consolidated accounts in conformity with the international accounting standards adopted … if, at their balance sheet date, their securities are admitted to trading on a regulated market of any Member State’ (EU, 2002).

Rationale for EU’s adoption of International Financial Reporting Standards
The main aim of International Financial reporting Standards is to bring convergence among different national financial reporting standards. Over time, the evolution of different national financial reporting standards has been influenced by local social, political and economic environments. Some of the major reasons for differences in accounting standards are:

• Political – Capitalist or Communist. Capitalist and communist countries have almost contrasting fundamental economic approach and their accounting standards reflect the same.
• Stage of economic development. Developed countries generally have better accounting standards in terms of transparency and clarity.
• Corporate finance – debt or equity. Companies in continental Europe are financed more by debt than the companies in UK. Accounting standards have over time evolved to reflect the importance placed by different sources of financing on different aspects of financial statements.
• Legal and taxation systems.

Convergence will help investors and analysts to compare companies across borders in a better way. But it also implies that either member countries will lose their independence to make national accounting standards that reflect local economic conditions or if they start introducing some changes, IFRS may slowly lose its main strength of common standard. Local, political and economical conditions may force national accounting bodies to introduce variations in IFRS. EU has already introduced some changes in the IAS 39 dealing with financial instruments. It is beyond the scope of this research to see which member countries have introduced variations in IFRS.

Convergence between UK GAAP and IFRS

ASB has declared its intention to converge UK GAAP with IFRS. It has issued a number of new standards in December 2004 to speed up the convergence of UK GAAP with IFRS. So sooner, even unlisted companies would be following a substantial portion of IFRS due to this convergence.

Comparison of UK GAAP and IFRS

Similarities

The ultimate goal of UK GAAP and IFRS is same – to present information about financial performance and position to all concerned stakeholders. If the aim is same, then should be the main approach adopted by both accounting standards.

The UK’s Accounting Standard Board’s Statement of Principles for Financial Reporting is a vital contributor at macro level standard setting. It plays almost same role as International Accounting Standards Committee’s ‘Framework for the Preparation and Presentation of Financial Statements’. ‘It is a description of the fundamental approach that the Accounting Standards Board (ASB) believes should, in principle, underpin the financial statements of profit-oriented entities’ (ASB, 1999). The Statement of Principles has true and fair concept at its core, much like the focal point in International Accounting Standards. Also like IAS, Statement of Principles insists on financial information being relevant and comparable.

It is beyond the scope of this research to highlight each and every similarity between UK GAAP and IAS.

Differences

Though the overall aim is same, the differences in implementation and financial reporting do occur due to social, economic and political backgrounds of different nations.

Main concepts behind UK GAAP and IFRS are same, but when we look at micro level, we see many differences at the individual standards level. Following are the main differences between UK GAAP and IFRS:

• The Statement of Principles allows use of both historical cost and current value approaches in measuring balance sheet categories. The dual use of historical and current value methods is known as modified historical cost basis (ASB, 1999). Under historical cost, the carrying values of assets and liabilities are stated at the lower of cost and recoverable amount. This approach is more conservative as compared to IAS approach which uses fair value method. Also the choice of historical or current value method is based on subjective analysis of a company’s management and hence it is open to some manipulation.
• Fair value. If we look at global level, both UK GAAP and IFRS have adopted fair value method as the foundation of their accounting standards. IFRS takes fair value adoption even higher when it says that income statement will include the changes in the fair value of items that have not been yet traded like derivatives. The emphasis in new accounting standards is on mark-to-market fair value of assets and liabilities rather than on actual market price based fair values. Now both realised and unrealised changes in fair values would be incorporated in income statements. The first year of transition will see high volatility in earnings and balance sheet statements. Though this brings higher volatility, it will also test the management skills in proper presentation and explanation of changes. It may also change the benchmarks of success for managements.
• Acquisitions. Acquisition accounting will change under new accounting standards. Under UK GAAP, companies can choose between purchase and merger accounting. Under IFRS, companies will have to account under purchase method only.
• Goodwill. UK GAAP allowed amortisation of goodwill and companies had the option of not segregating intangible assets from goodwill. Under IFRS, intangible assets have to be separated from goodwill. Goodwill can not be amortised now but companies will have to undertake annual impairment tests to justify the value of goodwill on the balance sheets. BAT’s profits for year 2004 increased by £454m because it no longer had to amortise goodwill of that amount (AccountancyAge, 2005b).
• Consolidation of accounts. Under new accounting rules, companies may have to consolidate certain additional subsidiaries into group accounts. On the other hand companies will have to exclude certain subsidiaries or special purpose vehicles which were not included till now.
• Research and development costs. Under IAS 39, research costs can’t be carried on the balance sheet and would have to write them off as incurred. Companies would still be allowed to capitalise development in line with UK GAAP.
• Stock options. Internet and share market last boom in late 1990s led to rapid increase in share options as a way to reward employees. The new requirements to record an expense on income statement for the value of share options granted to employees could have a significant impact on earnings. AstraZeneca said in its pro forma 2004 IFRS numbers that new accounting rules on stock options has made it re-consider the use of stock options in rewarding its employees (Tricks, 2005).
• Distributable profits. Organisations ability to pay dividends is dependent on their distributable profits. Following are some of the major impacts of IFRS on distributable profits – Inability to discount deferred tax liabilities, higher provisions for deferred tax when companies move from historical costs to fair value and inclusion of pension deficits in income statement. All of the above will reduce distributable profits. Many companies would have to financially restructure themselves in order to have sufficient distributable profits to meet dividends paid in last year.
• Deferred tax credit. Deferred tax credit is available under UK GAAP but not under IFRS. GlaxoSmithKline’s restated its 2004 earning per share by (1.9p) due to non-availability of deferred tax credit under IFRS (AccountancyAge, 2005a).
• Inclusion of business disposals gains in profits from operations. BAT’s profits for year 2004 increased by £1.3bn after it included gains from disposals to operating profits (AccountancyAge, 2005b). Adding disposal gains to operating profits will make it harder for investors and analysts to separate the earnings from continuing businesses.
• Derivative contracts. Under IFRS, some derivative contracts will not qualify as hedges as they wont meet the criteria. UK GAAP allowed deferment of such contracts until transaction took place. IFRS won’t allow the deferment of such contract and would impact the profit and loss account even before the transaction took place. It is better in a way that investors will know the current value of the firm as on date rather than historical costs of such instruments, especially if the duration of financial instruments was long. At the same time, it would increase the burden on the company to calculate the fair value of all such transactions.
• Agricultural. UK GAAP allowed companies to use a cost model for biological assets and all agricultural produce. But under IAS companies would have to use mark to market method for valuing such assets. Now companies would have to use market valuation even for assets in far off countries.

Advantages of IFRS over UK GAAP

• Common financial language. Adopting common financial reporting standards will open up a company to more markets and investors. The growth in telecommunications has made it easier for smaller investors to invest across physical boundaries. Such investors are normally not as financially sophisticated as some big financial institutions. They would also not like to understand more than one accounting standards as they don’t have required resources in hand to do so. With one common accounting standard, more investors would like to explore companies across nations.
• Acquisitions. IFRS 3 is more open and transparent than UK GAAP on acquisitions. It will allow investors and analysts to judge faster the success of an acquisition. Many of the companies that have relied on acquisition as a key cornerstone for growth would now come under intense scrutiny and may have to develop a new strategy for growing business.  
• Consolidation. In IFRS, all entities will have to provide a cash flow statement. Additionally there would be more transparency within the group companies and this should make the consolidation process more straight-forward.
• Securitisation by businesses is likely to be impacted by the new ways governing how companies can show assets and liabilities on their financial statements. Companies have used securitisation to cash in assets like trade receivables sitting on their balance sheets. Securitisation helps companies to slim down their balance sheets and hence allows companies to show higher return on assets at same earnings. And it was one of the reasons why companies went for securitisation. But stringent criteria for moving assets and liabilities off balance sheet will threaten securitisation. Sue Harding, chief accountant at Standard & Poor’s in Europe said that new international accounting standards were sweeping a lot of securitised assets back on to balance sheets (Jopson, Feb 2005).

This will help investors compare like to like and avoid companies that have used securitisation only to make-up their balance sheets. There is no harm in using securitisation if used in a proper way and not to deceive stakeholders. But we have seen how corporations like Enron had used securitisation to disguise their true financial position.

• Annual impairment review. Annual impairment review will benefit investors because the companies then won’t like to take big goodwill cuts in one year and not do anything for years. Annual reviews would help investors judging whether the amount paid by companies in acquiring other company was justified or not.
• Access to cheaper capital. Increase in investor profile diversification would most probably lower the cost of capital for most of the companies. This is especially true for smaller companies which don’t have financial muscles and resources to tap international investors.
• Expensing research costs gives better information to investors and other stakeholders because at research stage the chances of success are quite uncertain. Investors can only be sure of development costs bringing in some returns in future. Also by segregating research and development costs, external stakeholders will now have a better chance to differentiate the suitability of costs incurred in developing new products.
• Multiple listings. Many companies now have multiple listings across different countries. Companies need to prepare financial statements as per each local accounting standard to meet listing requirements. With one accounting standard only it will save a lot of botheration for companies with multiple listings.
• Dividends. Under IFRS dividends are not provided for until the dividend recommended by the Board is approved by shareholders. This move will bring more convergence between accounting profits and cash flows.

Disadvantages of IFRS

• Fair value. While fair value in a way conveys more up to date value of a company as compared to historic costs, it also puts a question mark on the methods used and the reliability of fair value. Derivative instruments which are commonly traded on various stock exchanges can be easily assigned value. So while valuing some of the assets or liabilities may not be difficult, the question still remains what impact such valuations will have on companies’ business models. Many companies use hedging instruments as a strategic tool rather than for intentional gains. Any short-term swings in such instruments may have a significant impact on income statement and probably adverse market reactions may deter companies’ from using such instruments.

Then comes the more important issue of valuing assets and liabilities that don’t have a proper market. The companies may use some valuation model, which itself may not be the right way, to value an asset or liability. The model will incorporate some subjective assumptions. An example would be brand value. A same brand can have two different values for two different companies because of its strategic importance. So at one hand, investors and other external stakeholders are getting more objective information about a companies’ assets and liabilities, they are also getting valuation based on more subjective assessments. Only time will tell whether some individuals or companies will use it to manipulate results.

An interesting thing to observe would be the treatment and importance given by analysts to unrealised fair value of assets and liabilities. Some investors may try to separate unrealised gains and losses from other operational performance. It may also prompt companies to issue adjusted earnings excluding unrealised gains and losses.
An important point to note about fair value principle is that the financial statements should not be seen as perfect prediction of things to come. That depends on the strategic and business decisions management will take in future. Just having a fair value of assets and liabilities doesn’t mean that the company will be able to extract those values in future.  

• Dividend. New accounting standards promote payment of dividend from distributable reserves. With the inclusion of unrealised gains and losses and pension deficits, the first few years of new accounting standards may not leave enough of distributable reserves for dividend payments.
• Securitisation. Securitising assets into special purpose vehicles and re-financing them through had also helped companies raise funds at lower costs. The new accounting standards by restricting the use of special purpose vehicles, would diminish some sources of cheap financing. It is question yet to be fully tested in the practical world that since the assets are same, change in financing options shouldn’t change the returns on total assets. By refinancing at lower rates through securitisation should result in higher financing cost for remaining assets such that the overall costs remain same. But examination of this hypothesis is beyond the scope of this dissertation. But what is mostly observed in capital markets is that when companies announce refinancing, the share price rises. How much of the rise is from relief that company will survive and how much from the fact that the overall costs have lowered is not known.
• Annual impairment tests. Annual impairment tests are easier said than done. Companies would not only have to devote substantial resources to do that first would have to train its personnel to do that. Assessing true value of a goodwill is not easy. If there is a comparable market then companies can easily value it. Even then it may differ from case to case as it would be very unusual to see exactly two similar companies. Goodwill is very different from tangible assets or technologies and depends a lot on market perception and strategy. Companies would have to review the whole process of valuing goodwill and would have to review the valuation process at constant intervals.
• Net pension liability. The inclusion of net pension liability on the balance sheet may have severe impact on the shareholders funds. Companies will be required to have annual actuarial valuation of their pension liabilities and the same would be reflected in financial statements. Most of the pension funds invest in equity markets, which have been quite volatile in the recent years. So though over a longer period, the movements in pension liabilities may even out but in short to medium term, it may have a dramatic effect on balance sheets and earning statements.
• Segmental information. IAS 14 requires companies to report information on their business segments and on a scale more detail than UK GAAP. As of date, no agreed accounting practices have emerged on how much should be disclosed because companies may end up revealing sensitive information to its competitors. If companies disclose the turnover, earnings and expenditure for each segment, its profitable operations may come under intense competition. Ian Dilks of PwC said that “some companies have found they’re giving much more information than they’re comfortable with on sales and the profitability of product areas” (Tricks, 2005)
• Expensing research costs may result in listed companies focusing more on products in development stage than in research stage. This will keep their balance sheets healthy but may harm long term prospects.
• Complex and long IFRS compliant reports. PricewaterhouseCoopers estimates that an IFRS compliant financial report for insurance companies could be up to twice as long as those prepared under existing UK GAAP (Finn & Zoon, 2004). The requirement for other industry sectors though may not be as intensive as for insurance sector, their IFRS compliant financial may also be longer and resource intensive than under UK GAAP. Any company that has makes an acquisition will have to do annual goodwill impairment analysis and most of them would like to explain the results also.
• Comparable formats. IAS 1 is less prescriptive than the UK GAAP when it comes to the format of the balance sheet and income statement. It just distinguishes current and non-current assets and liabilities. Investors, when faced with different formats, may find it difficult to compare companies.
• Modify organisation structures. Meall (2003) suggested that the additional burden of more financial reporting along different segments may force companies to modify their existing organisational structures within their financial systems to collect and analyse data.

Impact of IFRS on different industries

IFRS will have different impact on different industries. For some, most of the applied UK GAAP is almost same as IFRS and won’t feel the difference. But for some industries, the difference in accounting standards may have a substantial impact. Financial services and insurance companies are among them. Financial services companies would be affected by substantial change in recognition and measurement of financial instruments under IAS 39. UK GAAP has no equivalent to IAS 4 which deals with insurance contracts. Insurance companies would now have to account for this in their financial statements.

Under IFRS, insurance companies would have to book financial instruments such as derivatives at market value rather than historical value allowed under UK GAAP. Many insurers have said that this will distort their earnings (Reuters, 2005a). IFRS will put more stringent criteria for classification of insurance products and this may lead to reclassification of some insurance products as investment products.

Other industries that might face higher impact are the ones that heavily use hedging instruments in their day to day operations. Mostly companies using commodity materials like oil as a significant part of their input costs use hedging to smooth over the volatile changes in commodity markets.

New accounting standards will reduce Tesco’s projected annual profit of £2,000m by £30m only, a reduction of 1.5%. But for some companies the impact would be much more. Royal & Sun Alliance said that new accounting rules would reduce its net assets by £400m (Reuters, 2005a). This is a big number by any standards and shareholders of Royal & Sun Alliance would surely be concerned. Even though the company may classify it just an accounting issue, it casts certain doubt on the business practices and assumptions followed in past by the company.

The movement in assets and profits is not unidirectional for all companies. ICI, the chemicals company, said that its 2004 year profits were boosted by 6 per cent due to the changes introduced by new accounting standards (Smith, 2005). So while the underlying business has remained same for companies, introduction of new standards has the potential to increase or decrease the value of companies.

Moving from UK GAAP to IFRS is not just same as adjusting numbers. Many companies and their managements view move to IFRS as just an accounting issue. Andrew Higginson, Tesco's director of finance and strategy said "The adoption of IFRS is an important issue for all EU listed companies and one that we take seriously, but ultimately, it is an accounting, not an operational change," (Reuters, 2005b).

New accounting standards can also lead to confusion, at least in the short term till accounting practices are well agreed by different parties. An example of this was the recent comment about Northern Rock by Credit Suisse First Boston (Smith, 2005). Credit Suisse First Boston claimed profits at the UK bank would fall by 10 per cent due to the effects of IFRS. This led to a fall in Northern Rock’s share price. But Northern Rock’s management didn’t agree with the analysis and issued a rebuttal of the claims. Both Northern Rock and Credit Suisse First Boston are well established financial firms and if their accounting departments can have such significant differences over interpretation of IFRS, it can be imagined that smaller companies with less resources will face tougher choices.

Restatement of previous year financial statements has sometimes led to increase in profits also. British American Tobacco reported that its 2004 profits increased by £1.7bn under IFRS as compared to UK GAAP (AccountancyAge, 2005b). The increased profits have not resulted in higher valuation of the company. Jonathan Fell, analyst at Morgan Stanley commented ‘The increased figures are mainly a result of changes to the accounting for disposals. They do not affect the overall view of BAT’ (AccountancyAge, 2005b). It is a case of high movements in profits without a change in value of the firm.

While it may just be an accounting issue only but companies can still benefit from the change by looking at the ways of information collection and also at what data is collected and how it is analysed. Additional reporting will mean that some of the companies may now have to collect more data. Internal management reporting will be looked at to confirm to new accounting standards.

Adopting accounting policies and identifying the required financial data seems to be the approach taken by many companies. Introduction of IFRS is yet to see a change in business behaviour except in some areas like grant of share options. PwC said ‘companies are limiting the scope of their transition project in the short term and putting all their resources into finding fast solutions to provide the appropriate information for their 2005 reporting deadline’ (PwC, 2004b). Providing relevant numbers may meet the regulatory requirements but the full benefit of IFRS will only come when the principle behind its formulation are also incorporated into business thinking.  

IFRS 1, First-time adoption of International Financial Reporting Standards, was published by the International Accounting Standards Board to guide organisations through their transition from national GAAPs to IAS. IFRS 1 would make the transition process easier.

But still the work required to convert from UK GAAP to IFRS won’t reduce substantially. Companies would have to spend considerable resources and time in analysing and making significant changes to existing accounting policies.

Readiness of businesses

ICAEW acknowledges that companies won’t be ready for IFRS in the first year of transition. In a press release dated 26 July 2004 it said that it is inevitable that some audit reports will require qualification next year given the number of companies who are lagging behind in their preparation of IFRS (ICAEW, 2004b). Andrew Ratcliffe, Chairman of the Institute of Chartered Accountants’ Audit and Assurance Faculty has warned that some companies may delay publication of their financial statements due to transition to IFRS.

ICAEW carried out a survey of UK companies on the preparedness of companies for transition to IAS (ICAEW, 2004a). The survey received 661 responses from businesses and accounting practices in 2004. ICAEW had previously also carried out survey of British businesses on the same. The main outcomes of the latest survey and their analysis are as below:

• 81 percent of respondents were either “very aware” or “fairly aware” of the publication of the EU regulation. This is good news because in the previous survey only 61 percent of respondents were aware of EU regulations. The bad part is that even when EU regulations were so close to being coming into force, not all respondents were aware of it. Only half of respondents were aware of the IAS timetable. By mid 2004, the time of ICAEW survey, it was expected that respondents would not only be fully aware of the timetable but would have also started implementing changes in the reporting system.
• Only 38 percent of respondents were aware of ASB’s plan of convergence to IAS. It is not of much concern as of now. It would have been better if more respondents knew about ASB’s plan because then they could have started working on changes right now rather than waiting for the moment when ASB announces them.
• About 30 percent of respondents were not sure of any significant impact on their companies’ key performance indicators due to a move from ASB to IFRS. This only confirms that companies have yet not analysed fully the differences between IFRS and UK GAAP. It also shows that organisations are way behind in developing an implementation, and internal and external communication strategy to their stakeholders.
• Only 45 percent of respondents in business section were either on scale “very good” or “good” when asked about their organisation’s understanding of the implications of IFRS. IFRS is not just re-formatting of numbers. Organisations will have to look not only at the impact on performance indicators but also analyse the way information is collected at various levels with in the organisation. Managers across different divisions should also learn about how the changes would impact their performance measurement.
• Only 39 percent of respondents noted that their organisation is prepared for the introduction of IFRS. This number is very less and companies not ready for the change may find themselves in a fix when new regulations come into force.
• Another area of concern observed in the survey was the speed at which organisations were carrying out their IAS implementation programmes. The survey noted that implementation rate was slower than predicted in previous survey. About a quarter of respondents who mentioned that an implementation programme is required for their organisation already had one in place and another 27 per cent said that they would have one in place. About half of respondents who stated they need a programme didn’t have any plans then. So first of all not all respondents knew whether they need an implementation programme or not and even of those who thought they need one, only half had concrete plans.
• IFRS will also impact how investors perceive an organisations’ performance. Only about one-third of respondents who thought that they need a communication plan to convey impact of IFRS to external stakeholders had either put a plan in place or was going to put one in short time. Rest two-thirds had not thought about formulating any communication strategy yet.

Accountancy Age’s survey in the last quarter of 2004 showed that companies across European Union were well short of being ready for the IFRS transition (AccountancyAge, 2004a). In a poll of 1000 companies, 42 % of the respondents were yet to start their preparation for the impact of international accounting standards. Only 15% of the companies reported that they have finished their preparations (AccountancyAge, 2004a). The level of preparedness is so low that ultimately UK’s Financial Services Authority agreed to give companies additional 30 days to report their financials in line with IFRS.

Among non-listed companies, only 5.9% said that their preparation for IFRS is good and almost one-third said that their preparation is very poor (AccountancyAge, 2004b).

In a survey conducted by PricewaterhouseCoopers, 323 companies from 18 European countries and Australia and New Zealand responded to their readiness to start reporting under International Financial reporting Standards by 2005 (PwC, 2004b). The survey reported that companies are finding change to IFRS is much more than what they had anticipated. The change is not just reformatting numbers. Companies need to adopt systems and processes in their organisations to make IFRS a part of ‘business as usual’ rather than just data collecting exercise.  
The survey reported that most of the companies have probably missed the chance of incorporating IFRS in their internal reporting by the start of 2005 and progress to IFRS has been slow. Companies have a long path to travel before IFRS becomes an integral part of their businesses. PwC had also conducted a survey in March 2004 on the same topic and the latest survey in December 2004 showed that issues that were causing concern in the first survey were still an area of concern.  

Major highlights and findings of the PwC’s December 2004 survey are (PwC, 2004b):

• Larger companies better prepared than mid-cap companies. Larger companies are better prepared than mid-cap companies on almost all issues relating to IFRS transition. 83 percent of companies with market cap more than 10 billion euro had a training strategy in place where as the corresponding figure for companies with market cap less than 1 billion euro was only 33 percent. This result comes as no surprise because large companies probably have more resources than mid or low cap companies to be put on IFRS transition project without having a significant negative impact on day to day operations. Also large companies are more concerned about the capital market implications of non-conformity with IFRS. Additionally it also highlights the lack of attention being given by low and mid cap companies to IFRS transition process – an area of grave concern for financial regulators and capital markets.
• Scant communication of IFRS impact on businesses to the market. Only 4 percent of companies surveyed had communicated any broad picture of IFRS impact on their businesses to the market and about 29 percent had completed and approved a communication strategy. A large number of companies had not yet made any progress on external communication and the main reason could be that they themselves have yet to fully analyse the impact of IFRS on their financial performance and position.
• The above hypothesis is confirmed when survey reported that even near the end of 2004 only 88 percent of companies were assessing the impact of IFRS on their reporting and key performance indicators. And only about 45 percent of the sample have completed the assessment and reported the findings to their boards. So though many companies have started the work, the percentage of companies where board is fully aware of impact is still less. This means that many boards will end up with insufficient time to form a proper strategy to respond to the changes.
• IFRS conversion projects. Only 42 percent of respondents reported that their IFRS conversion project is up and running. 30 percent had either made limited progress on setting up a project framework or have made no progress at all. Small companies with one or few divisions could still squeeze through within deadline. But bigger companies with many divisions and multinational locations would find it hard to complete IFRS conversion if they haven’t started yet.
• Shortage of resources. Only 19 percent respondents said that they are confident that they have sufficient resources allocated to complete the conversion in time. It is the other 81 percent who now have to get additional resources for IFRS projects. Many of such companies might have planned to procure additional resources in house. But those who have plans for outside sourcing may find it difficult to get required personnel due to shortage of such personnel.
• Internal IFRS training. 39 percent of respondents were addressing the issue of internal IFRS training. Even within that only 13 percent were implementing strategies and rest 26 percent were still analysing the needs.
• Short-term fixes. Many companies were focusing only on a core group of people to implement necessary changes that would see them through the transition phase. Improper understanding of new reporting standards by other relevant personnel may result in errors or even much longer implementation delays. 45 percent of respondents said that their approach is based on short-term fixes rather than applying a more company wide approach.
• Poor company wide embedding of change requirements. Only about one-fifth of the companies had made necessary IT system and process changes to make IFRS a part of normal business. Even fewer were the companies who had put internal checks in place to ensure the robustness of data collection process.

The results also showed that many companies were focused solely on short-term quick fix solution to data capture and reporting. A half-hearted exercise like this could result in unintentional wrong reporting or even delayed reporting. A miss or a wrong guidance could be costly. Wrong numbers will not only lead to wrong valuations but would also reflect on the poor sate of internal systems – a signal that wont be much appreciated by the capital markets.

An interesting comparison would be to evaluate IFRS preparedness in different industries. Normally firms look at their peers rather than at whole market when deciding their strategies and practices. This is due to higher comparison within peer industry as compared to with whole of capital markets. In the survey conducted by PwC, companies in the financial services, technology and entertainment were ahead of organisations in the consumer and industrial products and services (PwC, 2004b). Financial and technology organisations were leading consumer and industrial companies at almost all the stages of IFRS implementation with differences not huge but significant.

One probable reason for such cross-industry differences would be the level of globalisation in sectors. Companies in more global sectors have to live up to international standards and some of their bigger customers are international companies. IFRS would help them win more international credibility.

Another interesting but obvious observation was the attention paid by different sectors on different IFRS. PwC reported that technology companies were ahead in terms of readiness in the areas of employee benefits, foreign entities whereas financial services companies have paid more attention to IAS 32 and IAS 39 which deal with financial instruments (PwC, 2004b).
Costs of IFRS transition

• Retrospective application. Organisations would have to restate financial statements in line with IFRS requirements. This would entail additional resources and costs to make necessary restatements. The companies would have to prepare an opening balance sheet at the date of transition to IFRS. For companies with one year of comparatives, the transition date would be 1 January 2004 and for companies with two years of comparatives, the transition date would be 1 January 2003. First IFRS statement may also need information that was not collected under previous national GAAP. First time adopters can choose from some of the 10 optional exemptions available. This may reduce some transition costs.
• Time spent in understanding and assessing the impact of IFRS on financial performance. As move to IFRS is much more than plain reformatting of numbers, organisations would need to spend time on assessing the impact of IFRS on their financial performance. New regulations on financial instruments, fair value may significantly change income and balance sheets. Management as well as senior managers across divisions would spend considerable time in understanding the implications of new regulations. Such process rarely concludes in one meeting due to its contentious nature.
• Communicating changes to stakeholders. Listed companies have to inform changes in accounting and their implications to their external stakeholders, notably investors. The first statement with IFRS will probably include a longer description of impact of changes. Any significant negative impact may lead to lower valuation and so management would spend time on developing and executing a good communication strategy to minimise negative impact.
• Training of employees. Employees, mainly in the financial departments would need training to become conversant with IFRS.
• Regular costs. Annual impairment costs. Costs incurred in collecting more data and analysing it.

It may be noted from the above points that most of the costs are either applicable in the first year only or are more significant in first year as compared to subsequent years. As companies adopt IFRS, regular costs of applying IFRS may not be significantly different from the costs incurred under national GAAP.

Reasons for apprehension towards IFRS are as follows:

• IFRS will increase the complexity of annual financial reports. This is an area of big concern for the preparers of financial statements as it means more work. It may also result in potentially litigable financial statements.
• There is confusion about applicable standards due to the constant revision of IFRS. EU is also constantly reviewing and revising IFRS. UK companies have to keep a constant watch on revisions being issued by IASB and European Commission. In the first adoption of IFRS, standards as on March 2004 would form a stable platform for first implementation. Companies can also adopt further revisions of reporting standards. So though two companies might both be IFRS compliant on a date, they might be reporting on different versions.
• Less use of summary reports. UK GAAP gives exemption to companies based on their size. Smaller companies utilise such exemptions to prepare just summary reports using less resources, but at the same time they contain most of the relevant information required by the readers of such reports.
• US dominance. It is perceived that IFRS are underpinned by US interests. As an example of this, European Commission has made some changes in IAS 39 before recommending it to its member states. European banks and ministers had raised serious issues on the impact of IAS 39 on their balance sheet. The US bias in accounting standards also comes from the view that International Accounting Standards Committee is dominated by US. Charlie McCreevy, EU Commissioner, in charge of internal markets has demanded a review of IASC (AccountancyAge, 2005c). McCreevy would like to see more number of Europeans at IASC.
• Many people believe that UK’s accounting standards are better than IFRS. UK’s accounting standards describe formats for income statement and balance sheet. IFRS has no such formats and companies would be allowed to choose style that suits them. First of all investors and analysts would have to deal with multiple formats which may make comparison difficult. Second, companies may vary their formats to suit their purpose.
• It is also believed that since IFRS had to take account of many accounting standards prevalent in late 90s and develop a standard which takes care of variations, IASB may have compromised somewhat in setting standards. UK may be made to sacrifice for the greater good of all.
• A major rationale behind IFRS is that it will allow global markets to develop and companies can access cheaper capital. But is there a big need for UK registered companies to raise international finance. Right now international companies, especially those based in developing countries, look for financing in UK. IFRS will certainly help such companies as more UK investors would now finance international companies. It may then happen that UK based companies would be competing against foreign companies for the same basket of UK funds. This may raise the cost of capital for UK based firms.
• First time implementation costs. IFRS will also result in significant implementation costs, especially for smaller companies.

The uncertainty around IFRS is highlighted in the annual financial reports presented by Alliance UniChem, a listed UK based pharmaceutical company. While presenting a summary reconciliation from UK GAAP to IFRS, the company said ‘The financial information has been prepared on the basis of IFRS expectation to be applicable for 2005 reporting’ (Alliance UniChem).

UK’s ICAEW has also said that current IFRS in its entirety is not suitable for smaller companies. ICAEW believes that IFRS will cause too much cost and resources for smaller companies. Also maximum of them are single-person owned and so the extra information and the efforts required to do that is not of any use. IASB is looking at ways to introduce some exemptions for smaller companies.

Variation in IFRS, as applied in different nations may falsely lead investors and analysts to believe that companies are following IFRS in the original and true form whereas they may not be doing so. As the enforcement of accounting standards would still be with national bodies, the local auditors will look only in terms of local IFRS and may not note the differences with the original IFRS as issued by IASB. Also investors and analysts may not be able to take note of local changes coming out time to time.

Internal management reporting

The adoption of International Accounting Standards is more than a simple technical exercise of rearranging formats and presentation of financial statements. The new formats and rationale behind them would throw up more important questions about business models and reasons behind many subjective assumptions in past. Most of the times new ways of analysing information challenges existing practices. The internal management reporting is now going to be more significant.

The detailed internal management reporting will put more pressure on information gathering and it might uncover hidden but important aspects of a business models in addition to increasing costs and time spent on information accumulation. The new formats provide an opportunity to re-examine the importance and effectiveness of internal management reporting.

But the companies have yet to make any significant change in internal controls and processes. PwC said ‘the low level of achievement [on IFRS processes and internal controls] at this stage of the change process should now be ringing bells in boardroom’ (PwC, 2004b). Until companies implement full controls and procedures in line with IFRS requirements, they won’t be able to derive benefits from it.
New reporting requirements will allow external stakeholders, especially shareholders, a chance to re-analyse business strategies and management decisions. The adoption of new accounting standards will bring in more transparency for external investors in areas like segmental disclosures and recognition of derivatives on balance sheets at fair value. Investors can then analyse management decisions and check whether the new investments are being made from a strategic point like expanding business or just to earn some additional amount from derivatives. Investors can invest in derivatives on their own and wouldn’t appreciate such investments by companies unless they are from a strategic point of hedging against unwanted currency fluctuations which can substantially harm companies’ balance sheets.

The focus of International Accounting Standards is on better performance measurement and communication of the same to internal and external stakeholders. Adoption of better and more transparent policies in reporting by a company would most probably seep down through to other companies in the sector as they would not like their peers to have an undue competitive advantage. Investors prefer more open companies and reward them by increasing their price multiples, which will tempt other companies to soon join the bandwagon of new reporting standards and formats.

It will be too early to say that new reporting standards will fundamentally change the businesses in the short run but it will definitely change the way success is measured by external stakeholders and information sharing between internal and external stakeholders. It will also have an impact on some of the related aspects – how the company’s financial function is organised and how people are rewarded.

Shortage of skilled manpower

Companies would also face shortage of skilled human resources to not only see them through transition but also to implement IFRS on a constant basis. Skilled staff, qualified enough to deal with IFRS, were in short supply. PwC survey reported the acute shortage of skilled resources (PwC, 2004b). One of the participant said ‘Finding and retaining resources is proving a very significant issue’ (PwC, 2004b). This may be due to most companies focusing on IFRS only in the last minute rather than implementing the change over time. PwC reported that shortage of IFRS skilled resources is a market-wide phenomenon (PwC, 2004b). 
Nearly 40% of the respondents reported that they were struggling to find staff with right skills (AccountancyAge, 2004a). This has resulted in higher wages for auditing staff. Auditor’s wages have gone up by 5.3% in the six months to October 2004 (AccountancyAge, 2004a).

The scene is worse when we compare shortage of staff in large and small firms. 44 percent of the largest companies as compared to 15 percent of the smallest companies in the PwC survey were confident that they have all the necessary resources in place (PwC, 2004b). The shortage of skilled manpower might be a big issue for the remaining 56 percent of largest companies. Though lower cap listed will probably need lesser amount of resources as compared to mid or large cap listed firms, they may still find it difficult to locate skilled resources as most of them would have been already grabbed by larger firms.

Transitional phase is always fraught with difficulties and confusion. A number of countries have adopted IFRS. But there is still no single or commonly accepted way of employing IFRS. As of date, there is no single International GAAP. A consensual International GAAP will only emerge after a few years of implementation by companies across different countries. The journey is definitely not short and easy. Companies and auditors interpretation of new financial reporting standards may differ across the cross-section and also may be with in same industry. 

Will we see a single accepted International GAAP in short term? Looking at the variations in current national standards and new standards being open to subjective interpretation, it would be naïve to say yes. It would be an ideal scenario to have a single International GAAP at some time but the more important issue is whether we need a single accepted International GAAP immediately. As long as the individual countries commit to implementing IFRS in true sense and allow their companies some time to navigate through the change process, it should be acceptable.

Auditors

Auditors are the links between IFRS and companies compliance with new accounting standards. Their role is vital in ensuring compliance of IFRS by companies and becomes more in the initial years when there would be some confusion on generally accepted accounting practices. But the things are not so rosy on that front. In a survey carried out by International Accounting Standards in 2000, it was found that major audit firms issued unqualified audit opinions on IAS financial statements that did not comply fully with IAS (Cairns, 2003). If this was the state of major audit firms, it wouldn’t be wrong to imagine that things would be similar or even worse in smaller audit firms. It was also found that auditors sometimes limit their opinion to compliance with national GAAP even when the financial statements of the company asserted compliance with IAS.

While both personnel from companies and accountants agree that IFRS will need more resources and result in higher costs than the implied benefits of it, accountants are more favourable in their opinion about IFRS. It is the companies that will have to incur all costs and on regular basis. Accountants will have to just learn once the differences and they can recover learning costs by charging higher to their clients. Probably more complexities in IFRS will result in higher work for accountants.

Impact on non-financial personnel

Finance personnel would have to learn new accounting standards being introduced under IFRS. They will have to develop new formats for internal reporting. The changes and their impact would also be felt by operational managers. The new formats may impact the profitability of divisions. Managers may be forced to look at the ways business is carried out and explore new ways to maintain or increase profits.

Also since most of the employee bonuses are linked to profits, the application of new accounting standards will also impact performance bonuses. The first year of transition may result in huge variations in bonuses. Employees of insurance companies may find that their bonus packages have been severely impacted by new regulations on financial instruments. Companies may be forced to come up with new bonus packages, an extra and costly burden as bonus packages take long time to evolve.

Non-listed firms and IFRS

Non-listed firms are generally smaller, less diverse in terms of divisions and number of international locations as compared to listed firms. All these factors mean that non-listed firms may find the IFRS transition process less complex and hence can complete it with lesser resources and in lesser time as compared to listed firms.  

METHODOLOGY

The central question in this research – justification of IFRS and its implications – means that it is an area dependent upon people’s subjective opinion on various issues related to IFRS. The complexity of the issue means that this research is better approached in an inductive way rather than deductive way. The world of business is too complex and diverse to render itself to generalised assumptions and hence one approach for all should not be adopted. The research collects and analyses both qualitative and quantitative data to see if IFRS is suitable for un-listed companies.

The qualitative approach is a better starting point. It helps in developing a better understanding of the topic and also to explore other issues related to the central question of this research. Quantitative approach lends credibility to the whole approach and to conclusion, if any. To overcome the quality or bias in the quantitative data, the data is analysed from statistical viewpoints also.

Both secondary and primary data such as questionnaires and interviews have been used in data collection. The central question on justification and implications of IFRS is mostly explored using secondary resources like journals, press releases and other documentary sources. The report analyses the views expressed in various publications. A large number of publications and sources have been used to present a much boarder picture. The secondary research also challenges the viewpoint expressed by different sources.

The results of secondary data analyses have been used in formulating a strategy for primary research. Primary research covers the issue of IFRS from the viewpoint of un-listed UK companies. Most of the research on applicability and usefulness of IFRS have been done on listed companies and much less resources have been spent on analysing IFRS from the viewpoint of un-listed companies. This report and its findings deal primarily with un-listed companies.

Primary data is collected through interviews with relevant personnel in un-listed companies and their accountants. Most of the persons interviewed were either Finance Director or Group Financial Controller and in almost all cases they were in charge of IFRS transition process. Interviews were conducted using a semi-structured format using the insight gained from secondary data to initiate the topic and then exploring deeper into issues faced by un-listed companies. Any interesting observations and insights of interviewees were further explored to gain better perspective of a wider range of areas. Experience gained in the first few interviews was used to refine interview questions and procedure for remaining interviews to obtain better results. Where possible, interviews were recorded with the prior permission of interviewees to increase the reliability and validity of results. Interviewees were also informed about the purpose of this research and their rights. As far as possible with in the time constraints in each interview, same questions were asked to interviewees to statistically strengthen the results.

Interviewee selection was one of the key issues in research. A major limiting factor was the availability of time and resources to conduct a much broader research. As such, the search was limited from a geographical area of 25 miles. It wasn’t possible to cover all industry sectors and it was also essential to conduct more than one interview in sectors to prevent synthesis of biased opinion.

A questionnaire is also used to obtain a larger set of primary data. Using questionnaire is an economical way of reaching more information from a larger sample of UK un-listed companies and accountants and a larger geographical area can be covered in relatively shorter time. A drawback of questionnaire is that only objective information can be obtained and it is difficult to capture the unique experiences of respondents.

Another drawback of questionnaire is that one is not sure of number of responses. An initial estimate of response rate was used in conjunction with the responses required to obtain the minimum number of postal questionnaires to be sent. The following equation gives the relationship:

Actual sample size = Minimum sample size / estimated response rate

It is hard to estimate a response rate for such questionnaires and a 10% response rate was used. A 10 % should result in 30 responses.

Responses from company respondents and questionnaire were compared with those from auditors. Auditors responses to IFRS will be different from company respondents due to the nature of difference in jobs. Auditors will have to work with IFRS and it is difficult to expect an opposition to IFRS. But it is useful to compare their view with the view expressed by other respondents. Also being able to express their views unanimously, auditors will be more candid and fair.

DATA ANALYSIS AND INTERPRETATION

The results of interviews with companies and accountants and questionnaires pinpoint in one direction only – IFRS in its current form is not suitable for unlisted and smaller companies.

We interviewed [34] people – [20] were from company management and [14] were accountants with those companies. Interviews with accountants were less in number than with management because of two reasons – first, some firms had same accountants and second, some interviews were cancelled. 

Appendix I shows the questionnaire used along with the interviews. Interviewees were given the questionnaire to get more objectives answers. Often interviews run short of time due to some change in plans of interviewees or due to longer time taken to answer some specific issues. Appendix I questionnaire was also sent in postal survey.

Appendix III shows the interviewees response to the questionnaire. All interviewees answered all the questions, probably because they had been personally interviewed.

Out of [20] companies interviewed, [8] had annual turnover less than £50m, [6] had turnover between £50m and £250m, and [6] with turnover more than £250m. The distribution is also skewed towards the smaller turnover companies in the questionnaire surveys.

Companies surveyed were from a number of industries to avoid any kind of bias. IFRS will impact some industries more than others and hence surveying a larger number of industries gives a broader perspective.

A total of [300] questionnaires were sent to different companies and a total of [52] responses were received at a response rate of [18] percent, a percentage much higher than anticipated. Larger data set in questionnaire survey has improved the quality of results.

Appendix IV shows the response to the postal survey. Unlike the questionnaire to interviewees, not all respondents answered all the questions. A reason could be that they answered only in the areas they felt comfortable with.

On the timeline for implementing IFRS, most of the companies said that they would implement probably in 2007 only and around the time when it becomes mandatory for them to do so. Only [2] of the companies interviewed and [6] of those responded via postal questionnaire said they planned to implement IFRS in 2005. Interviewees were asked the rationale for this decision. Most of them mentioned the uncertainty around IFRS as a major reason for delaying the implementation decision. Interviewees said that they would wait for industry practices to be established over time by listed and bigger companies before implementing IFRS. It also reduces their costs associated with multiple changes in accounting standards.

On the question of whether they have made a decision on change in accounting policies due to IFRS, [50] percent of companies interviewed said that they haven’t started the process yet. The response was also similar in case of questionnaire. This shows that unlisted companies are way far behind in implementing IFRS. It is also in line with the results of surveys done by PwC and ICAEW on listed companies. The good thing here is that unlisted companies have still got time till 2007. But they shouldn’t wait till the last minute to initiate the process.

It was also found out that those companies which planned to list in short or medium term were ahead in accounting policies review process. They will have to comply with IFRS as and when they list. Additionally investors and analysts will compare such companies with their listed peer group who now have to use IFRS and hence it makes sense for companies planning to list soon to start adopting IFRS sooner.

On the aspect of evaluating impact of IFRS on companies’ financial performance indicators, the percentage of respondents saying not yet started was even higher. [60] percent of interviewed companies said that they haven’t yet started evaluating the impact of IFRS on financial performance indicators. This is not surprising because if they haven’t started a review of accounting practices under IFRS, it is difficult to comment on impact of IFRS on their performance indicators. The results were also similar in postal questionnaire survey. When the results of this question were analysed with reference to the turnover of companies, it was found that the companies where no work has started on impact assessment were mostly in the lowest turnover bracket.

But when respondents were asked what would be the general impact of IFRS on key financial indicators, the response was mostly negative. [40] percent of companies interviewed said that they think IFRS will have a negative impact on key financial indicators while [30] didn’t have much idea. The negative general impact is higher than the negative impact question on their specific companies. It is probably due to the wide-spread publicity given to IFRS and the likely negative volatility in the annual reports of bigger companies. Also the news coming out on IAS 39 and its potential negative impact on banks and insurance companies have helped form a general opinion that IFRS will lower their results.

And as the companies had yet to finish or even start their review of accounting policies under IFRS and its impact on their key financial performance indicators, the Board member were mostly unaware of the specific impacts. Some of the interviewees did mention that the Board members have a fair idea of the impact and they have discussed the issue in general even though no systematic approach has been adopted yet. About [40] percent of Board members had no idea of IFRS impact. On correlating this with their annual turnover, it was found that the percentage was much higher in case of lower turnover companies. Lower turnover companies normally have lesser resources to spare for issues like review of accounting policies and they are the ones who didn’t have plans for listing in near future. So they have probably left the whole exercise of review and assessment until the date of mandatory application.

One interesting difference observed between listed and unlisted companies is the need for external communication. Listed companies, in the survey done by PwC and ICAEW, had either prepared their external communication strategy or were in the process of doing so. But about [50] percent of the unlisted companies in this report said that they don’t feel a need to communicate changes to external environment. Interviewees said that changes, if any, would only need to be discussed with their banks. And since they have a good communication with their bankers on regular basis, they don’t feel a need to develop a separate strategy to communicate with their bankers.

When respondents were asked if IFRS is better than UK GAAP, about one-third replied in negative. Only about [10] percent said that IFRS is better than UK GAAP. About half of the respondents said that either they don’t know it as of now or both the standards were almost same. Once companies start applying IFRS on day to day basis, the number of undecided respondents will come down and we will have a better comparison of two accounting standards.

The response was even more critical of IFRS when asked with respect to smaller companies. About [50] percent of respondents said that UK GAAP is better than IFRS for smaller companies. Though less than [50] percent of respondents have done a proper assessment of accounting standards, yet many say that UK GAAP is better than IFRS. This is mostly based on the perceptions they have gained from media and also from discussions with other companies.

IFRS will increase the complexity of financial reports as compared to UK GAAP. [50] percent of interviewed companies and [40] percent of questionnaire responses reported that IFRS financial reports will be more complex than UK GAAP. UK GAAP allows smaller companies to avail exemptions in financial reports. Smaller companies don’t have to share their reports with a large audience and hence shorter version of financial reports is sufficient for them. Under IFRS, no such exemptions are available right now. IASB is considering giving smaller companies some sort of exemptions from full reporting but nothing is certain now.

Smaller and unlisted companies are also well behind in setting up IFRS conversion projects. Many companies have yet to start a project implementation team. Many companies also said that they don’t need a project team. The responses were than tallied with companies’ turnover. It was found that companies with turnover less than £50m are the ones that have mostly either not set up a project team yet or don’t intend to do so. One more factor to bear in mind is the unlisted companies have time till 2007 to implement IFRS.

On resources, companies’ were almost unanimous in saying that they don’t have sufficient internal resources to implement IFRS. More than [50] percent companies surveyed via both interviews and questionnaire said that they don’t feel confident in their in house abilities to implement IFRS. We saw before that how most of them feel that IFRS financial reports would be more complex.

Companies would need to collect more data on segmental information. [50] percent of interviewed companies said that IFRS will need more resources on regular basis. The implied costs on smaller companies would be high as compared to listed companies.

IFRS financial reports demand a lot more data collection. Data collection is one thing but it should also be monitored how data is collected and analysed. Smaller and unlisted companies normally don’t have well laid out procedures to monitor data gathering. Companies surveyed said that they will have to increase their internal process controls. [60] percent of respondents said that IFRS will require either some or significant increase in internal control procedures. Additional activity levels will increase costs for companies. Larger companies will probably won’t feel the pinch of more resources on internal controls. Most of the smaller companies are managed by a small set of close knit people and it is doubtable whether the extra resources put on improving internal control procedures would result in any better information for owners.

The high demands placed by IFRS on companies would mean their staff should be suitably trained to handle transition to IFRS and to maintain proper financial records on regular basis. [60] percent of the respondents said that their existing staff were either very or slightly inadequately trained to handle IFRS. If [60] percent of the companies have this view then it implies that IFRS trained staff may be in short supply. Companies may face huge bills for making their accounts and procedures complaint with IFRS. And they agreed on this. Respondents either were not sure of how much it would cost them to train their staff or said that it may be a significant figure. Resources like manpower spent on training may have a negative impact on business during the transition phase.

Not only finance personnel would have to learn new changes, the impact may also be felt by operational managers. The divisional profits would be reported in under new formats and may impact the profitability of divisions. Since most of the employee rewards are linked to profits, the application of new accounting standards will also impact performance bonuses.

IT has become an integral part of businesses, even for smaller businesses. Bigger companies have more elaborate IT systems to capture more data. IFRS reporting will mean that companies have to collect more data than under UK GAAP. [60] percent of the companies surveyed said that IFRS will result in either in changing their IT systems completely or making significant changes. Changing IT systems may also cause business problems.

All the above requirements – training and IT systems change – mean that companies have to incur a cost in transition to IFRS. About [50] of the respondents said that the costs due to IFRS transition are significant. Significant cost is also a major reason why unlisted companies are behind in IFRS implementation and have delayed it till it becomes mandatory. Then smaller companies can gain from the experience of listed companies and reduce costs. Also by then changes in IFRS would be occurring at a much lesser frequency and companies can avoid costs due to each change.

Costs are major factor in most of the business decision. IFRS transition costs represent a significant burden for smaller companies and they don’t see any benefit coming in short term. Smaller companies don’t have the luxury of bigger companies in terms of long term investment because they are not sure how long they would be in business. Moreover smaller businesses face more cash flow problems and would like to delay any costs that don’t result in immediate business.

This leads to the central issue whether IFRS is better than UK GAAP and if so, does the costs justify the transition. Smaller companies think that costs of transition don’t justify the benefits of transition. Only [20] percent of the respondents said that the costs justify the change to IFRS – a result not in favour of IFRS. ICAEW has also asked IASB to look at giving some exemptions to smaller companies.

On question of whether IFRS will result in better internal management reporting, most of the respondents said that were either not sure of the benefits or didn’t think it will result in significant benefits. The answer is based more on perceptions than experience as most of the companies have not yet put in place all controls and procedures in line with IFRS. Once IFRS becomes mandatory for unlisted companies and is in place for some time, only then it would be a better time to test whether IFRS compliant systems result in better management reporting.

Overall unlisted companies were not as receptive to IFRS as listed companies. Many raised concerns about the complexity, applicability and benefits of IFRS for unlisted companies. Some even mentioned the exemptions available under UK GAAP and how full IFRS will make their life tougher.

Respondents also mentioned about the costs associated with training of personnel and changing IT systems. As compared to listed companies, these costs represent a significant portion. Respondents were not sure what benefits the transition will bring to unlisted and smaller companies. And this made the decision to spend money all the more difficult.

Respondents also mentioned that they might be forced to adopt IFRS even before the mandatory date due to competitive forces. As listed companies adopt IFRS, smaller companies will also start implementing IFRS so as not to give any undue competitive advantage to listed companies.

Variations due to turnover
The study also analyses the probable variation in IFRS approach and implementation because of company size. The data obtained through questionnaires – both through face to face interviews and postal – is segregated based on company annual turnover. The firms were divided into three categories – large with annual turnover more than £250m, medium with annual turnover between £250m and £50m, and small firms with annual turnover less than £50m.

The results for main areas are:

• Assessing high level impact. The large firms were far ahead of small firms in terms of assessing high level impact. The most likely reason could be that financial institutions will compare their performance with listed firms and hence it would be better to analyse impact of IFRS right now to present a stronger case to financial institutions.
• Internal training. As above, larger firms had either started training their employees in IFRS or were mostly planning to do so in near future. Successful training of employees is key to meaningful analysis of IFRS’s impact on companies’ balance sheets and earning statements.
• System enhancements. Unlisted companies were more or less similarly distributed in enhancement of their systems for data gathering and evaluation. Large firms are more advanced in their understanding and desire to implement IFRS but they were also not yet preparing for major changes in systems.
• Internal controls. The results were similar to what was observed in case of system enhancements though in this case significant proportion of large firms had either put some thoughts to this or were planning to do so in near future.

Variations due to listing in short or medium term

It was expected that companies with plans to list in near future would be more receptive to implementing IFRS. More of such companies were ahead of their peers who had no plans to list in near future. The results, when analysed with reference to companies desire to list in short or medium term, showed clear demarcation.

• Assessing high level impact. Almost all companies that planned to list shortly were far ahead in assessing and implementing IFRS as compared to those companies that had no plans to list in short or medium term.  [80] percent of companies with listing plans had either assessed or were assessing the impact of IFRS on their financial position and performance measurement. Only [20] percent of companies with no listing plans in near future were at assessment stage.
• Internal training. [60] percent of companies with listing plans had either started internal training or were putting a strategy to do so in near future. Only [10] percent of companies with no listing plans in near future were at comparable stage.
• System enhancements. [40] percent of companies with listing plans had started looking at their systems to bring them at levels required with IFRS. For companies with no listing plans in near future, the comparable figure was [10] percent only.
• Internal controls. The results were similar to what was observed in above parameters. The evaluation and setting up of commensurate internal controls was going on in [40] percent of near term listing desirable companies as compared to [10] percent in case of companies with no listing plans.

The above results are not surprising and clearly demonstrate that unlisted companies with near future listing plans were far ahead in terms of IFRS assessment and implementation. They know that when they will go for public floatation, both investors and financial institutions will compare them with listed firms. And it would strengthen their case as well as their credit ratings if they have IFRS systems in place for longer duration. It will also give potential investors more confidence in their financial statements.

Auditors

Appendix II shows the questionnaire used along with interviews for auditors. The theme of the questionnaire is same as that used for companies and auditors but was tailored to match different role of interviewees in companies and auditing firms.

Appendix V shows the response of auditors to the questionnaire.

On the issue of implementation of IFRS, [50] percent of the accountant respondents said that the companies they are working with will implement IFRS in 2007 only, when it becomes mandatory. This shows that either the companies don’t see much benefit in implementing IFRS right now or the costs are too high and don’t justify the early transition now. Also the uncertainty around evolving IFRS standards would be reduced by 2007.

As a consequence of the above decision, only [1] company out of [14] companies associated with the accountants surveyed have completed IFRS implementation. And [10] out of [14] respondents said that the companies audited by them have yet to analyse the impact of IFRS on their key financial performance indicators.

A major difference of opinion between auditors and companies is noticed on the question of impact of IFRS on key financial performance indicators. [50] percent of accountants said that impact would either be same or positive whereas corresponding figure in case of companies interviewed was only [30] percent. When accountants were quizzed that general opinion is that impact would be much more like negative, many replied that the major issues which will result in negative numbers, like hedging instruments, pension deficit won’t arise in case of smaller companies.

Accountants were also more positive about IFRS. When asked whether IFRS is better than GAAP, negative responses were only [15] percent as compared to [35] percent in case of company respondents.

But accountants also confirmed that IFRS is not better when it comes to smaller businesses. In response to whether IFRS is better for smaller companies, [5] auditors replied in negative as compared to [3] that had said that IFRS is not better for companies. Auditors also broadly agreed that if smaller companies have to follow all regulations in IFRS in the current form, the costs and resources required to do so would outweigh benefits. Plus the rationale for IFRS – international capital market and globalisation – is not much applicable for smaller companies that only have domestic markets and don’t plan to list in near future.

Auditors were also less agreeable on whether IFRS will lead to more complex financial reports. Only [2] out of [14] respondents said that IFRS will result in complex financial reports. Many auditors believe that though financial reports would be more voluminous, they won’t be more complex in case of smaller companies. Smaller companies deal with lesser number of contentious issues and hence there is less scope of complexity. Smaller companies have very few or no acquisitions, use less hedging instruments and have very few or no foreign subsidiaries.

On questions of whether the companies have set up IFRS project implementation teams, auditors’ responses were similar to that of company respondents. Only difference was that no auditor said that the companies audited by them don’t need a project implementation team. They believed that even though implementation would be much lesser in smaller companies, they would still need to set up a proper project team to implement the changes. This is necessary so as not to miss finer points in IFRS.

Auditors were more critical on whether companies have sufficient internal resources to meet the IFRS transition requirements. [9] out of [14] auditors believed that companies don’t have enough resources for a successful transition. This number in terms of percentage was even higher than what company respondents said. A reason could be that companies might be thinking that their internal finance staff is capable of handling transition, a view not shared by many auditors. Auditors believed that IFRS will require many changes than what looks from an overview and first year IFRS statements would be the most difficult to prepare. They advised more companies to use professional auditors for a successful transition.

Auditors’ response on additional resource requirement on regular basis was almost same as that of company respondents. Most of them believed that companies may need only slightly more resources as compared to what they are using now.

Though auditors didn’t believe that companies would need significantly more resources, they were more unanimous in saying that companies would have to significantly improve process controls. IFRS reporting needs more data and hence good process controls would help in timely collection and analysis of data. Auditors also mentioned that it is the first time of putting all controls in place that is much more resource intensive and needs technical guidance, but once all procedures and controls are put in place companies can do most of it on regular basis without significant addition in resources.

On the issue of trained staff in the companies, auditors said that staffs in smaller companies were inadequately trained as of now to handle IFRS reporting. [6] out of [14] respondents said that staff in companies were very inadequately trained to handle transition. But they also agreed that as of now it is not a big issue because unlisted companies have time till 2007 to train their staff. Many also said that finance personnel themselves in those companies may themselves go for training before that so that their professional learning is up to date.

This is an interesting observation as training needs might be forced by employees on the employers. So even though employers might not implement IFRS before 2007, they may end up spending on training costs much sooner.

Auditors also said that companies will have to make changes in their IT systems, either significantly or somewhat. Only [3] out of [14] respondents said that the companies audited by them have IT systems that can handle all IFRS requirements.

[3] out of [14] auditors said that costs of implementing IFRS were not significant. But a large number [5] said that the costs would be significant for smaller companies. Also [6] said that don’t know how much would be the costs. As most of the unlisted companies have yet to start implementing IFRS, auditors were not a position to comment on costs impact.

Auditors were equally split on the question whether costs of transition justify IFRS. [4] replied in affirmative and [4] in negative. Also important to note that a significant [6] were yet to form any opinion on this.

We see a major deviation between company respondents and auditors on the issue of improvement in internal management reports. More auditors believed that implementation of IFRS and subsequent new procedures and controls would result in better management reports.

Introduction of The Companies (Audit, Investigations and Community Enterprise) Act 2004 has strengthened the rights of auditors. Directors have to disclose more information in Directors’ reports and auditors can contact more persons. When accountants were asked if they think that the new law has strengthened their rights, only [30] percent said yes. Many agreed that it has improved things on paper now but good accountants were already following those practices.

Auditors highlighted following two areas which will strengthen their rights:

• Auditor of a parent company can now require the information directly from a wider group of individuals
• Increase in penalty for knowingly making a false or misleading statement to the auditor

Auditors were more in favour of IFRS as compared to company respondents. They did agree on the cost implication of making the changes but said that the benefits will justify the costs. But they also pointed out during interviews that this was more of a case with listed and large companies than with smaller and unlisted companies.

Recommendations

• IFRS is here to stay and unlisted companies would be forced to adopt it – either by mandatory laws or though competitive forces. But there is much scope in fine-tuning IFRS for unlisted companies.
• IFRS, in its current form is not suitable for un-listed companies. It has been designed with listed companies in mind and is too complex for un-listed companies to follow. IFRS should be relaxed for un-listed companies.
• IFRS should also allow use of smaller reports for un-listed companies. Such companies don’t have to report to a large audience and are annual reports are only for owners and its lenders, if any. Smaller reports, as being currently allowed by UK GAAP under exemptions for smaller companies, would present almost all the relevant information needed.
• IFRS should only be applied to un-listed companies once international accounting standards have stabilised. Right now there is a lot of uncertainty about different IFRS and smaller companies would find it difficult to cope with numerous changes.
• IFRS should also recommend some reporting formats for smaller companies that can be easily followed by unlisted companies at lower costs. Unlisted companies don’t have to gain much from disclosing all the financial information and hence should not be asked to spend more on preparation of financial statements.

CONCLUSION

The adoption of international financial reporting standards across the European Union from 1st January 2005 is a defining movement which will have an immediate impact on 7000-plus listed European companies who will have to implement new financial reporting standards first. A common international financial reporting standards could result in true global capital markets.

IFRS or IAS was supposedly developed with an eye for a larger audience. It is difficult to design an accounting system that meets everyone’s demands. Whatsoever may be the outcome of these pressures, UK companies now have to implement it. Unlisted companies have been given time till 2007 to implement IFRS. The standards that UK listed companies will follow are not those issued directly by the International Accounting Standards Board, but are those that have been endorsed by the European Commission.

Both IFRS and UK GAAP share broader level aims. But there are many differences at implementation level. IFRS further enhances the concept of fair value and its regulations place stiff definitions on assets and liabilities. Pension deficits would now also need to be on income statements. Financial instruments would also undergo finer scrutiny. All this means that there will be greater volatility in financial statements.

Studies and research on listed companies with reference to IFRS has already highlighted many areas where UK GAAP is better than IFRS. This research has highlighted additional areas where unlisted firms feel comfortable with IFRS. The research confirmed the uneasiness and anxiety in the unlisted companies. First of all IASB is yet to finalise all accounting standards and is issuing regular updates. Unlisted companies will find it difficult to cope with regular stream of changes.

Firms feel that the costs that will be incurred in transition to IFRS are significant with reference to their size. Companies will spend on training of their staff to meet IFRS requirements. It is also believed that not only financial staff has to be trained but the non-financial staff has also to be made aware of the changes. The new regulation on more detailed reporting on segments and products may result in some business changes.

Companies would also have to make significant changes in their IT systems. This would not only incur cost and resources to do that but may also impact normal business during the time of change.

But the most concern was that the benefits of IFRS don’t justify the costs incurred on IFRS. The benefits of IFRS are more for listed companies and unlisted UK-based won’t stand to gain much from that. Respondents said the benefits in cheaper costs and international investor base don’t apply to unlisted firms.

Smaller companies, even listed ones, will find it difficult to cope with extra work due to IFRS. They will lose the exemption granted under UK GAAP and will have to report full financial reports.

The results show that there is definitely a much scope in improving International Financial Reporting Standards for unlisted companies. Respondents were concerned about the costs associated with transition to IFRS and also the additional burden that will come with regular enhanced reporting. That IFRS will help in globalisation of capital markets and probably cheaper costs of capital is not of much significance for unlisted companies registered in UK.

More companies indicated that the impact of IFRS on key performance indicators would be negative than positive, though most of the respondents were not sure of the impact. This highlights the fact that most of the companies have not yet started analysing the impact of IFRS on their key performance indicators.

Even auditors feel that unlisted companies may pay more than what they will get in turn from IFRS. Auditors’ responses were more in favour of IFRS as compared to companies responses. But auditors also agreed that unlisted companies don’t have necessary trained staff and IT systems and they would find it difficult to cope with the changes.

Unlisted companies in general have a long way to go before they can become IFRS compliant. The studies conducted on listed companies showed a higher IFRS compliance than this study. Listed companies were ahead in analysing accounting policies and its impact on their financial performance. A reason for lower initiation of IFRS procedures could be that unlisted companies have time till 2007 to implement IFRS.

But they should not delay the implementation process till the last date. Many listed firms have delayed the implementation of IFRS till the last minute and are now finding it hard and more costly to implement the change. Implementation of IFRS will definitely throw up minor issues that could prolong the implementation process.

The analysis also showed that unlisted companies with near future listing plans were far ahead in terms of IFRS assessment and implementation. They know that when they will go for public floatation, both investors and financial institutions will compare them with listed firms. And it would strengthen their case as well as their credit ratings if they have IFRS systems in place for longer duration. It will also give potential investors more confidence in their financial statements.

The study also analysed the probable variation in IFRS approach and implementation because of company size. The large firms were far ahead of small firms in terms of assessing high level impact. The most likely reason could be that financial institutions will compare their performance with listed firms and hence it would be better to analyse impact of IFRS right now to present a stronger case to financial institutions.

As above, larger firms had either started training their employees in IFRS or were mostly planning to do so in near future. Successful training of employees is key to meaningful analysis of IFRS’s impact on companies’ balance sheets and earning statements. Unlisted companies were more or less similarly distributed in enhancement of their systems for data gathering and evaluation. Large firms are more advanced in their understanding and desire to implement IFRS but they were also not yet preparing for major changes in systems. The results were similar to what was observed in case of system enhancements though in this case significant proportion of large firms had either put some thoughts to this or were planning to do so in near future.

Mostly accounting standards have been framed with an eye for listed and large companies. But unlisted companies have much lesser resources to spend on large regulatory requirements and hence should have different reporting requirements that match the benefits obtained from such reporting. IFRS in its present form would not be a good thing for unlisted companies and should be modified before it can be used by unlisted companies in 2007.

Appendices

Appendix I - Questionnaire for interviewees and postal survey

Name (optional):
Designation (optional):
Company (optional):

1. What is the annual turnover of your organisation?
   1. Less than £50m
   2. £50m to £250m
   3. More than £250m.
2. What is the nature of your industry? (Kindly use common sector name) If your company doesn’t fall into any one of the commonly used sector names, write ‘Others’ and if possible give a little description of your industry.
3. When do you plan to implement IFRS?
   1. In 2005
   2. In 2006
   3. In 2007
   4. Not sure
4. Does your organisation plan to list in short or medium term?
   1. No
   2. Not sure
   3. Yes
5. Has your organisation made decision on change in accounting policies needed due to IFRS?
   1. Not yet started
   2. In process
   3. Completed
   4. Not required
6. Has your company analysed the impact of IFRS on financial performance indicators?  
   1. Not started yet
   2. Preliminary analysis only
   3. Assessment completed
7. What would be the general impact of IFRS on key performance indicators?
   1. Don’t know
   2. Negative
   3. Nothing significant
   4. Positive
8. Is your board of directors aware of the impact of IFRS on your company’s key financial performance indicators?
   1. No
   2. Partially aware
   3. Fully aware
9. If so, have they formulated a communication strategy to convey the same to stakeholders?
   1. Don’t need to communicate
   2. Not started yet
   3. In the process of formulating one
   4. Already formulated
10. Is IFRS better than UK GAAP?
    1. No
    2. Don’t know
    3. Almost same
    4. Yes
11. Is IFRS better than UK GAAP for smaller companies?
    1. No
    2. Don’t know
    3. Almost same
    4. Yes
12. Will IFRS increase the complexity of financial reports?
    1. No
    2. Don’t know
    3. To some extent
    4. Substantially
13. Have your organisation set up an IFRS conversion project ream?
    1. Don’t need one
    2. Not yet
    3. Looking for resources
    4. Project fully staffed and running
14. Does your company have enough internal resources to run IFRS conversion project?
    1. No
    2. Don’t know
    3. Yes 
15. Will IFRS need additional resources, as compared to UK GAAP, on regular basis?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, much more significant
16. Does your organisation need to put more internal process controls?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, much more significant
17. Is your staffs suitably trained to handle the transition to the IFRS?
    1. Very inadequate
    2. Slightly inadequate
    3. Can manage through
    4. Fully trained
18. If your staffs need training, how much would be the training costs?
    1. Don’t know
    2. Insignificant
    3. Significant
    4. Very high
19. Can your IT systems handle the transition to the IFRS?
    1. No, will have to change them altogether
    2. Need substantial change
    3. Need some change
    4. Fully capable
20. Will extra resources for IFRS cast a negative impact on the business?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, Much more significant
21. Are the costs of IFRS change significant?
    1. No
    2. Don’t know
    3. Yes
22. If IFRS is better than UK GAAP, does change cost justify the transition?
    1. No
    2. Don’t know
    3. Yes
23. Will extra efforts result in better internal management reporting?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, Much more significant

Note: This survey is being conducted to do research on the justification for and impact of IFRS on smaller companies. No information revealed by answering this survey will be revealed to external sources without the prior permission of respondents.

Appendix II - Questionnaire for accountants

Name (optional):
Designation (optional):
Company (optional):

1. When do you think most of the unlisted companies plan to implement IFRS?
   1. In 2005
   2. In 2006
   3. In 2007
   4. Not sure
2. How far are the organisations on change in accounting policies needed due to IFRS?
   1. Not yet started
   2. In process
   3. Completed
   4. Not required
3. Has this company analysed the impact of IFRS on financial performance indicators? 
   1. Not started yet
   2. Preliminary analysis only
   3. Assessment completed
4. What would be the general impact of IFRS on key performance indicators?
   1. Don’t know
   2. Negative
   3. Nothing significant
   4. Positive
5. Is IFRS better than UK GAAP?
   1. No
   2. Don’t know
   3. Almost same
   4. Yes
6. Is IFRS better than UK GAAP for smaller companies?
   1. No
   2. Don’t know
   3. Almost same
   4. Yes
7. Will IFRS increase the complexity of financial reports?
   1. No
   2. Don’t know
   3. To some extent
   4. Substantially
8. Do you think that this company needs to set up an IFRS conversion project ream?
   1. Don’t need one.
   2. Not yet
   3. Looking for resources
   4. Project fully staffed and running
9. Does this company has enough internal resources to run IFRS conversion project?
   1. No
   2. Don’t know
   3. Yes 
10. Will IFRS need additional resources, as compared to UK GAAP, on regular basis?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, much more significant
11. Does this organisation need to put more internal process controls?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, much more significant
12. Is the current staffs suitably trained to handle the transition to the IFRS?
    1. Very inadequate
    2. Slightly inadequate
    3. Can manage through
    4. Fully trained
13. Can this company’s IT systems handle the transition to the IFRS?
    1. No, will have to change them altogether
    2. Need substantial change
    3. Need some change
    4. Fully capable
14. Are the costs of IFRS change significant?
    1. No
    2. Don’t know
    3. Yes
15. If IFRS is better than UK GAAP, does change cost justify the transition?
    1. No
    2. Don’t know
    3. Yes
16. Will extra efforts result in better internal management reporting?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, Much more significant
17.  Has the new Companies Regulation strengthened the rights of auditors?
    1. Not significant
    2. Don’t know
    3. Yes, but only slightly more
    4. Yes, Much more significant

Note: This survey is being conducted to do research on the justification for and impact of IFRS on smaller companies. No information revealed by answering this survey will be revealed to external sources without the prior permission of respondents.

Appendix III – Results of questionnaire for interviewees

Question	Options				Total responses
	A	B	C	D
1	8	6	6		20
2	N/A
3	2	6	8	4	20
4	6	4	10		20
5	10	7	3	0	20
6	12	6	2		20
7	6	8	4	2	20
8	8	7	5		20
9	11	5	4	0	20
10	7	5	5	3	20
11	9	4	4	3	20
12	4	5	2	9	20
13	3	9	5	3	20
14	11	6	3		20
15	3	4	10	3	20
16	3	3	11	3	20
17	7	5	5	3	20
18	8	3	3	6	20
19	4	10	3	3	20
20	4	7	7	2	20
21	9	6	5		20
22	7	7	3	3	20
23	7	10	3		20

Appendix IV – Results of questionnaire for postal survey

Question	Options				Total responses
	A	B	C	D
1	22	19	11		52
2	N/A
3	6	13	22	11	52
4	13	16	13		42
5	22	17	7	0	46
6	26	14	11		51
7	13	20	9	8	50
8	19	13	16		48
9	23	14	12	0	49
10	17	12	10	9	48
11	23	9	8	8	48
12	8	14	7	21	50
13	9	18	15	7	49
14	24	14	9		47
15	9	14	19	8	50
16	10	12	20	8	50
17	19	12	10	9	50
18	18	13	9	10	50
19	16	14	11	8	49
20	14	17	13	6	50
21	19	21	10		50
22	17	13	8	10	48
23	15	23	12		50

Appendix V – Results of questionnaire for auditors

Question	Options				Total responses
	A	B	C	D
1	2	5	7		14
2	9	4	1		14
3	10	3	1		14
4	2	5	4	3	14
5	3	3	5	3	14
6	5	3	4	2	14
7	4	3	4	3	14
8	0	8	4	2	14
9	9	3	2		14
10	2	4	6	2	14
11	1	1	8	4	14
12	6	3	3	2	14
13	2	7	2	3	14
14	5	6	3		14
15	4	6	4		14
16	2	3	5	4	14
17	4	3	5	2	14

 
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