[Excerpt] The EU is proposing to implement a directive requiring listed companies in the EU to prepare their consolidated financial statements in accordance with generally accepted accounting principles set out in International Accounting Standards (or International Financial Reporting Standards, as they will soon be called!). The impetus for this is the harmonisation of the capital markets in the EU and the desire to have a consistent set of accounting principles used in the consolidated financial statements ("group accounts") of all EU listed entities.
It is understood that Member States will have an option to extend this requirement and either permit or require other companies, or other classes of companies (such as banks or insurance companies or, indeed, all companies) to adopt 'IAS GAAP' in the preparation of their financial statements.
The purpose of this article is to examine some of the issues that may arise under different options that might be adopted by the Irish government in implementing this directive. The Member States options outlined above give a wide range of possible approaches that could be adopted but, for the purposes of this article, I have chosen to examine just the following three alternatives:
â?¢Option 1 IAS GAAP required and permitted only for the group accounts of listed companies
-Option 2 IAS GAAP required and permitted only for the financial statements of public listed companies (plcs) and public interest companies (say regulated companies and large private companies)
-Option 3 IAS GAAP required for all companies.
Under each alternative I have attempted to look at some of the pros and cons from the perspectives of a number of interested parties, such as preparers, users, regulators, professional accounting bodies, Revenue, etc.
Option 1 IAS GAAP required and permitted only for the group accounts of listed companies
The main argument in favour of this approach is undoubtedly that the vast majority of Irish companies are not listed companies and there would therefore be little impact on most preparers of financial statements with a consequential low cost of implementation of the Directive. However, it must be remembered that while listed companies are numerically very few, there would be a significant number of accountancy professionals affected by this change (including members in business and members in practice). Also the principal users of the financial statements of unlisted companies are likely to be the shareholders / owners / managers and since they are comfortable with Irish GAAP, why impose an unnecessary change on them. This approach would also have no impact on the Revenue authorities as tax is levied on entity financial statements and not on group accounts.
However, there are also disadvantages to this approach. Presently, entity financial statements of the parent are normally presented with the group accounts as one package. This practice would probably have to cease, since it would be cumbersome and confusing to have to explain two different bases of preparation for the entity balance sheet and the group balance sheet of listed companies. It would also be problematical for preparers of subsidiaries of listed companies, in that they would need to keep records under Irish GAAP to prepare their own financial statements and supply information under IAS GAAP to the parent for consolidation purposes. This could add significantly to costs.
There would also be the problem of an unlisted company that was applying for a listing on a stock exchange. These companies normally have to give a three year history in their prospectus (generally extracted from their past three years' audited financial statements). It does not seem appropriate to give prospective investors information based on Irish GAAP when all future financial statements will be based on IAS GAAP. The alternative is to restate the history on the basis of IAS GAAP, which in an entity with complex transactions could be both costly and time consuming. Listed companies acquiring an unlisted Irish company would have similar difficulties in preparing their Class 1 circulators.
Lenders and regulators would also be faced with difficulties as they would have to be proficient in both sets of GAAP in order to understand the financial statements they were reviewing. Loan agreements and covenants would need to specify the GAAP on which they were to be based. In particular companies with a lot of financial instruments, such as banks, could have significantly different results and balance sheets under IAS GAAP then they would have under Irish GAAP (IAS 39 deals with Recognition and Measurement of Financial Instruments and there is not an Irish GAAP equivalent). This could impact on the calculation of capital adequacy ratios and make comparisons between unlisted banks and listed banks difficult.
Accountancy professional bodies would have to address the training needs of their members and trainees. There would be the immediate issue of retraining for members in industry and practice dealing with listed companies but also the long term issue of which GAAP should be used for future qualification examinations or whether trainees be examined in both.
Users in general also would be impacted as there would be a lack of comparability between listed and unlisted companies operating in the same industries. This option would also I believe add considerably to the general public's confusion with accounting matters as the term 'true and fair' would have two different meanings depending on the underlying GAAP. It must be seriously questioned as to whether it is appropriate to have this term mean different things in one country. There is also the question of keeping Irish GAAP up to date. At present we are heavily reliant on the UK for 'Irish GAAP' and if the UK does not continue to develop UK GAAP as distinct from IAS GAAP, there must be the danger that our Irish GAAP will fall behind market developments with a consequential effect on reporting standards.
Option 2 IAS GAAP required and permitted only for the financial statements of public listed companies (plcs) and public interest companies (say regulated companies and large private companies)
Una Curtis, FCA, is Director of Professional Standards at KPMG.
Accountancy Ireland Vol 34 No 2 April 2002