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IFRS is a step change in financial accounting and reporting and is intended to harmonise accounting practices across the European Union. This consistency is intended to make it easier for shareholders across country borders to measure and compare performance and to truly embrace a global international language.

Much of the focus on the transition to IFRS for software and services companies has been to ensure that the interpretations of the new accounting framework are consistent and many common topics continue to be debated by finance teams and audit committees. Market analysis in the UK shows that the net quantum of the adjustments for each company ranges from no impact to a near twenty fold increase in profits, however the common factor within the sector is the small number (average 3-4) of adjustments which are consistent in nature.

So, was it all hype? In working with financial teams and audit committees it is clear that these results mark the complexity of some of the new accounting standards and the difficult journey that has been taken by companies to accurately identify the impact of IFRS on their results. Nearly sixty per cent of those companies who have reported the impact of the transition to IFRS have seen an increase in net assets and nearly eighty percent have seen an improvement in their restated results under IFRS.

In the UK there are six companies within the thirty-one software and computer services industry that have announced to date, who have seen a significant reduction in their net assets as a result of the change in accounting of their defined benefits pension schemes.

USE OF SHARE BASED SCHEMES The use of share-based awards has been widely used within the sector as a staff and senior management incentive. The potential volatility to earnings can be significant with the requirement to fair value these awards. The charge that companies expense through the profit and loss account will come under scrutiny as analysts begin to evaluate the use of company's own shares via this charge and the associated benefit. Companies continue to analyse arrangements, given the accounting consequences.

RESEARCH & DEVELOPMENT COSTS MUST BE CAPTURED Previously under Irish/UK GAAP, companies had an accounting policy choice to capitalise or expense development expenditure, with practice being that amounts were routinely expensed. Under IFRS, there is a requirement to capitalise development expenditure once certain criteria have been met. Many commentators believe that by capitalising such amounts, companies are effectively putting costs on their balance sheets which were previously expensed, which is not appealing. There is also a widespread concern that the application of this standard would lead to a diversity in practice on what was being capitalised.

However, the rules need to be applied and a degree of judgement is necessary. Many companies manage their product life cycle in different ways and the determination of whether the specific capitalisation criteria are met are much more visible and determinable in some instances.

A few companies in the UK market analysis have capitalised amounts, noticeably they include all of the larger-cap companies. Does this indicate that large-cap companies have a more defined product development life cycle and that they have embraced the spirit of the standard? For those who have capitalised nothing, one must question whether it is because they believe nothing meets the criteria, they are unable to capture the costs, the amounts involved are not material or that they believe it does not apply to their circumstances.

Many companies will continue to watch practice as it evolves but it is fair to say that for the moment experience remains mixed. It is likely that there is not one answer for all. Companies must evaluate if they need to improve their systems to capture such costs, as product development remains critical to the success of the companies in this sector and their ability to bring new technologies to the market.

HOW COMPANIES RECOGNISE REVENUE For many years, the principal accounting issue this sector has wrestled with is revenue recognition. Valuations were hugely dependent on reported revenue and there was a real business need to report the right revenue figure. Prior to recent guidance in the form of Application Note G to FRS 5, 'Reporting the substance of transactions' there was a growing trend to ensure consistency, by adopting the principals set out within SOP 97-2 (the very rules based US standard for software revenue recognition). Following the adoption of Application Note G to FRS 5 the market expected that compliance with Irish/UK GAAP would not give rise to material IFRS differences but as with general rules of thumb, there will always be exceptions. The sector continues to make sure it progresses with some consistency on how it recognises revenue but it continues to require significant judgement.

GOODWILL VS INTANGIBLES Consolidation and acquisition activity remains buoyant. The requirement not to amortise goodwill has seen some dramatic impacts to the reported results, with only one company to date recognising impairment in the year following adoption of IFRS. The need for an annual impairment test places a great deal of emphasis on companies to have reliable cash flow forecasts at a relatively detailed level (commonly defined as a cash generating unit) to continue to support the carrying value of goodwill.

IFRS requires companies to value intangibles as part of an acquisition which were previously included as part of goodwill. Even in a relatively small deal, the need to identify and value these intangibles can add to the deal timeframe and the requisite expertise to value these items can be costly - many companies do not have the necessary valuation expertise in house and will need to engage outside valuation experts.

EMBEDDING IFRS IS ESSENTIAL Embedding IFRS is one challenge which still remains to be addressed by many companies. The majority of the conversions have not yet implemented wholesale system and process change. The need to embed IFRS into an organisation should be seen as an improvement initiative to reduce risk and increase efficiency over the financial reporting process.

John McDonnell is IFRS Services Partner with PricewaterhouseCoopers.