International Financial Reporting Standards (IFRSs) have been a part of financial reporting in the United Kingdom since 2005 when EC Regulation 1606/2002 (‘the IAS Regulation’) came into effect.

The IAS Regulation requires companies with securities (either equity or debt) admitted to trading on a regulated market of any member state of the European Union to use ‘international accounting standards’ in preparing their consolidated financial statements.

• Who has to use IFRS in the UK?
• What is the Difference Between UK GAAP and IFRS?
• Why is IFRS important?
• What is Difference Between IAS and IFRS?
• Is IFRS Certification Good?

In this context, ‘international accounting standards’ means standards (International Accounting Standards and International Financial Reporting Standards) issued by the IASB and interpretations issued by the IFRS Interpretations Committee (and its predecessor, the Standing Interpretations Committee) that have been endorsed by the EU. 

EU endorsement

The process for endorsement of a new standard or interpretation (or a change to an existing standard or interpretation) has both a technical level and a political level.

Read Also: Modern Accounting Standards: Do they live up to the Regulator’s Expectations?

The technical merits of each new or amended standard or interpretation are considered by the European Financial Reporting Advisory Group (EFRAG) which is a private sector body.

EFRAG makes recommendations to the Accounting Regulatory Committee (ARC), which comprises representatives of the member state governments of the EU and advises the Commission.

The UK is represented on ARC by the Department for Business, Energy and Industrial Strategy (BEIS). The final decision on endorsement is formally made by the European Commission.

EFRAG maintains a list of the standards and interpretations that have not yet been endorsed.

A company required to apply IFRS as adopted by the European Union may apply a standard or interpretation that has not been endorsed at the date of approval of its financial statements only if it does not conflict with an existing standard that has been endorsed.

Many companies (particularly Foreign Private Issuers subject to the rules of the U.S. Securities and Exchange Commission) seek to state compliance with IFRSs as issued by the IASB as well as with IFRSs as adopted by the European Union.

This is generally possible, but may require the adoption of a new standard ahead of its mandatory application date as determined by the EU.  

Companies with securities admitted to trading on a regulated market

The European Securities and Markets Authority (ESMA)maintains a list of EU regulated markets which is updated from time to time. The Financial Conduct Authority also maintains a list of regulated markets in the United Kingdom. Currently, this list comprises:

• London Stock Exchange – Regulated Market;
• CME Europe;
• The London Metal Exchange;
• ICE Futures Europe;
• NEX Exchange Main Board (formally ICAP Securities & Derivatives Exchange – Main Board);
• Euronext London; and
• BATS Europe

It should be noted that the IAS Regulation applies to only the consolidated financial statements of companies within its scope.  Listed companies with no subsidiaries, typically investment trusts, may continue to use UK GAAP under the law and the Listing Rules.

Similarly, companies with securities admitted to trading on a regulated market may use UK GAAP in preparing their ‘company only’ financial statements.

The Alternative Investment Market (AIM) is not a regulated market within the scope of the IAS Regulation.

However, the AIM rules require any AIM company incorporated in an EEA country (being any EU member state, Norway, Iceland, Liechtenstein or (for the purposes of the AIM rules) the Channel Islands and Isle of Man) to prepare accounts under IFRS as adopted by the European Union. 

Use of IFRSs by other companies

The Companies Act 2006 allows companies, other than charities, to prepare their individual and/or consolidated financial statements in accordance with either UK GAAP or IFRSs. 

This is subject to certain constraints about consistency within groups as discussed below.  Companies that are charities must continue to prepare their individual and group financial statements in accordance with UK GAAP.

Where companies prepare both individual and group financial statements, the choice between IFRSs and UK GAAP operates separately for each. 

A company that is required by Article 4 of the IAS Regulation to use IFRSs for its consolidated financial statements still has a free choice of using IFRSs or UK GAAP for its individual financial statements. 

Similarly, a company outside of the scope of the IAS Regulation that has chosen to use IFRSs for its consolidated financial statements does not have to use IFRSs for its individual financial statements. 

Although less likely, it is also possible by law for a parent company to prepare IAS individual financial statements while preparing UK GAAP consolidated financial statements.

The Act requires that consolidated and individual financial statements (when required) are published together. This continues to apply where the consolidated and individual financial statements are prepared using different frameworks. 

The Act does not specify whether the financial statements should be presented as separate sections of the report or combined together into a single set of primary statements and notes.

In practice, the statements will be clearer if the separate section approach is taken when two frameworks are combined in a single document.

Who has to use IFRS in the UK?

UK publicly traded companies are currently required by company law to apply IFRS as endorsed and adopted by the EU to their consolidated accounts. All other companies must produce their accounts using either EU-adopted IFRS or UK GAAP.

The legislation for company accounts is generally mirrored for other types of corporate entities, for example building societies, limited liability partnerships and friendly societies.

So the question arises: what version of IFRS will be applicable to UK entities if and when the UK leaves the EU?

IFRS as adopted by the UK = IFRS as adopted by the EU on exit day

The stated objective of government is to ensure that laws and rules that are currently in place continue to apply as far as possible.

The draft legislation laid before Parliament (The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019) provides that the international accounting standards (IFRS) adopted for use in the UK on the day that the UK leaves the EU will be those that had been adopted by the EU immediately before exit day.

In other words, IFRS as adopted in the UK will be identical to IFRS as adopted in the EU on that day.

UK adoption of IFRSs post-Brexit

The draft legislation provides for a national framework for endorsement and adoption of IFRS after departure from the EU. Under the draft legislation the Secretary of State has the power to adopt and endorse IFRS for use in the UK when it meets certain assessment criteria.

The intention is that the decision-making function will be delegated to a UK IFRS Endorsement Board, which will be a subsidiary of the Financial Reporting Council (FRC). The Endorsement Board will also be charged with influencing the development of IFRS by the IASB.

European Public Limited-Liability Companies

The draft legislation also includes provisions relating to European Public Limited-Liability Companies (also known as Societas Europaea or SEs).

The draft regulations make consequential amendments and transitional provisions following on from The European Public-Limited Liability (Amendments etc.) (EU Exit Regulations 2018 (SI 2018/1298).

The draft legislation is accompanied by an Explanatory Memorandum which explains the background to the provisions and provides more detail on the changes.

What is the Difference Between UK GAAP and IFRS?

Financial reporting under UK GAAP has more or less followed that of IFRS as it has always been the intention that the UK will report fully under IFRS eventually.

Currently we have quoted PLC’s and ‘AIM’ listed entities reporting under IFRS in the UK. The jury is out at the moment finalising the way forward for the rest of the UK (the SME sector) to follow suit.

When we say there is “not a lot” of difference, there actually is not. However, there are some quite notable differences between UK GAAP and IFRS, which we shall outline as follows:

Stock valuation

Under SSAP 9 Stocks and long-term contracts a company can adopt the ‘last-in first-out’ method of stock valuation (often referred to as the ‘LIFO’ method). However, under the provisions of IAS 2 Inventories this method of stock valuation is not permitted.

Intangible assets – amortisation vs. impairment

In UK GAAP, FRS 10 Goodwill and intangibles allows an entity to amortise goodwill over its expected useful life if that expected useful life is less than twenty years.

There is a rebuttable presumption whereby an entity may consider the life of the goodwill to be more than twenty years.

However, where an entity states that goodwill is deemed longer than twenty years, the directors have to undertake an ‘impairment’ review at the end of the first full financial year following the initial recognition of the goodwill or intangible asset and in other periods, where events or changes in circumstances indicate that its carrying value may not be recoverable in full.

Under the provisions of IAS 38 Intangible assets amortisation is prohibited and the directors must undertake an impairment review on an annual basis. This links into IAS 36 Impairment of assets.

Cash flow statements

Under FRS 1 Cash flow statements cash flows of an entity prepared under UK GAAP are prepared under eight headings – operating activities, returns on investments and servicing of finance etc.

IAS 7 Cash flow statements require cash flows to be reported under three headings: operating activities, investing activities and financing activities.

Another notable feature under IAS 7 is that the ‘reconciliation of movements in cash flows to movements in net debt’ is not required.

The cash flow statement under IFRS is a mandatory primary financial statement, whereas in UK GAAP most ‘small’ companies are exempt under FRS 1 from the requirement to prepare a cash flow statement.

Operating profit

Under FRS 3 Reporting financial performance the FRS requires an entity to report ‘operating profit’. Under IAS 1, Presentation of financial statements this is not required, though an entity may choose to do so.

Changes in accounting policy

Under IAS 8 Accounting policies, changes in accounting estimates and errors a company can only change its accounting policies if it results in the financial statements giving more ‘relevant and reliable’ information.

Under FRS 18 Accounting policies management must review their accounting policies to ensure they remain the most appropriate to its particular circumstances for the purposes of giving a ‘true and fair’ view.

Note the differences between the IFRS objective of ‘relevant and reliable’ and UK GAAP ‘true and fair’.

Construction contracts

Under IAS 11 Construction contracts an entity can apply the ‘percentage of completion’ method if the outcome of the contract can be reliably estimated.

Under the provisions of SSAP 9 Stocks and long-term contracts this task force abstract takes a more prudent approach and recognises ‘prudently’ calculated profit only if the outcome of the contract can be reliably estimated.

However, both IAS 11 and SSAP 9 take the same stance that where a contract is loss-making, losses are recognised in the statement of comprehensive income (income statement)/profit and loss account as soon as they arise.

Deferred tax

Under the provisions of FRS 19 Deferred taxation a company can choose to ‘discount’ its deferred tax to present day values – though it has to be said that this is rarely done in practice.

Under the provisions of IAS 12 Income taxes a company cannot discount its deferred tax to present day values.

Another notable difference in deferred tax is that FRS 19 recognises deferred tax as ‘timing differences’. Under IAS 12, deferred tax is recognised on the basis of ‘taxable temporary differences’.

Fixed assets (Non-current assets)

Under IAS 16 Property plant and equipment, assets ‘held for sale’, ‘biological assets’ related to agricultural activity and ‘exploration and evaluation assets’ are specifically excluded from IAS 16.

They are, instead, covered under IFRS 5 Non-current assets held for sale and discontinued operations, IAS 41 Agriculture and IFRS 6 Exploration for and evaluation of mineral resources respectively.

Such assets identified above which are not covered by IAS 16 do, however, fall under the scope in UK GAAP of FRS 15 Tangible fixed assets.

It is to be noted that ‘investment properties’ are excluded specifically from both standards (IAS 15 and FRS 15), being dealt with under the provisions of IAS 40 Investment properties and SSAP 19 Accounting for investment properties respectively.

Related party transactions

Under IAS 24 Related party disclosures there is no exemption to report related parties if this conflicts with the entity’s ‘duties of confidentiality’. There is an exemption under FRS 8 where such disclosure would conflict with the reporting entity’s duties of confidentiality arising by operation of law.

Consolidation

Under FRS 2 Accounting for subsidiary undertakings, a parent does not consolidate where there are severe long-term restrictions over the assets or management of the subsidiary undertaking. IAS 27 Consolidated and separate financial statements does not have such exclusion.

Investment properties

Under IAS 40 Investment properties, an entity can choose between the fair value model and depreciated cost model for valuation of its investment properties. SSAP 19 Investment properties does not allow the depreciated cost model for such properties.

Agriculture

This follows on from the issues touched on in Fixed Assets (Non-current assets) above. There is no UK equivalent standard for agriculture but there is under IFRS by virtue of IAS 41 Agriculture.

Fixed assets (non current assets) held for sale

Again, there is no ‘specific’ standard which deals with assets held for sale or discontinued operations. In UK GAAP, these are dealt with under FRS 3 Reporting financial performance.

However, the international regime deals with these under separate accounting standard, IFRS 5 Non-current assets held for sale and discontinued operations.

Employee benefits

Actuarial gains and losses are recognised in the Statement of Recognised Gains and Losses (STRGL) in the UK under FRS 17 Retirement benefits. IAS 19 Employee benefits offers a choice.

These can either be recognised in the statement of comprehensive income (income statement); usually over a period representing the average working lives of the employees participating in the defined benefit scheme.

Alternatively, an entity can recognise actuarial gains and losses in full as and when they arise, outside profit or loss, in a Statement of Recognised Income and Expenses (SoCIE). This is very similar to the provisions of FRS 17 Retirement benefits mentioned above.

So when we mentioned earlier that there are “not a lot” of differences between UK GAAP and IFRS, there are some ‘notable’ differences which are identified above.

There are some other differences, but those are the ‘main’ differences. However, in the main the gap between UK GAAP and IFRS is quite small.

Why is IFRS important?

The G20 and other major international organisations, as well as very many governments, business associations, investors and members of the worldwide accountancy profession support the goal of a single set of high quality, global accounting standards.

Why is this the case?

Global standards for global markets

Modern economies rely on cross-border transactions and the free flow of international capital. More than a third of all financial transactions occur across borders, and that number is expected to grow.

Investors seek diversification and investment opportunities across the world, while companies raise capital, undertake transactions or have international operations and subsidiaries in multiple countries.

In the past, such cross-border activities were complicated by different countries maintaining their own sets of national accounting standards.

This patchwork of accounting requirements often added cost, complexity and ultimately risk both to companies preparing financial statements and investors and others using those financial statements to make economic decisions.

Applying national accounting standards meant amounts reported in financial statements might be calculated on a different basis.

Unpicking this complexity involved studying the minutiae of national accounting standards, because even a small difference in requirements could have a major impact on a company’s reported financial performance and financial position—for example, a company may recognise profits under one set of national accounting standards and losses under another.

Benefits of IFRS Standards

IFRS Standards address this challenge by providing a high quality, internationally recognised set of accounting standards that bring transparency, accountability and efficiency to financial markets around the world.

IFRS Standards bring transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions.

IFRS Standards strengthen accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money.

Our Standards provide information that is needed to hold management to account. As a source of globally comparable information, IFRS Standards are also of vital importance to regulators around the world.

And IFRS Standards contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation.

For businesses, the use of a single, trusted accounting language lowers the cost of capital and reduces international reporting costs.

Experience of adopting jurisdictions

Changing to IFRS Standards does not come without cost and effort. The companies reporting will generally need to change at least some of their systems and practices;

investors and others using financial statements need to analyse how the information they are receiving has changed; and securities regulators and accounting professionals need to change their procedures.

But academic research and studies by adopting jurisdictions provides overwhelming evidence that the adoption of IFRS Standards has brought net benefits to capital markets. 

The documented benefits include a lower cost of capital for some companies and increased investment in jurisdictions adopting IFRS Standards.

Some companies also report benefits from being able to use IFRS Standards in their internal reporting, improving their ability to compare operating units in different jurisdictions, reducing the number of different reporting systems and having the flexibility to move staff with IFRS experience around their organisation. 

In Japan, where use of IFRS Standards has been voluntary since 2010, a report by the Japanese Financial Services Agency identified business efficiency, enhanced comparability and better communications with international investors as the main reasons why many Japanese companies had chosen to adopt IFRS Standards.

Progress towards global standards

IOSCO recognised the benefits of global Standards when, in the year 2000, it recommended to its members that they allow IFRS Standards to be used on their exchanges for cross-border offerings. 

Since that point, IFRS Standards have gone on to become the de facto global language of financial reporting, used extensively across developed, emerging and developing economies.

The research shows that 144 jurisdictions now require the use of IFRS Standards for all or most publicly listed companies, whilst a further 12 jurisdictions permit its use. 

What is Difference Between IAS and IFRS?

IFRS are formulated by International Accounting Standard Board. However, the responsibility of convergence with IFRS vests with local government and accounting and regulatory bodies, such as the ICAI in India.

Thus ICAI need to invest in infrastructure to ensure compliance with IFRS. India has several constraints and practical challenges to adoption and compliance with IFRS.

So there is a need to change some laws and regulations governing financial accounting and reporting.

Therefore there are several challenges that will be faced on the way of IFRS convergence. These are:

1. Difference in GAAP and IFRS:

Adoption of IFRS means that the entire set of financial statements will be required to undergo a drastic change. The differences are wide and very deep routed. It would be a challenge to bring about awareness of IFRS and its impact among the users of financial statements.

2. Training and Education:

Lack of training facilities and academic courses on IFRS will also pose challenge in India. There is a need to impart education and training on IFRS and its application.

3. Legal Consideration:

Currently, the reporting requirements are governed by various regulators in India and their provisions override other laws. IFRS does not recognize such overriding laws. The regulatory and legal requirements in India will pose a challenge unless the same is been addressed by respective regulatory.

4. Taxation EFFECT :

IFRS convergence would affect most of the items in the financial statements and consequently the tax liabilities would also undergo a change. Thus the taxation laws should address the treatment of tax liabilities arising on convergence from Indian GAAP to IFRS. 

5. Fair value Measurement:

IFRS uses fair value as a measurement base for valuing most of the items of financial statements. The use of fair value accounting can bring a lot of instability and prejudice to the financial statements. It also involves a lot of hard work in arriving at the fair value and valuation experts have to be used.

Is IFRS Certification Good?

Without any international financial reporting standards, it would be difficult to compare financial accounts of organisations from different countries from different parts of the world.

You would have, otherwise, had to find out the accounting principles followed in those countries, then find out the differences in the accounting standards. This leads to a tedious task of comparing and adjusting.

Read Also: Internal controls: Good or bad for Employees of Accounting Firms?

IFRS has made it easier to compare organisations from different parts of the world who follow the common accounting standards.

What are the advantages of adopting IFRS?

Apart from providing a common standard of reporting, there are numerous advantages of adopting IFRS. Some of the prominent ones are mentioned below:

• Provides better comparability – When businesses are using a similar financial reporting standard, it makes easier for investors to compare the financial statements more accurately. It is highly helpful for investors to understand where to invest when they have a clear picture of the financial comparisons of the organisations.
• Benefits new and small investors – As the financial standards are common, the reporting standards are made simple and have better quality. This puts the new and small investors at par with professional investors and is the financial standards are simple to be read by all, they do not face the risk of professionals taking advantage.
• Manage resources better – As the accounting standards are streamlined through IFRS, companies can manage their resources better. It can also lower the cost of auditing and statutory reporting.
• Lowers the cost of capital – As the financial reports are standardised through IFRS, businesses can raise more capital from foreign markets at a lower rate as it creates a sense of confidence among the investors. It is easy for investors to understand the financial reporting when it complies with the international standards.

What are the benefits of having an IFRS certification?

Having a certification always has its advantages and if you are looking to start a career as a finance manager, an IFRS certification can really help you. Following are some of the reasons why you should get an IFRS certification:

• There is a lack of skilled accounting professionals who are well-versed with international standards in the industry. Getting certified and having the skills will place you in a great position to get opportunities to work with some of the top organisations.
• As the implementation of IFRS has already started in India, the demand for people who are skilled in it is going to skyrocket in the next few years. You can get attractive salary packages if you have a certification in IFRS.
• There is a demand for IFRS professionals across the financial and banking industry. They need skilled professionals who can implement IFRS in their financial reporting. With a certification, you can improve your chances of a promotion or getting a better position.
• As an IFRS expert, you can also start a successful career in the financial education industry. You can join as a subject matter expert in institutions offering training in IFRS and this is a lucrative industry.

What are the top IFRS certifications?

Are you looking to start a career in accounting? IFRS is a great skill you can have to improve your professional life. Some of the top IFRS certifications you can go for are:

• IFRS – 6months: This course has been specifically designed to provide a comprehensive understanding of the international financial reporting standards, along with the diversities and complexities in the globe.
• IFRS – International Financial Reporting Standards: Get intensive training on the international accounting standards based on IFRS. Through this course, you can learn all the elements of financial statements.
• Diploma in IFRS (DipIFRS) Training: The objective of this diploma is to train candidates on the fundamentals of IFRS and how to implement while producing financial reporting. This course has been designed by some of the experts in the industry.