Life under IFRS

1
Life under IFRS
The Co-operative Accountants Forum 20 November
2008 Paul Perry
2
Background

• The Co-operative Group implemented IFRS for the
  first time in its 2005 Annual Report (to January
  2006)
• Project kicked off late 2003 ran through to
  January 2006
• Real challenge because of diversity of the Group
  - particularly Financial Services (Banking and
  Insurance).
• Within trading Group as well as generic issues
  (goodwill, intangibles, leases) a whole host of
  business specific issues e.g
• Funerals accounting for funeral bonds
• Farms - valuation of crops in Farms
• Dual layout for balance sheet

3
Approach

• Ran by Group finance with typical project mgt
  disciplines
• Scale of Group amount of workload wanted
  in-house
• Variety of issues specialist business knowledge
  CFS and Farms
• Approach
• Set up project structure Identify stakeholders
• Gap analysis to identify differences
• Summary of key changes ratify with auditors
• Develop tailored training programme - KEY
• Restate opening balance sheets (Jan 2004 and Jan
  2005)
• Budget under IFRS for 2005
• Report 2005 in monthly MI under IFRS .
• 2005 statutory accounts to Jan 2006 prepared
  under IFRS

4
Post implementation issues - MI

• IFRS brought huge volatility pl and balance
  sheet mark to market/investment property
  valuations/goodwill impairment
• Need to consider impact on reporting financial
  performance in monthly management accounts
• Market related items vs. underlying trading
  result
• Mgt accounts have evolved to help users
  understand underlying business performance vs.
  total result

5
MI presentation
6
Post implementation issues - presentation

• Volatility pl and balance sheet mark to
  market/valuations/goodwill impairment
• Impact on reporting financial performance in
  monthly management accounts vs. statutory
  accounts
• Market related items vs. underlying trading
  result
• Mgt accounts have evolved to help users
  understand underlying business performance vs.
  total result
• IFRS not very prescriptive on layout/format of
  statutory Pl. Can use subtotals to ease
  understanding (e.g. mark to market, significant
  items)

7
Post implementation tracking performance

• Budgeting v difficult to budget for certain
  items pensions, mark to market, impairment
• Need to consider how derive targets for
  performance management e.g. profit share schemes
• exclude mark to market, investment properties
  etc?
• Need to involve HR early impact on design of
  scheme.
• Not just a Finance issue
• Need to train users of MI (Boards/ Senior
  Managers)
• HR (pensions/profit share)
• Investment appraisal/acquisitions goodwill and
  intangibles

8
Post implementation issues - Contracts

• Banking covenants need to be revisited
• Interest cover ratios -exclude pension interest,
  mark to market?
• Net debt -at market or book value? Debt vs.
  equity
• Net asset ratios exclude pension balances
  -volatility
• All operational contracts that may have covenants
  e.g. with suppliers
• Business relationships (e.g. JVs etc) control
  issues
• Embedded Derivatives in contracts e.g. prices
  in contracts (wheat in Farms etc)

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Disclosure

• Much of early focus was on accounting methodology
  and measurement changes (because impacts
  definition/value of profit, net assets etc)
• BUT arguably biggest impact on Finance was
  DISCLOSURE Annual Report increased 100 to 142
  pages on adoption!
• Risk (13 pages)
• Insurance contracts (9 pages)
• Pensions (gt 3 pages)
• Accounting policies (gt 6 pages)

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What were biggest issues

• PENSIONS (but now UK GAAP and IFRS same)
• GOODWILL and INTANGIBLES
• Annual impairment reviews arduous, subjective
  (discount rate, cashflows, CGUs) very volatile
  and potentially very material, disclosure
  (significant items?)
• Acquisitions (identifying intangibles vs.
  goodwill)
• Valuation of intangibles (e.g. pharmacy licences
  dcf or market rates)
• Life of intangibles (indefinite?)
• Impacts all areas of business (accounts,
  investment appraisal, acquisitions)

11
Summary

• Implementation lessons
• Training
• Not just Finance
• Timing and Planning
• DISCLOSURE!
• Key issues
• Presentation of MI
• Impact on budgeting/performance mgt
• Bank covenants and contracts
• Subsidiary accounts prepared under IFRS or not?