The globalisation of the stock market has prompted a growing need for uniform financial reporting standards. These standards have traditionally varied from country to country, making financial statements difficult to compare. The International Financial Reporting Standards (IFRS) have quickly gained traction over recent years. IFRS is well on its way towards becoming the global standard for financial reporting. Unlisted companies are also adopting IFRS in their financial statements to an increasing extent, due, in part, to the fact that local generally accepted accounting principles (GAAPs), including Dutch GAAP, are progressively being brought in line with IFRS.
What follows are a number of frequently asked questions about IFRS that are relevant to Dutch medium-sized entities.
Does the conversion to IFRS not just signify a technical transition to a different set of accounting principles?
In essence, this is correct, but the implications and the effects can be dramatic. Where Dutch GAAP is often just regarded as a set of recommendations, IFRS is much more in-depth and prescriptive. Business owners will feel more restricted in their actions. In addition, the more extensive disclosure requirements will provide greater transparency, also towards competitors.
What are the potential challenges in transitioning to the new standards?
In order to allow the new standards to be used, you need to know and understand them. Although the International Accounting Standards Board (IASB) alleges that IFRS is mostly principles-based, those principles are not always adhered to in the standards. In other words, logical reasoning based on the principles may at times still lead to the wrong conclusions about measuring assets and liabilities. Details are quick to be overlooked. In addition, IT systems may have to be modified, for instance when it comes to inventory valuation, revenue recognition and hedge accounting records.
Why is IFRS better than Dutch GAAP?
The Dutch Accounting Standards Board has aligned its standards to IFRS for some years now. Now that Dutch GAAP is no longer relevant to listed companies, the Dutch Accounting Standards Board will start to focus more on small and medium-sized entities (SMEs). The IASB has also published a set of IFRS standards recently specifically targeting SMEs (IFRS for SMEs).
Why would an SME want to adopt IFRS?
The benefits of adopting IFRS should outweigh the associated costs, which not only include administrative expenses, but also the ‘cost’ of becoming more transparent for competitors. By adopting IFRS, an enterprise demonstrates to the bank that it moves with the times and takes its financial reporting seriously. Also, if a business has branches or group companies in several countries, its consolidation will benefit from every division using the same accounting principles. True, a head office may issue detailed instructions about using specific accounting principles, but life is made a lot easier if every division speaks the same internationally accepted accounting language. What is more, simply dictating the use of IFRS will facilitate the incorporation of newly acquired businesses into a group’s reporting system.