Ready to take the plunge?

In less than six months, European listed companies must be ready for International Financial Reporting Standards (IFRS). Ian Wright assesses the progress business has made so far and the challenges ahead

We are fast approaching 2005, the year listed companies in Europe will be required by law to start reporting under International Financial Reporting Standards (IFRS). The deadline we have talked about for years has become more of a reality. The introduction of IFRS is the most significant accounting change in a generation and the potential impact on over 7,000 listed companies in Europe, their advisers, auditors, employees and stakeholders, cannot be underestimated. The time to prepare is fast running out.

PricewaterhouseCoopers has been monitoring the readiness of European companies for the introduction of IFRS for a number of years. Its latest survey of 310 listed European companies - Ready to Take the Plunge? - showed that 75% of European listed companies have taken the first crucial steps towards IFRS implementation by at least starting to assess the impact on their business.

The fact that so many companies are moving towards implementation is encouraging. However, even these companies still have much work to do if they are to be ready for the IFRS deadlines. The one in 10 companies that have yet to set up an IFRS project at all have some serious catching up to do. This late start is perhaps less surprising when you consider that the text of some standards that formed the 'stable platform' for 2005 was only finalised at the end of March this year. Some companies seem to have delayed their implementation process until the standards were final. Time is now running out, however, and delay is no longer an option.

A successful implementation strategy requires careful planning - this is not something that can happen on an ad hoc basis. The PricewaterhouseCoopers report identifies seven key steps that enable companies to embed IFRS throughout their organisation.

One of the most crucial steps is to identify the missing information that will be needed for IFRS reporting, and to assess the company's ability to collect that information. The survey shows that almost three-quarters of companies have yet to complete this task - larger companies have made the most progress here. Since work on adapting systems for IFRS cannot begin until it is clear what information is needed, identifying data gaps should be a matter of urgency for everyone affected. The experience of existing IFRS reporters shows that adapting IT systems to produce the required information is one of the most time-consuming tasks ahead.

Another vital step is communication, both internal and external. IFRS reporting is much more than a matter of publishing numbers. The changes represent, in some cases, significant accounting differences that will require careful explanation to the markets. So far, just one-fifth of companies, according to the survey findings, have determined their strategy for doing this.

It is a mistake to believe that IFRS reporting begins with the publication of the 2005 financial statements. It does not. Ideally, reporting some IFRS information should already have started in the 2003 financial statements to meet the recommendation of the Committee of European Securities Regulators. CESR has called for companies to provide markets with a narrative on how they intend to tackle IFRS transition. It also recommends that full IFRS comparatives for 2004 are included in this year's national GAAP financial statements. The 2004 comparatives are required anyway for the 2005 financial statements, and collecting that information retrospectively is not an easy task.

The ultimate challenge for every company will be to avoid 'surprise' changes when reporting under IFRS for the first time. That requires consistent, clear communication. By the end of this year, every analyst will be asking how IFRS will affect a company's reported numbers and key performance indicators. Without a sensible answer, the share price could ultimately be at risk.

Neither should companies make the mistake of believing that IFRS is a matter for management and markets alone. The different reporting requirements and revenue recognition criteria will affect an organisation at every level, from administrative staff to non-executive directors. Again, clear communication and training is the key to a successful implementation strategy.

The PricewaterhouseCoopers survey shows that the majority of companies still have a lot of work to do in communication and training, both internally and externally.

The challenge ahead for many companies is considerable, but by no means impossible. Strong organisation and leadership are key to successful implementation. The ultimate prize from IFRS - comparable, high-quality financial information - will benefit everyone.

IFRS: Ready to Take the Plunge? PricewaterhouseCoopers' latest survey is available on the website at www.pwc.com/ifrs or for hard copies e-mail: corporatereporting@uk.pwc.com.
Ian Wright is global corporate reporting leader at PricewaterhouseCoopers.