Indias blue-chip companies have begun to align their accounting standards to the

International Financial Reporting Standards (IFRS), three years ahead of the mandatory time
for the switchover. The list of companies includes IT firms like Wipro, Infosys Technologies
and NIIT, automakers like Mahindra & Mahindra and Tata Motors, textile companies like
Bombay Dyeing and pharma firm Dr Reddys Laboratories.
The companies are moving on despite being compliant with the US GAAP standards, the
current global accounting norms. This is because the IFRS has become mandatory for listing
in the European markets after 2007. The other reason is that the new norms provide for
stiffer provisioning for mark-to-market losses, also known as AS-30 standards.
For companies with exposure in European markets through equity or debt, such
transparency is essential to raise capital cheap and hence, the proactive approach. The
Indian accounting standards body, the Institute of Chartered Accountants of India (ICAI), has
set a time line of 2011 for compulsory switchover to the new standard. IFRS is the
accounting benchmark developed by the International Accounting Standards Board.
Suresh Senapaty, CFO and executive director, Wipro Ltd, said, We welcome the initiative of
ICAI in driving convergence with international financial reporting standards by 2011. We
have adopted AS-30 from April this year, much ahead of its scheduled implementation. We
are also actively considering early adoption of AS-31, which is the next standard.
Ved Jain, president, ICAI, said, Many companies have already started following the new
accounting standards because these ensure transparency and uniformity. The
implementation would strengthen the confidence of stakeholders in the companies financial
statements, which, in turn, will bring value to the corporates.
The ICAIs accounting standard 30 mandates companies to provide for mark-to-market losses
as well as profits from April 2009 on a voluntary basis. All complexities regarding derivatives
have been addressed in AS-30, which is in line with the IFRS norms.
If an entity does not opt for either AS-30 or AS-1, the auditors will need to make a suitable
disclosure. Analysts note that the total mark-to-market losses of Indian companies from
forex derivative exposures could be about $5 billion.
The company auditors would need to disclose the figures separately if the company balance
sheet does not bring them out. Companies with international presence are not willing to
take this risk. Says Rajendra S Pawar, chairman, NIIT Technologies: AS-30 was started from
January 2008, and by 2012, it is expected that we would start following AS-31 as well as AS-
32 as they both happen to be a continuation of AS-30, which we have already started off
with.
A large number of Indian firms are currently battling how to write in huge losses on their
exposure to forex derivatives, when their currency bets went wrong.

Attitude of Unlisted Companies Towards IFRS

SECTION I – INTRODUCTION
The adoption of international financial reporting standards across the European
Union from 1st January 2005 is one of the biggest events in the accounting history.
This is especially important after the capital markets were rocked by some big
accounting frauds in recent years. In the first phase, 7000-plus listed European
companies will have to implement new financial reporting standards from January
2005 (Fuller, Jan 2005).

When European Union moved towards one market across Europe, it faced the
prospect of different financial reporting regimes across EU participants. To achieve
true scale of financial integration, it has become necessary to adopt common
financial reporting standards.

In June 2002, the European Commission adopted a regulation requiring all listed EU
companies in regulated markets to prepare their financial statements in accordance
with International Accounting Standards (IAS) or International Financial Reporting
Standards (IFRS). The regulation is applicable only on consolidated accounts and
companies are free to choose their national GAAPs for subsidiaries and associate
companies. The regulation came into force from January 2005.

Companies Act 1985 governs the use of UK GAAP by UK based companies. Similarly
other EU states have their own laws for accounting standards. The EU states have
now modified their national laws to include IFRS regulation to offer a common
financial reporting standard. Companies Act 1985 (International Accounting
Standards and Other Accounting Amendments) Regulations 2004 has extended the
application, on a non-compulsory basis, of the EU IFRS regulation to all non-
charitable organisations.

In the last quarter of previous century, the world economies have moved towards
globalisation. Multinational companies are manufacturing and selling across the
world and many of these firms are listed at foreign stock exchanges. Globalisation of
markets and establishment of multinationals led to increased desire and awareness
about international markets. This was soon followed by globalisation of financial
markets which increased the value of understanding of international financial results
and reporting formats. Rapid improvement in communication technologies and easy
access through internet has further spread the profile of international investor. Now
a day international investors are not limited to some portfolio managers in big banks.
International investors are now as diverse as sophisticated equity manager to a small
investor in a remote town. Investors too have diversified their portfolio by
international equities and bonds. This rapid globalisation has fuelled the desire to
have common international standards that could be understood and followed across
nations.

The ever increasing network of investors has not only opened new financing sources
to countries, it has also put some pressure on the financial regulatory authorities to
design and improve their financial reporting systems in a manner that is easily
understood by wider audiences.
The regulatory authorities have on one hand evolve the financial reporting system to
match the ever increasing demands of international investors and on the other hand
make sure that companies in their countries are not faced with sudden increase in
time, resources and knowledge needed to cope with new regulations. 

In 1973, 9 countries included UK formed International Accounting Standards

Committee (IASC) with an aim to develop common accounting standards. The
membership has now grown well over hundred countries with each country,
especially bigger economies, bringing in their own perspectives of accounting
standards. IASC had to deal with accounting conflictions in coming up with common
acceptable accounting standards.

One would immediately think whether IASC has been successful in resolving all the
conflicts with all member countries and the answer would easily be no. To fully satisfy
more than hundred accounting bodies from across the world is almost an impossible
task. Yet IASC has done a commendable job and from 1 January 2005, International
Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) is
applicable in more than 90 countries. In EU, IFRS is compulsory only for listed
companies.

The standards that UK listed companies will follow are not those issued directly by
the International Accounting Standards Board, but are those that have been
endorsed by the European Commission. EU has now endorsed IFRS, except for IFRS 6
and some of the IFRIC interpretations, and some changes in IAS 39 relating to the fair
value of financial instruments (PwC, 2005a).

While the EU regulation is only enforceable on listed companies, it also says that a
member state has an option to extend the use of IFRS to unlisted companies within
their jurisdiction. Department of Trade and Industry (DTI), the government trade
body responsible for company regulation in UK, has said that while there is no
mandatory move to IFRS for unlisted companies, the unlisted companies would still
be allowed to adopt IFRS over UK GAAP from 2005 onwards.

The basic aim of new financial reporting standards is same as that of existing
standards – to provide information about financial performance and position of a
company to different stakeholders. Internal stakeholders – management – normally
have a good grip of what’s going in the business. It is external stakeholders like
investors, auditors, suppliers and creditors who need to be informed in a succinct
and clear manner about financial implications of business decisions.

The IFRS would aim to present a more complete picture of a business by making
operating income a more encompassing number. As an example, the financial
implications of stock options were kept out of income statements. Companies merely
mentioned the number of stock options granted. But now onwards, companies will
have to incorporate the fair costs of granting stock options in their income
statements. This will allow investors to assess the true costs of executive
remuneration.

Though the overall aim is same, the differences in implementation and financial
reporting do occur due to social, economic and political backgrounds of different
nations.

Will it be a good policy to allow two different accounting standards in UK – one

standard for listed companies and another for unlisted companies. UK’s Accounting
Standard Board clearly sees there is no merit in having two separate standards. ASB
issued a Discussion Paper in March 2004 highlighting its strategy for convergence
with IAS and says that convergence of UK accounting standards to IAS is a foregone
conclusion. It has already introduced many changes in recent past to bring UK’s
GAAP in line with IFRS.

Smaller companies, even listed ones, will find it difficult to cope with extra work due
to IFRS. Alternative Investment Market (AIM) realises that most of its companies
won’t be in a position to meet IFRS requirements soon. So it changed its regulatory
status in October 2004 and is now an “exchange regulated market” and out of
purview of European Commission regulation on regulated markets. Now companies
listed on AIM have time until January 2007 to implement IFRS.

Accounting Standards Board is also sensitive to the needs placed on business in

making a transition from UK accounting standards to IFRS. Big businesses probably
have sufficient resources to cope with the change in one year. But the smaller
businesses will find it difficult to make all required changes in one year. ASB has
proposed a series of changes that would be implemented in 2005 and 2006 which
will bring UK financial reporting standards more in line with IFRS. Thereafter ASB will
carry out a series of step changes by replacing one or more UK standards. So by the
end of 2005-2006, UK standards will almost be in line with IFRS and unlisted
companies transition to IFRS in 2007 would be smooth.

This research analyses the attitude of unlisted companies towards IFRS. Many
research and surveys have been carried out on the acceptance and readiness of listed
companies for transition to IFRS. But the issue has not been explored in depth with
respect to unlisted companies.

The research is based on primary and secondary data. Primary data is collected via
interviews and questionnaires with companies and their auditors. A total of [34]
interviews – [20] with companies and [14] with their auditors – were conducted to
obtain primary data. [52] questionnaire responses by postal survey were also
analysed.
The results show that there is definitely a much scope in improving International
Financial Reporting Standards for unlisted companies. Respondents were concerned
about the costs associated with transition to IFRS and also the additional burden that
will come with regular enhanced reporting. That IFRS will help in globalisation of
capital markets and probably cheaper costs of capital is not of much significance for
unlisted companies registered in UK.

This research would be useful for institutes and associations framing accounting
standards for unlisted companies. Mostly accounting standards have been framed
with an eye for listed and large companies. But unlisted companies have much lesser
resources to spend on large regulatory requirements and hence should have
different reporting requirements that match the benefits obtained from such
reporting.

The time limitation and resource constraint mean that the primary data via interviews
and questionnaire surveys could only be collected through a limited number of
respondents. It would be useful to cover a larger data base before implementing the
changes. Also more users of data in unlisted companies like banks and creditors
should be contacted before policy formulation.

The remaining paper is divided in the following sections. Section II is a literature

review on justification and applicability of IFRS, and state of readiness in companies.
Section III discusses the methodology used in this research. Section IV covers analysis
of data obtained through the primary data collection and its interpretation. The
paper concludes with section V. 

SECTION II – LITERATURE REVIEW

In June 2000, the European Commission proposed a new directive requiring that all
publicly traded companies in the member states to adopt International Accounting
Standards Board (IASB) standards by no later than January 2005. On 19 July 2002, the
European Parliament and the Council approved the IAS regulation (EC) 1606/2002
which said ‘For each financial year starting on or after 1 January 2005, companies
governed by the law of a Member State shall prepare their consolidated accounts in
conformity with the international accounting standards adopted … if, at their balance
sheet date, their securities are admitted to trading on a regulated market of any
Member State’ (EU, 2002).

Rationale for EU’s adoption of International Financial Reporting Standards

The main aim of International Financial reporting Standards is to bring convergence
among different national financial reporting standards. Over time, the evolution of
different national financial reporting standards has been influenced by local social,
political and economic environments. Some of the major reasons for differences in
accounting standards are:
  Political – Capitalist or Communist. Capitalist and communist countries have
almost contrasting fundamental economic approach and their accounting
standards reflect the same.
 Stage of economic development. Developed countries generally have better
accounting standards in terms of transparency and clarity.
 Corporate finance – debt or equity. Companies in continental Europe are
financed more by debt than the companies in UK. Accounting standards have
over time evolved to reflect the importance placed by different sources of
financing on different aspects of financial statements.
 Legal and taxation systems.

Convergence will help investors and analysts to compare companies across borders
in a better way. But it also implies that either member countries will lose their
independence to make national accounting standards that reflect local economic
conditions or if they start introducing some changes, IFRS may slowly lose its main
strength of common standard. Local, political and economical conditions may force
national accounting bodies to introduce variations in IFRS. EU has already introduced
some changes in the IAS 39 dealing with financial instruments. It is beyond the scope
of this research to see which member countries have introduced variations in IFRS.

Convergence between UK GAAP and IFRS

ASB has declared its intention to converge UK GAAP with IFRS. It has issued a
number of new standards in December 2004 to speed up the convergence of UK
GAAP with IFRS. So sooner, even unlisted companies would be following a
substantial portion of IFRS due to this convergence.

Comparison of UK GAAP and IFRS

Similarities
The ultimate goal of UK GAAP and IFRS is same – to present information about
financial performance and position to all concerned stakeholders. If the aim is same,
then should be the main approach adopted by both accounting standards.

The UK’s Accounting Standard Board’s Statement of Principles for Financial

Reporting is a vital contributor at macro level standard setting. It plays almost same
role as International Accounting Standards Committee’s ‘Framework for the
Preparation and Presentation of Financial Statements’. ‘It is a description of the
fundamental approach that the Accounting Standards Board (ASB) believes should, in
principle, underpin the financial statements of profit-oriented entities’ (ASB, 1999).
The Statement of Principles has true and fair concept at its core, much like the focal
point in International Accounting Standards. Also like IAS, Statement of Principles
insists on financial information being relevant and comparable.

It is beyond the scope of this research to highlight each and every similarity between
UK GAAP and IAS.
Differences
Though the overall aim is same, the differences in implementation and financial
reporting do occur due to social, economic and political backgrounds of different
nations.

Main concepts behind UK GAAP and IFRS are same, but when we look at micro level,
we see many differences at the individual standards level. Following are the main
differences between UK GAAP and IFRS:

 The Statement of Principles allows use of both historical cost and current
value approaches in measuring balance sheet categories. The dual use of
historical and current value methods is known as modified historical cost basis
(ASB, 1999). Under historical cost, the carrying values of assets and liabilities
are stated at the lower of cost and recoverable amount. This approach is more
conservative as compared to IAS approach which uses fair value method. Also
the choice of historical or current value method is based on subjective analysis
of a company’s management and hence it is open to some manipulation.
 Fair value. If we look at global level, both UK GAAP and IFRS have adopted fair
value method as the foundation of their accounting standards. IFRS takes fair
value adoption even higher when it says that income statement will include
the changes in the fair value of items that have not been yet traded like
derivatives. The emphasis in new accounting standards is on mark-to-market
fair value of assets and liabilities rather than on actual market price based fair
values. Now both realised and unrealised changes in fair values would be
incorporated in income statements. The first year of transition will see high
volatility in earnings and balance sheet statements. Though this brings higher
volatility, it will also test the management skills in proper presentation and
explanation of changes. It may also change the benchmarks of success for
managements.
 Acquisitions. Acquisition accounting will change under new accounting
standards. Under UK GAAP, companies can choose between purchase and
merger accounting. Under IFRS, companies will have to account under
purchase method only.
 Goodwill. UK GAAP allowed amortisation of goodwill and companies had the
option of not segregating intangible assets from goodwill. Under IFRS,
intangible assets have to be separated from goodwill. Goodwill can not be
amortised now but companies will have to undertake annual impairment tests
to justify the value of goodwill on the balance sheets. BAT’s profits for year
2004 increased by £454m because it no longer had to amortise goodwill of
that amount (AccountancyAge, 2005b).
 Consolidation of accounts. Under new accounting rules, companies may have
to consolidate certain additional subsidiaries into group accounts. On the
 other hand companies will have to exclude certain subsidiaries or special
purpose vehicles which were not included till now.
 Research and development costs. Under IAS 39, research costs can’t be carried
on the balance sheet and would have to write them off as incurred.
Companies would still be allowed to capitalise development in line with UK
GAAP.
 Stock options. Internet and share market last boom in late 1990s led to rapid
increase in share options as a way to reward employees. The new
requirements to record an expense on income statement for the value of
share options granted to employees could have a significant impact on
earnings. AstraZeneca said in its pro forma 2004 IFRS numbers that new
accounting rules on stock options has made it re-consider the use of stock
options in rewarding its employees (Tricks, 2005).
 Distributable profits. Organisations ability to pay dividends is dependent on
their distributable profits. Following are some of the major impacts of IFRS on
distributable profits – Inability to discount deferred tax liabilities, higher
provisions for deferred tax when companies move from historical costs to fair
value and inclusion of pension deficits in income statement. All of the above
will reduce distributable profits. Many companies would have to financially
restructure themselves in order to have sufficient distributable profits to meet
dividends paid in last year.
 Deferred tax credit. Deferred tax credit is available under UK GAAP but not
under IFRS. GlaxoSmithKline’s restated its 2004 earning per share by (1.9p)
due to non-availability of deferred tax credit under IFRS (AccountancyAge,
2005a).
 Inclusion of business disposals gains in profits from operations. BAT’s profits
for year 2004 increased by £1.3bn after it included gains from disposals to
operating profits (AccountancyAge, 2005b). Adding disposal gains to
operating profits will make it harder for investors and analysts to separate the
earnings from continuing businesses.
 Derivative contracts. Under IFRS, some derivative contracts will not qualify as
hedges as they wont meet the criteria. UK GAAP allowed deferment of such
contracts until transaction took place. IFRS won’t allow the deferment of such
contract and would impact the profit and loss account even before the
transaction took place. It is better in a way that investors will know the current
value of the firm as on date rather than historical costs of such instruments,
especially if the duration of financial instruments was long. At the same time,
it would increase the burden on the company to calculate the fair value of all
such transactions.
 Agricultural. UK GAAP allowed companies to use a cost model for biological
assets and all agricultural produce. But under IAS companies would have to
use mark to market method for valuing such assets. Now companies would
have to use market valuation even for assets in far off countries.
Advantages of IFRS over UK GAAP
 Common financial language. Adopting common financial reporting standards
will open up a company to more markets and investors. The growth in
telecommunications has made it easier for smaller investors to invest across
physical boundaries. Such investors are normally not as financially
sophisticated as some big financial institutions. They would also not like to
understand more than one accounting standards as they don’t have required
resources in hand to do so. With one common accounting standard, more
investors would like to explore companies across nations.
 Acquisitions. IFRS 3 is more open and transparent than UK GAAP on
acquisitions. It will allow investors and analysts to judge faster the success of
an acquisition. Many of the companies that have relied on acquisition as a key
cornerstone for growth would now come under intense scrutiny and may have
to develop a new strategy for growing business.  
 Consolidation. In IFRS, all entities will have to provide a cash flow statement.
Additionally there would be more transparency within the group companies
and this should make the consolidation process more straight-forward.
 Securitisation by businesses is likely to be impacted by the new ways
governing how companies can show assets and liabilities on their financial
statements. Companies have used securitisation to cash in assets like trade
receivables sitting on their balance sheets. Securitisation helps companies to
slim down their balance sheets and hence allows companies to show higher
return on assets at same earnings. And it was one of the reasons why
companies went for securitisation. But stringent criteria for moving assets and
liabilities off balance sheet will threaten securitisation. Sue Harding, chief
accountant at Standard & Poor’s in Europe said that new international
accounting standards were sweeping a lot of securitised assets back on to
balance sheets (Jopson, Feb 2005).

This will help investors compare like to like and avoid companies that have used
securitisation only to make-up their balance sheets. There is no harm in using
securitisation if used in a proper way and not to deceive stakeholders. But we have
seen how corporations like Enron had used securitisation to disguise their true
financial position.

 Annual impairment review. Annual impairment review will benefit investors

because the companies then won’t like to take big goodwill cuts in one year
and not do anything for years. Annual reviews would help investors judging
whether the amount paid by companies in acquiring other company was
justified or not.
 Access to cheaper capital. Increase in investor profile diversification would
most probably lower the cost of capital for most of the companies. This is
 especially true for smaller companies which don’t have financial muscles and
resources to tap international investors.
 Expensing research costs gives better information to investors and other
stakeholders because at research stage the chances of success are quite
uncertain. Investors can only be sure of development costs bringing in some
returns in future. Also by segregating research and development costs,
external stakeholders will now have a better chance to differentiate the
suitability of costs incurred in developing new products.
 Multiple listings. Many companies now have multiple listings across different
countries. Companies need to prepare financial statements as per each local
accounting standard to meet listing requirements. With one accounting
standard only it will save a lot of botheration for companies with multiple
listings.
 Dividends. Under IFRS dividends are not provided for until the dividend
recommended by the Board is approved by shareholders. This move will bring
more convergence between accounting profits and cash flows.

Disadvantages of IFRS
 Fair value. While fair value in a way conveys more up to date value of a
company as compared to historic costs, it also puts a question mark on the
methods used and the reliability of fair value. Derivative instruments which are
commonly traded on various stock exchanges can be easily assigned value. So
while valuing some of the assets or liabilities may not be difficult, the question
still remains what impact such valuations will have on companies’ business
models. Many companies use hedging instruments as a strategic tool rather
than for intentional gains. Any short-term swings in such instruments may
have a significant impact on income statement and probably adverse market
reactions may deter companies’ from using such instruments.

Then comes the more important issue of valuing assets and liabilities that don’t have
a proper market. The companies may use some valuation model, which itself may not
be the right way, to value an asset or liability. The model will incorporate some
subjective assumptions. An example would be brand value. A same brand can have
two different values for two different companies because of its strategic importance.
So at one hand, investors and other external stakeholders are getting more objective
information about a companies’ assets and liabilities, they are also getting valuation
based on more subjective assessments. Only time will tell whether some individuals
or companies will use it to manipulate results.

An interesting thing to observe would be the treatment and importance given by

analysts to unrealised fair value of assets and liabilities. Some investors may try to
separate unrealised gains and losses from other operational performance. It may also
prompt companies to issue adjusted earnings excluding unrealised gains and losses.
An important point to note about fair value principle is that the financial statements
should not be seen as perfect prediction of things to come. That depends on the
strategic and business decisions management will take in future. Just having a fair
value of assets and liabilities doesn’t mean that the company will be able to extract
those values in future.  

 Dividend. New accounting standards promote payment of dividend from

distributable reserves. With the inclusion of unrealised gains and losses and
pension deficits, the first few years of new accounting standards may not leave
enough of distributable reserves for dividend payments.
 Securitisation. Securitising assets into special purpose vehicles and re-
financing them through had also helped companies raise funds at lower costs.
The new accounting standards by restricting the use of special purpose
vehicles, would diminish some sources of cheap financing. It is question yet to
be fully tested in the practical world that since the assets are same, change in
financing options shouldn’t change the returns on total assets. By refinancing
at lower rates through securitisation should result in higher financing cost for
remaining assets such that the overall costs remain same. But examination of
this hypothesis is beyond the scope of this dissertation. But what is mostly
observed in capital markets is that when companies announce refinancing, the
share price rises. How much of the rise is from relief that company will survive
and how much from the fact that the overall costs have lowered is not known.
 Annual impairment tests. Annual impairment tests are easier said than done.
Companies would not only have to devote substantial resources to do that
first would have to train its personnel to do that. Assessing true value of a
goodwill is not easy. If there is a comparable market then companies can
easily value it. Even then it may differ from case to case as it would be very
unusual to see exactly two similar companies. Goodwill is very different from
tangible assets or technologies and depends a lot on market perception and
strategy. Companies would have to review the whole process of valuing
goodwill and would have to review the valuation process at constant intervals.
 Net pension liability. The inclusion of net pension liability on the balance sheet
may have severe impact on the shareholders funds. Companies will be
required to have annual actuarial valuation of their pension liabilities and the
same would be reflected in financial statements. Most of the pension funds
invest in equity markets, which have been quite volatile in the recent years. So
though over a longer period, the movements in pension liabilities may even
out but in short to medium term, it may have a dramatic effect on balance
sheets and earning statements.
 Segmental information. IAS 14 requires companies to report information on
their business segments and on a scale more detail than UK GAAP. As of date,
no agreed accounting practices have emerged on how much should be
 disclosed because companies may end up revealing sensitive information to
its competitors. If companies disclose the turnover, earnings and expenditure
for each segment, its profitable operations may come under intense
competition. Ian Dilks of PwC said that “some companies have found they’re
giving much more information than they’re comfortable with on sales and the
profitability of product areas” (Tricks, 2005)
 Expensing research costs may result in listed companies focusing more on
products in development stage than in research stage. This will keep their
balance sheets healthy but may harm long term prospects.
 Complex and long IFRS compliant reports. PricewaterhouseCoopers estimates
that an IFRS compliant financial report for insurance companies could be up
to twice as long as those prepared under existing UK GAAP (Finn & Zoon,
2004). The requirement for other industry sectors though may not be as
intensive as for insurance sector, their IFRS compliant financial may also be
longer and resource intensive than under UK GAAP. Any company that has
makes an acquisition will have to do annual goodwill impairment analysis and
most of them would like to explain the results also.
 Comparable formats. IAS 1 is less prescriptive than the UK GAAP when it
comes to the format of the balance sheet and income statement. It just
distinguishes current and non-current assets and liabilities. Investors, when
faced with different formats, may find it difficult to compare companies.
 Modify organisation structures. Meall (2003) suggested that the additional
burden of more financial reporting along different segments may force
companies to modify their existing organisational structures within their
financial systems to collect and analyse data.

Impact of IFRS on different industries

IFRS will have different impact on different industries. For some, most of the applied
UK GAAP is almost same as IFRS and won’t feel the difference. But for some
industries, the difference in accounting standards may have a substantial impact.
Financial services and insurance companies are among them. Financial services
companies would be affected by substantial change in recognition and measurement
of financial instruments under IAS 39. UK GAAP has no equivalent to IAS 4 which
deals with insurance contracts. Insurance companies would now have to account for
this in their financial statements.

Under IFRS, insurance companies would have to book financial instruments such as
derivatives at market value rather than historical value allowed under UK GAAP. Many
insurers have said that this will distort their earnings (Reuters, 2005a). IFRS will put
more stringent criteria for classification of insurance products and this may lead to
reclassification of some insurance products as investment products.
Other industries that might face higher impact are the ones that heavily use hedging
instruments in their day to day operations. Mostly companies using commodity
materials like oil as a significant part of their input costs use hedging to smooth over
the volatile changes in commodity markets.

New accounting standards will reduce Tesco’s projected annual profit of £2,000m by
£30m only, a reduction of 1.5%. But for some companies the impact would be much
more. Royal & Sun Alliance said that new accounting rules would reduce its net
assets by £400m (Reuters, 2005a). This is a big number by any standards and
shareholders