Accounting Issues

The biggest differences are expected to be in accounting for financial instruments, deferred taxation, business combinations and employee benefits. Some specific examples are below:

  • Capital instruments
    IFRS has complex rules governing what constitutes debt and equity. These rules can result in equity type instruments being reclassified as debt.
  • Derivatives and hedging
    IFRS can significantly boost income volatility because all derivatives must be realised on the balance sheet at fair value. As a consequence, companies are forced to re-visit the way they do business, because they may spot embedded derivatives for the first time. For example, a company’s treasury department identified foreign exchange risks in its subsidiaries’ contractual agreements, and had to make the difficult decision of whether and how to mitigate them by hedging.

  • Deferred tax
    There are some significant tax effects from the differences between financial accounting resulting from fair value method under IFRS and tax accounting.
  • Employee benefits
    IFRS accounting for pensions and new treatment of stock options may create significant changes in company policy that will affect all employees and the numbers on financial statements. These impacts require careful consideration from finance and HR departments.
The list goes on: fair valuations, capital allocation, leasing, segment reporting, revenue recognition, impairment reviews, cash flow, disclosures, borrowing arrangements and banking covenants.