The Impact of the Current Changeover from Uk Gaap to Ifrs on the Performance and Financial Position of Kingfisher Plc.

This year's preliminary results season has been something of a landmark. Last year was to be the last reporting period where listed companies presented their results according to UK generally accepted accounting principles (GAAP). After that, they would be required to use international financial reporting standards (IFRS) to prepare their consolidated financial statements for accounting periods commencing on or after 1st January 2005 (http://search.ft.com, 2004). The requirement to adopt IFRS applies only to those companies that are active direct participants in the capital market (i.e. those that have securities that are publicly traded on recognised stock markets). There are estimated to be about 7,000 such companies in the EU, of whom 2,500 are in the UK (www.accountancyage.com, 2004).

The rules are changing for two main reasons. The investors chronicle seeks to explain this first by suggesting that 'in the wake of accounting scandals in both Europe and the US, regulators want greater convergence between standards. Listed company accounts in the UK and US exist primarily for the benefit of shareholders. Conversely, in parts of Europe, the banking system has historically been the main provider of finance to industry, so company accounts have evolved with creditors in mind. In some European countries it will bring fundamental change, particularly where medium-sized companies have traditionally had closer relationships with their banks than with their shareholders. As a result, their financial statements have tended to be more conservative, and placed greater emphasis on assets. Harmonising the two systems so that there is greater convergence between European and non-European conventions is what IFRS is partly about.' (http://search.ft.com/, 2004) The other aim is to keep abreast of the growing popularity of options and derivatives. Current accounting practices originated in the 16th century, and were significantly updated in the 19th century. Things were simpler in those days - there were credits and debits, assets and liabilities. The idea of a derivative instrument that could give rise to a profit or a loss was alien. In effect, switching to the new standards, therefore, should not just alter what companies and their auditors do with financial information when they get it, but how firms run and report on their businesses (http://search.ft.com/, 2004).

In the UK, the Department of Trade & Industry has announced that publicly traded companies in the UK will be permitted to use IFRS in their individual accounts, alongside their group accounts, from the same date. Other companies and limited liability partnerships in the UK will also be permitted to use IFRS in both their individual and consolidated accounts. It is likely that subsidiaries and associates of listed companies will need to supply consolidation information based on IFRS. A number of unlisted companies, especially those considering listing in the near future, may well want to take up this option. All UK companies not using IFRS for their accounts will be expected to continue to comply with UK standards and the accounting requirements of the Companies Act (www.accountancyage.com, 2004). The Accounting Standards Board (ASB) is, however, 'aiming to achieve almost complete convergence between UK GAAP and IFRS as quickly as possible whilst at the same time avoiding the burden of excessive changes in one year and, in particular, minimising the cases where an entity using UK standards may be required to make successive changes of accounting policy in respect of the same matter.' (www.accountancyage.com, 2004).

The most significant difference in terms of broad treatments of items between UK GAAP and IFRS are in the following areas:

* Pension costs for defined benefit schemes

* Deferred tax, especially on revaluations and discounting of provisions

* Financial instruments (in respect to derivatives and investments at fair values)

* Hedge accounting

* Preference shares and convertible bonds

* Merger accounting

* Goodwill amortisation

* Negative goodwill

* Investment properties, especially the treatment of revaluations

* Proposed dividends

* Finance leases - some operating leases may become finance leases under IFRS

There are many differences in wording and emphasis in the two sets of standards even when the overall treatment of items is broadly the same. The disclosures required under UK GAAP and IFRS are, however, different in some cases (www.accountancyage.com, 2004).

Like many other major accounting changes, the introduction of IFRS has been controversial. A common complaint has been that UK GAAP are already robust enough, and that it is the European regulators who need to pull their socks up. It will also be difficult (and expensive) for companies to provide five years' worth of restated profit-and-loss accounts and that, for a while, investors will have little choice but to compare new-style accounts with old-style ones. In many cases, there will be little material difference. Given time it is also likely, especially in industries where IFRS may introduce a degree of volatility into accounts, that finance directors will conjure up still more variations on the profit measure to strip out market-driven fluctuations and get to an 'underlying' number (http://search.ft.com/, 2004).

Only 31% of British listed companies see the move to IFRS as a real opportunity to improve their internal organization. The United Kingdom is therefore way behind the European average which stands at 57% and is focused very much on the costs that will be incurred in making the change . A survey of 266 companies in 18 European countries by PricewaterhouseCoopers, a firm of consultants, reveals that fewer than half of those questioned had identified the data they would need for IFRS, while fewer than a quarter had upgraded their systems to collect the information. As expected, bigger companies have the edge in preparation, yet even here there are problems. The survey found that as few as 11% of respondents among large companies (i.e. those with a stockmarket capitalisation of Ђ10 billion or more) had put in place processes to ensure that the data they collected was robust (www.mazars.com, 2004).

With regards to simulating the effect of using IFRS on their accounts, the United Kingdom is behind it's European counterparts with only 15.4% of the companies questioned having performed such an

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