Draft guidance for auditors on first-time IFRS adoption

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30 Aug 2004

The Auditing Practices Board of the United Kingdom has issued a 37-page draft bulletin on Guidance for Auditors on First-time Application of IFRSs in the United Kingdom.

The bulletin would provide auditors with interim guidance on issues that may arise when entities move from UK GAAP to IFRSs. Comments on the draft are due by 31 October 2004. Among the audit risks noted are limited experience with IFRSs, problems caused by systems changes, shortage of resources, identification of all of the differences between the accounting frameworks, valuation issues in such areas as share options and non-traded financial instruments, and earnings management. Regarding the latter, the bulletin notes:

There may be opportunities for aggressive earnings management by companies. For example, management may wish to set an advantageous starting figure for earnings under IFRSs in the year of transition, conscious of the implications for future years. This could involve setting the figure as low as possible in the year of such a major change, while attention is focussed on the changeover itself, so giving leeway for flattering increases in earnings in future years.

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