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Aim companies - the transition to IFRS The rules of AIM require companies currently reporting under UK GAAP to adopt International Financial Reporting Standards (IFRS) for their annual accounts in respect of accounting periods commencing on or after 1 January 2007.
The process of selecting accounting policies involves drafting the statement of accounting policies that will be applied under IFRS, and determining the impact of these policies. As a general guide, IFRS statements of accounting policies tend to be more detailed than those prepared under UK GAAP. In many areas there are important points of detail that need to be noted. Once the policies have been determined, an entity shall use the same accounting policies throughout all periods presented in its first IFRS financial statements, and also in its first IFRS balance sheet. These accounting policies have to comply with each IFRS effective at the reporting date for its first IFRS financial statements. Opening IFRS Balance Sheet A company is required to prepare an opening IFRS balance sheet at the date of transition to IFRSs. The opening IFRS balance sheet is the starting point for the entity’s subsequent accounting under IFRSs. In the case of an EU listed company with a 31 December year end the opening IFRS balance sheet at 1 January 2006 will have to be presented. This opening balance sheet must fully comply with IFRS and there are few transitional exemptions from the requirements of the standards. In the opening IFRS balance sheet a company recognises all assets and liabilities whose recognition is required by IFRSs. The company also removes all assets or liabilities that IFRSs do not permit to be recognized. As an example, IFRS applies a full provisioning approach to the recognition of deferred tax liabilities whereas UK GAAP applies an 'incremental liability' approach. The company must reclassify items that were recognised under UK GAAP as one type of asset, liability or component of equity, but that are a different type of asset, liability or component of equity under IFRSs. For example, long term receivables are treated as current assets under UK GAAP, but would be regarded as 'non-current assets' under IFRS. The requirements of IFRSs must be applied in measuring all recognised assets and liabilities. For example, IFRSs makes greater use of fair value accounting than UK GAAP. The accounting adjustments arising from the transition should be recognised directly in retained earnings rather than in the income statement. Essentially the accounting is a form of prior year adjustment. Disclosure When both the first interim statement and the first full financial statements are presented under IFRS, detailed disclosures must be given explaining the financial effect of the change from UK GAAP to IFRS. The disclosures cover presenting a reconciliation of the opening balance sheet, and of the last published UK GAAP balance sheet and income statements which become IFRS comparative statements. The reconciliations are usually given in the form of a table supported by a narrative explaining the implications of the change. Support to AIM companies in transition Horwath Clark Whitehill has developed a service of working with AIM listed companies to assist them with their transition to IFRS. The service involves:
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