The creation of International Financial Reporting Standards (IFRS) began in the early 2000s when the internationalization of companies and the robust expansion of financial activities across borders prompted the need to bring transparency and comparability to company financial statements in different countries. Initially known as International Accounting Standards (IAS), IFRS were seen as a way to improve EU competitiveness by increasing the market efficiency of companies in the area and by reducing the costs of raising capital for companies.
“Since 2005, all publicly-traded companies in the EU have had to compile their consolidated financial statements in accordance with IFRS. Compliance with IFRS is voluntary for other companies,” notes Jani Rämö, Financial Managerat FII.
The biggest change for FII is that investments are now valued at their fair value on IFRS-compliant balance sheets, not on the basis of their acquisition cost, as had been the practice with the Finnish Accounting Standards (FAS) used prior to the change.
FII’s investment activities mainly target risk capital funds and unlisted growth companies directly. According to Rämö, investments are valued at fair value in IFRS-compliant financial statements, in accordance with International Private Equity Valuation Guidelines (IPEVG).
The markets determine the value of a listed company. On the other hand, a market-determined valuation generally isn’t available for venture capital investments, so, depending on the investment instrument, the values of the investments are determined on the basis of commonly accepted valuation methods. The determination of value typically requires significant discretion and the use of estimates.
More accurate information
With IFRS, the person reading the financial statements should pay more attention to the balance sheet because its significance is emphasized. The notes to the financial statements provide plenty of new information because the IFRS rules are much more detailed and extensive than in FAS.
“This will give our owner and other stakeholders a clearer and more understandable picture of our consolidated financial statements, of the processes behind the compilation, and of risk management.”
“The significance of the balance sheet is emphasized.”
According to Rämö, the new financial statements standards provide a more accurate picture of the value of FII’s investment portfolio at the financial statements date. In FAS financial statements, the maximum balance sheet value of the investments is their acquisition cost. In other words, when the fair value of investments exceeds the acquisition cost, the difference is not entered as an unrealized gain in the income statement.
“The IFRS-compliant financial statements present investment value gains, so the portrayal of the value of the company’s investments at the financial statements date is more realistic than that in FAS-compliant financial statements. At the same time, it also inevitably leads to the fact that the financial results can vary more than before because all investment valuation changes during the financial period also impact the bottom line.”
Another positive in the transition to IFRS, says Rämö, is that the formula for the income statement can be modified more freely. This is beneficial especially for an investment company, like FII, because anyone reading its IFRS-compliant income statement can immediately see what comprises the company’s financial results.
Good groundwork pays off
The scope of the transition project is extensive and has required a lot of time and effort.
“Fortunately, we started the project well in advance – essentially, as soon as FII’s Board of Directors approved the 2014 financial statements.”
Rämö points out that the IFRS transition phase is still under way and will end when the IFRS-based 2015 financial statements including comparison and transition data are ready. But good groundwork with the first IFRS-compliant financial statements will pay off in the future.
However IFRS is not static.
“The norms in IFRS change and are constantly evolving. This underscores the importance of monitoring and anticipating, so that a response to renewals and changes can be expedited.”