Institutes get behind IFRS big bang

UK INSTITUTES have thrown their weight behind rapid adoption of international financial reporting standards in the US.

This so-called big bang approach would see large companies immediately empowered to prepare accounts in IFRS, with smaller businesses following suit.

ACCA said a speedy jump would facilitate trade and the transfer of skills, warning an extended convergence period could diminish the comparability of accounts and affect the quality of global standards.

Head of financial reporting Richard Martin said US regulator the SEC “will ultimately want to see a consistent reporting base”, but questioned the proposed convergence timescale of seven years.

Seven-year itch

A protracted transfer could undermine the quality of global standards and attraction for preparers and users of accounts, he warned, by allowing irregularities to creep in.

Some slow-and-steady advocates have argued that the US’s huge pool of domestic companies would suffer unnecessarily if forced to drop US GAAP, reaping none of the benefits of international comparability.

Martin disagreed, questioning how many companies would choose to remain resolutely closed to foreign investment, even if their current shareholders are all American Pie.

And accounting standards are not just about what companies want. Investors are interested in cross-border comparison and IFRS should be the facilitator, even if businesses themselves have no global aspirations.

Comparable questions

America argues that even with a long lead time to IFRS, pressure for comparability would keep standards on the straight and narrow, avoiding the drift some commentators fear.

Dr Nigel Sleigh-Johnson, head of financial reporting at the ICAEW, is unconvinced. He warned gradual change could “result in a rather incoherent and complex accounting framework”, saying rapid adoption would minimise market disruption and be “easier for everyone”.

Big bang advocates point to countries like Canada and Australia as evidence of the strategy’s success. However, the vast majority of adopters spend a few years settling in to the standards, often debating or implementing regional variations.

Much of the IFRS Interpretations Committee’s time is spent helping new converters work through contentious issues, and it is rare that a seamless switch sees countries merrily accept IFRS without a backward glance.

It could be argued that the US’s proposed convergence period is simply an official version of this adaptation process, one that all nations go through, but others are too compliant to suggest.

Nevertheless, it is undoubted that a fast switch to IFRS allows companies to gather together financial metrics and restate key figures all at once, potentially reaping greater benefits from comparability.

At what price change?

Countries that adapt IFRS to their own needs could lose the advantage of global standards, Martin suggested, as each minor change introduces a host of unanswerable questions for the investor.

How important is the variation? What are its implications? Each layer of disparity takes accounts further from the goal of global comparability.

Ultimately, the success or otherwise of a US switch to IFRS depends upon commitment to comparability. If the US insists on a long convergence window and ultimately arrives at the same place as other IFRS users, it will fulfil the goal of global standards – albeit a little late.

If, however, slow convergence brings with it a slew of nips and tucks that result in the bastardisation of IFRS, no one will have won, and least of all US businesses.

Related reading

Fiona Westwood of Smith and Williamson.