For hundreds of years a wide range of accounting frameworks and conventions
with most developed countries now having their own accounting standards board or
And although it is several decades since the International Accounting
Standards Committee - the forerunner of the International Accounting Standards
Board - first started to develop standards for international use, it is only in
the last few years that major steps have been taken to achieve substantive
convergence on a global scale. At the heart of that convergence is IFRS.
Much of the story so far has focused on Europe and the 1 January 2005
deadline. Nearly 12 months ago, more than 7,000 European-listed companies were
required to converge their reporting on an agreed set of accounting standards:
The imperatives behind this transformation have been well rehearsed. IFRS
would decrease the cost of capital, create a more competitive Europe and greater
comparability of reporting, harmonise European capital markets, increase market
liquidity, and generate greater returns for investors.
The struggles and drawbacks have been well documented too:individual
companies have cited conversion costs; there have been disagreements over
individual standards; the timeframe was imposed by ‘Europe’; the companies
concerned were not consulted; the future direction of standard setting has
become the subject of increasingly voluble concerns.
But the trend to convergence is here to stay that much we know. And the
benefits that will apply across Europe would also hold true for global markets.
The objectives of the IASB and the US Financial Accounting Standards Board in
signing the Norwalk Agreement in 2002 the commitment to converging US and int
ernational accounting standards still remain but the practical implications of
future convergence need to be debated.
From one point of view, the convergence of IFRS and US GAAP is the obvious
next stage in an evolution. For some in the business world, this seems highly
For others, the practicalities will seem overwhelming. But this kind of step
change does not happen in some remote academic environment it has the
potential to affect the global business community. As such, it must be vocally
and vigorously debated.
The response so far of UK-listed multinationals to the possibility of
converging IFRS and US GAAP has been mixed and depends very much on the
circumstances of individual companies. For businesses also listed in the US,
there are obvious and immediate benefits to working towards a mutuallyagreed set
of international standards.
It would eliminate the need to reconcile figures that must currently be
expressed under both IFRS and US GAAP, removing cost, risk and complications
from the task of international investor relations.
For others, the benefits are not so clear. In fact, for companies that are
not SEC-registered, while the potential costs of convergence are becoming more
obvious the benefits are not.
This is particularly the case for unlisted companies which, across Europe as
well as the UK, are still generally subject to local GAAP. A few countries -
Australia and South Africa, for example - have imported IFRS virtually
wholesale into their local GAAP, resulting in a big bang approach to change; it
will be interesting to see what happens.
In Europe, the UK Accounting Standards Board wants to move to IFRS fairly
rapidly (faster than other parts of Europe) an issue that will require further
debate. Should the changes that IFRS has brought, such as a move to fair value
accounting and greater disclosures, be imposed on smaller entities?
Plenty will argue against it, but if the changes aren’t imposed, there is a
risk that a two-tier system will emerge that will increase both cost and risk
and make future changes more onerous in the long run.
Then there’s the issue of what convergence will mean. If the convergence
process favours a US approach a rules-based system of financial reporting
there are likely to be problems ahead. IFRS takes a principles-based approach
with which UK companies are most familiar.
There are real concerns that a rules-based approach would not cover all
eventualities, and that while the rules would be suitable for the country in
which they were written, they would not adapt themselves very readily to the
European environment and would be difficult to apply across the diverse
commercial and regulatory environments that exist worldwide.
Remember, though, that these are relatively early days for IFRS and that so
far all that has happened is that the FASB and IASB have said they will converge
the two sets of standards and announced a series of joint projects to achieve
this aim. Convergence is not being imposed politically as it has been in Europe.
It is also worth bearing in mind that IFRS has been generally well received
globally and that other markets are monitoring the transition and its effects
Around 100 countries will require or permit IFRS by 2007 for publicly traded
and in some cases unlisted companies, which would make it the most widely used
accounting convention in the world. Many major economies such as Hong Kong are
moving to IFRS. Interestingly the Canadian Accounting Standards Board has
adopted a similar stance to the UK, despite Canada’s proximity to the US.
In the meantime, there’s still much work to be done on IFRS closer to home.
First, the international standards are a work in progress. Sir David Tweedie and
the IASB originally set a 2010 target date for improving the standards they
inherited from their predecessors.
The European 2005 implementation deadline accelerated the implementation but
not the improvement process, so the standards that finance directors began
working on in 2004 were themselves in flux and will remain a moving target.
Second, having to adopt a new reporting platform has been a significant
distraction from the day job for CFOs. Companies that have treated IFRS adoption
as a one-off change project must now adopt a more sustainable model. Is it an
extra cost? Yes, but a positive position taken now will increase companies’
ability to be flexible going forward.
Third, there is the issue of enforcement. For the markets to have confidence
in the quality of information, the standards must be consistently applied and
enforced. In the UK, the Financial Services Authority and the Financial
Reporting Council have been vocal about their determination to take an active
stance on IFRS compliance.
Achieving consistency across Europe is also high on the agenda of bodies such
as the Committee of European Securities Regulators.
As the first phase of IFRS implementation draws to a close, UK businesses
need to look closely at what they have achieved so far and assess what needs to
be done to keep pace with changes in the standards, emerging interpretations and
developments in market practice.
They also have an additional opportunity, or perhaps that should be
obligation, to engage in the debate on what convergence will mean in practice
and what its implications will be.
If they are to play any role in influencing the future direction of financial
reporting, businesses must be prepared to monitor the activities of bodies such
as the IASB, IFRIC, EFRAG, the European Commission and its Accounting Regulatory
Committee and CESR, and in the US the FASB, EITF and SEC. Companies of all sizes
will potentially be affected by IFRS, but the time still available to influence
the shape of international standards is running out.
Ian Dilks, IFRS conversions leader at PricewaterhouseCoopers
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