Standards need time to work
By Mark Vaessen
If we want global standards, there can be no doubt that further convergence between international financial reporting standards and US GAAP is necessary. Without convergence, the prospect of future US acceptance of IFRS will be minimal.
Convergence is also needed if we want to have a level playing field for US companies and the thousands of European and Australian companies that will be using IFRS from 2005.
The real question is not whether convergence is desirable, but rather how high up the agenda should it be for the IASB? With the deadline drawing closer, the IASB must first finalise the package of standards that companies must implement by 2005.
At present, there are more than 15 of the 2005 standards under review. Until they are finalised, companies will be hesitant to focus on their conversion to IFRS, which in turn may lead to higher costs and, at worst, flawed implementation of the new standards.
If finalising the 2005 standards means temporarily slowing down the pace of convergence with US GAAP, so be it. Rushed solutions are in no one’s interest, especially not in a time when restoring market confidence in accounting is crucially important.
But this is not to say that we must forget the longer-term objective.
Properly approached, convergence to a globally accepted set of standards has many benefits and should not be a one-way street to adopting US GAAP, either in terms of style or substance.
Some fear the latter will be unavoidable – with more rules, more complex standards and less room for professional judgment as a result. I believe these concerns are overstated. The IASB is determined to issue principle-based standards and the mood in the US is also changing in this direction.
A spiral into abstract rules is not a foregone conclusion and the IASB deserves a chance to prove its critics wrong.
As with many things in life, it is a matter of balance. The direction is right, but the pace of convergence may need to be adjusted.
- Mark Vaessen is head of IAS advisory services at KPMG.
US influence may be damaging
By Peter Holgate
The business world is becoming more complex and it should be no surprise that international financial reporting standards (IFRS) are going the same way. The old IASC was very successful for 25 years operating with a part-time board and a small staff. Yet by the end of the nineties, it was acknowledged that this was no longer adequate.
The replacement – the IASB – was set up with a full-time board of 12 (plus two part-timers) and a technical staff of 20. Thirty two people who have nothing else to do other than write IFRS are bound to produce longer and more complex standards than the old regime. But a more professional approach to standard setting is what modern business needs.
Among the current board of 14 are five US members, reflecting the importance of the US in world accounting. The US has a system of accounting standards from the FASB and other organisations, including the SEC. They have been writing accounting standards for longer, and have written them in far more detail, than anyone else.
This partly reflects their litigious society and partly the expectation that has built up that US GAAP will tell business people and accountants what to do in almost every situation. No scope is left for judgement.
The automatic response to a gap in GAAP is to ask for more GAAP – for example a ruling by the Emerging Issues Task Force – whereas in the UK and in current IFRS, the gap would be seen as the place to use professional judgement within the overall objective of a true and fair view.
Under the Norwalk agreement of September 2002, the two major forces in world accounting – the IASB and the FASB – are to co-operate and harmonise their standards.
This will be good news if the resultant harmonised standards are similar to international standards. It will not be good news for the rest of the world if the standards are mid-Atlantic, and worse still if they are pitched somewhere just off the New Jersey coast.
- Peter Holgate is senior accounting technical partner with PricewaterhouseCoopers UK.
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