Change is not a popular activity. Beyond the cost of a dislocation are the worries that a new order will be less benign than the previous one. That novelty will lead to mistakes and damage is another valid concern, yet change is relentless and inescapable. Hopefully, change is progress.
IFRS is progress and reflects that the world of commerce and finance is shrinking at an unprecedented pace. The world has become a tightly bound network of activity that knows few boundaries and punishes those who hold out.
Different accounting standards are a drag on progress in much the same way as diverse languages are an inconvenience. Unlike creating a world language, creating one set of standards is achievable. Apart from the potential savings for companies with diverse international structures, complying with an internationally understood accounting paradigm opens up a wider investment audience.
The world of investment selection is about sieving through companies’ financial information and finding companies that fit investment criteria. If financials do not adhere to standards then they will miss out on the benefits of scale that wide markets deliver.
Markets that do not adhere to international standards will be increasingly ignored, not just because of a perceived lack of transparency, but because dealing with the local facts is a clumsy and bespoke process.
International norms create a large pool of companies to research in an easy, cost effective and powerful way. Players outside this dynamic are only of fringe interest.
The bourses of this world are still largely parochial, but this is changing fast as investment becomes yet easier, cheaper and often more enticing around the globe.
The fact that new accounting standards might show some companies’ balance sheets in an unflattering light is almost a proof of concept.
While companies that may have spent too much time on their financial engineering may fear the effects of the new standards, the benefits of increasing the flow of capital are overwhelmingly positive.
Clem Chambers is CEO of ADVFN, Europe’s leading stocks and shares index.