RegulationAccounting StandardsVariety isn’t the spice of life

Variety isn't the spice of life

IFRS has been well received but don't relax just yet

A collective sigh of relief can be heard emanating (cautiously) from the
financial reporting community.

 The first IFRS reporting season is well underway and a recent series of
interviews by KPMG on the experiences of users, preparers, auditors, standard
setters and regulators suggests that IFRS adoption is going well.

Looking forward, while there is an optimism that IFRS could be the basis for
comparable, globally-accepted standards, many can see dangers lurking ahead.

A key danger is differing interpretations leading to different ‘varieties’ of
IFRS. One leading CFO commented that ‘we could have European IFRS and US IFRS
and its on a knife edge which way it will go’.

A potential source of differing interpretations is the securities regulators,
to whom the focus now shifts as they begin to receive the first IFRS filings.

‘Notably, the Securities and Exchange Commission will spend the summer of
2006 reviewing the “faithfulness and consistency” of foreign private issuer’s
2005 IFRS financial statements and reconciliations.’

Regulators are rightly looking to IFRS to deliver improved consistency and
comparability. But it’s early days. In practice, the next few months will
determine whether individual regulators are able to avoid second guessing the
good faith judgement of management in applying IFRS.

Preparers and auditors must be willing to exercise such judgment without
asking for an interpretation (or rule) for every scenario – a challenge that our
interviewees expressed a willingness to embrace.

Unfortunately, there are signs individual regulators (and national standards
setters) are already finding it difficult to resist issuing interpretations of
IFRS.

The difficulty of maintaining a single variety of IFRS will grow as US GAAP
and IFRS contain an ever increasing number of converged standards. Should we
realistically expect the US emerging issues task force or the SEC to avoid
interpreting a converged US standard without consulting IFRIC?

The IASB and IFRIC also must help if they are to remain the only bodies that
set (and interpret) IFRS.

The challenge for the regulators is to have sufficient confidence in this
process to allow time for the standards to mature as a single variety.

David Littleford is a partner in KPMG LLP

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