Impact of IFRS

The spread of International Financial Reporting Standards (IFRS) across the world has been the biggest single development in accounting over the past decade. More than 100 countries have now adopted IFRS and more are due to follow. But has the move been beneficial for business?

One of the original key drivers for the IFRS system was that it should increase cross-border trade and hence boost the global economy, because investors will be more likely to trust financial information in other countries that they recognise as being based on the same rules.

The move was kickstarted by the Asian financial crisis of 1997–8. This crash showed the weaknesses, in Western investors’ eyes, of a system where accounting standards and corporate governance systems were so different in an important economic region.

Several studies carried out since then have shown encouraging signs that IFRS is helping. ACCA-commissioned surveys of CFOs across Europe, Asia Pacific and the US in 2007 and 2008 showed a majority supporting global standards. But given the scale of the world financial crisis since then, ACCA decided to carry out new research in late 2011 to see if those views had changed.

Investors and CFOs in Asia Pacific, the Middle East, Europe and the US were asked to give their views as to whether, given the crisis, global standards in the form of IFRS had proved to be beneficial or not.

The results were positive. Of particular encouragement to the International Accounting Standards Board (IASB) was that even in countries at different stages of implementation, finance professionals seem positive about the regime.

More than 40% said IFRS had improved access to capital and 25% said it had lowered the costs of capital. Almost half believed it had played a positive effect in increasing cross-border activity. While not overwhelming, these results are a strong vindication given the economic backdrop. In fact, the financial crisis has, if anything, improved perceptions of global accounting standards among both investors and issuers.

Joining the club

The IASB will hope that such findings ultimately persuade the biggest market of all to join the IFRS club – the US financial regulator the Securities and Exchange Commission put off a decision promised for December 2011 on whether it would adopt IFRS. At a time of continued economic uncertainty, and with a presidential  election looming, the prospect of burdening US companies with implementation costs was unappealing.

US respondents in our survey were less enthusiastic than those in other regions. James Hance, senior adviser at Carlyle Group, said: ‘Companies and financial firms are focused internally on running their businesses. Things are very tight and IFRS is going to require significant investment.’

But some were supportive of IFRS.  Anne Simpson, portfolio manager and head of corporate governance at  the California Public Employees Retirement System (CalPERS), argued: ‘We’re all very good at being able to identify costs and put a price tag on conversion. But should we be visited by horrors like the financial crisis and realise we’ve not invested sufficiently in quality accounting and auditing, then the cost runs to billions.’

Respondents also affirmed the value of one of the core drivers for IFRS adoption – the transparency and comparability it brings to the numbers. Russell Picot, London-based chief accounting officer at HSBC, confirmed the advantages of getting a single view of the group’s performance. ‘One of the great benefits has been a single set of rules which underpins a single set of numbers by which the group is run. It’s done away with the Tower of Babel of different reporting and accounting languages we had before.’

James Singh, CFO at Nestlé, the Swiss food giant, said: ‘The benefit comes in using a single standard for performance measurement, both inside and outside the company. From a regulatory standpoint, it’s an efficient way of preparing accounts.’ Some 60% of those surveyed agreed that global accounting standards were a facilitator of more consistent regulation.

One of the problems most noted by respondents was where countries which have officially adopted IFRS still tinker and amend their own national systems.

Ravi Nedungadi, president and CFO at UB Group, an Indian brewer, supports the idea of global standards but warned: ‘In reality what will happen is that there will be some carve-outs that will be country-specific and require multiple sets of accounts. We’ve held back on reporting to IFRS until clarity arrives.’

This article originally appeared in Accountancy Futures issue 5 2012.