This article was first published in the January 2013 International edition of Accounting and Business magazine.
The International Accounting Standards Board (IASB) is no longer threatened by US reticence about adopting International Financial Reporting Standards (IFRS), but is concerned about the increasing divergence between IFRS and US GAAP. This was the view of IASB chairman Hans Hoogervorst, when speaking at ACCA’s International Assembly 2012.
Hoogervorst noted that the spread of IFRS in the last decade has been ‘truly phenomenal’. Around three-quarters of G20 countries have already adopted or are on the verge of adopting IFRS. Similarly, many emerging economies have also adopted or are in the process of doing so, although a few countries ‘still need to take a first or last step’. China’s standards, for example, though closely aligned with IFRS, are not exactly the same. The biggest question mark, however, hangs over the US. The Securities and Exchange Commission’s failure in 2012 to take any decision on its approach to IFRS was ‘a big disappointment’, Hoogervorst admitted, referring to the SEC’s July 2012 paper listing possible problems for the US arising from IFRS adoption.
The IASB has subsequently analysed all these possible obstacles, comparing them with the challenges faced and overcome by other countries that have already adopted IFRS. ‘Our conclusion,’ Hoogervorst told delegates at the London event in November, ‘was that there was nothing that countries like Brazil, Malaysia or Argentina could do that the US – as a “can do” country – cannot.’ That said, giving up its rules-based system for IFRS would be hard for the US, Hoogervorst admitted.
Regardless of any future US decision, Hoogervorst said countries that have adopted IFRS show few signs of second thoughts. ‘They have done the conversion and the work; they see the benefits of an internationally recognised language. Five years ago, it [lack of US adoption] might have led to a disintegration of the whole project. I am not worried about that now. But I am worried that the US finds it so hard to make a decision and that it might lead to growing divergence between IFRS and US GAAP. If we do not see any sort of tangible step towards IFRS in the near future, there is a danger we will drift apart.’ Already Hoogervorst senses a change in the attitude of US standard-setter the Financial Accounting Standards Board (FASB), with talk now only of ‘greater comparability in global standards’, as opposed to ‘a single set of global standards’.
Nevertheless, the reasons for the spread of IFRS are ‘logical’, Hoogervorst said. ‘Institutional investors no longer invest [only] in their own country, they invest around the world. Investors need to trust the numbers. That’s why we need one [accounting] language.’ Similarly, multinational companies want to eliminate the burden of multiple local reporting requirements, while securities regulators also ‘want a level playing field around the world’, Hoogervorst said.
Given the global reach of IFRS, the IASB itself needs to be a global organisation, Hoogervorst said. It has therefore set up an Emerging Economies Group as ‘an informal forum to learn about the challenges that especially emerging economies can face when applying certain aspects of IFRS’. The IASB’s constitution has also been amended to be more inclusive of its broad range of stakeholders, and the board now contains members from China, Korea, India and Africa. A new Accounting Standards Advisory Forum is also being set up, consisting of national standard setters and regional groupings. ‘We will try to get input from all over the world,’ Hoogervorst said.
One ongoing challenge, Hoogervorst noted, was to gain input from investors. ‘They are the people we are doing all the work for, but they are hard to find… We need to find a new way to approach them,’ he said.
Looking to the future, the IASB will be trying to complete the four remaining convergence projects on revenue recognition, leases, financial instruments and insurance. It will also, in line with constituents’ requests, focus on its principles and the conceptual framework. ‘We are going to go back to our roots and going to think about the main principles of accounting,’ Hoogervorst said.
China’s transparency revolution
The accounting and reporting requirements for listed companies in China have evolved hugely. However, as Zhou Qinye, former executive vice president of the Shanghai Stock Exchange, explained, there is still a need to do more to enhance transparency and disclosure.
Zhou identified the key requirements for this ‘transparency revolution’: the creation of a healthy information disclosure culture; the building of ‘a sophisticated information disclosure system and relevant rules’, with a shift towards principles rather than provisions; and a set of best practices for information disclosure.
He then outlined five steps China needs to take to achieve these requirements. First, actively promote information disclosure. Next, develop the Management Discussion and Analysis Disclosure Guidelines to encourage management’s disclosure of risks, uncertainties, forward-looking information, business plans and trends. Third, for impartial institutions to help build a complete information disclosure rating system, and he encouraged the press and public to play a supervisory role in relation to corporate reporting. The fifth step was to ‘increase penalties for illegal behaviour regarding information disclosure’, including false and misleading statements and untimely disclosure.
Forum chair in coordination plea
Lorraine Holleway FCCA, chair of ACCA’s Global Forum for Corporate Reporting and head of financial reporting at Qatar Shell, highlighted the importance of standards that enable markets to make meaningful comparisons of corporate performance across national borders. ‘ACCA has always championed the cause of setting strong and credible technical standards in accountancy and audit,’ she said. ‘We at ACCA will continue to be a constructive partner to the IASB in its efforts to achieve a framework that all companies and markets can buy into. In particular, we will support the IASB in its efforts to achieve a definitive agreement on the status of IFRS with the US authorities.’
Holleway suggested that progress was also needed in relation to the degree of coordination in the current standard-setting frameworks for accounting, external and internal audit, and corporate governance. Individual standard setters justifiably had their own priorities, but the individual disciplines did not exist independently – they did impact each other. She said: ‘The whole standard-setting process, and all the stakeholders who are interested in it, could benefit from the standard-setting bodies coming together to create a common vision’ – a shared understanding of what their various processes are trying to achieve.
Sarah Perrin, journalist