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Global standards
| by Lesley Meall 18 Aug 2008 |
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Today, more than 100 countries on all five continents use International Financial Reporting Standards (IFRS), and over the next few years they will be joined by many more. ‘The number of countries using IFRS is increasing rapidly,’ says Sir David Tweedie, chairman of the International Accounting Standards Board (IASB), ‘and it is expected to rise substantially within a relatively short timeframe,’ which is why ACCA is focusing on IFRS in 2008, and has developed a microsite dedicated to the subject. IFRS are now either required or permitted in numerous countries from Australia to Zambia. All European Union (EU) listed companies (more than 6,000) have been preparing accounts in accordance with IFRS since 1 January 2005; during 2007, Canada, Chile, Israel and Korea all announced plans to abandon national standards for IFRS; and the major emerging and transition economies of the world - Brazil, Russia, India and China - are adopting or considering the adoption of IFRS. ‘There is a clear momentum towards accepting IFRS as a common financial reporting language throughout the world,’ says Sir David, and the benefits of adoption can be significant for companies, investors and regulatory authorities. In the EU, for example, IFRS helps companies to cut their compliance costs, by removing the need to consolidate different national accounts into a single statement to meet their home country’s requirements. They also enable investors to more easily compare companies operating in different jurisdictions, and facilitate a more consistent approach to supervision by regulators across the region. But the EU and the European Parliament have spearheaded the global move towards international standards - not all jurisdictions have been quite so keen. For IFRS to become anything approaching a ‘global standard’, some of the world’s most important economies still need to converge their national standards with international standards. Of the G8 countries, Japan and the United States have been the most notable laggards, but over the past year, both countries have made significant moves towards international standards. In August 2007, the Accounting Standards Board of Japan (ASBJ) and the IASB announced the ‘Tokyo Agreement’, an initiative to accelerate convergence between Japanese GAAP and IFRS, eliminating major differences between the two by the end of 2008, with the remaining differences removed on or before 30 June 2011. ‘We have reaffirmed our commitment to convergence,’ says Ikuo Nishikawa, chairman of the ASBJ, ‘and are pleased to have an opportunity to increase the significant involvement of the ASBJ, and Japan more generally, in the international standard-setting process.’ Fast forward?Japan started the process of convergence back in 1997, with reforms to consolidation policies, income taxes, employee benefits, and financial instruments, but bringing J-GAAP closer to IFRS GAAP has been a long and complex business. The Tokyo Agreement resulted in short-term and long‑term convergence projects, but some of the areas where deliberations are expected to go on beyond 2011 may include financial instruments, fair value measurements, and revenue recognition. All of which highlights what those involved mean by the term ‘convergence’. Convergence has less to do with the use of identical standards than it does with comparability. It means that where transactions are the same or similar, the accounting should be the same, or there should be enough transparency in the disclosures to allow the reader to understand the differences. But it also means that the standard setters involved will make an ongoing effort to try to reduce differences between the systems over time - and this calls for give and take from national and international standard setters. The US and the IASB made a commitment to convergence in 2002 with the ‘Norwalk Agreement’, in which they agreed to ‘seek to remove’ the differences between their two sets of standards; and this was reaffirmed in a February 2006 Memorandum of Understanding. But the US took its biggest step so far towards convergence in December 2007, when it adopted rules to allow foreign private issuers to file financial statements prepared in accordance with IFRS without reconciliation to US GAAP. ‘The expanded use of a single, high-quality accounting standard will eventually empower investors to make better-informed investment decisions by giving them information that is more easily comparable,’ says Securities and Exchange Commission (SEC) chairman Christopher Cox. So, doing away with the need for reconciliation for foreign issues that comply with IFRS could be the first step in a process that eventually gives all US public issuers the choice between filing their financials using US GAAP or IFRS. ‘This has set off a debate about US companies’ use of IFRS,’ says Richard Martin, ACCA head of financial reporting, but he doesn’t expect to see much more convergence between the two sets of standards. ‘This is just the US saying that it’s contemplating the switch for all US companies,’ he suggests, somewhere down the line. ‘Maybe in 2011,’ he adds. ‘In recent years, the need for a common accounting language has become compelling,’ says Cox, as increasingly investors seek access to foreign markets and companies seek capital outside their home markets. ‘Addressing the use of IFRS in US markets is vitally important for US investors, and will be critical in determining the role that US capital will play in global capital markets,’ he adds, ‘and this year, the SEC will consider how we will map the future for US firms and IFRS.’ If the US does decide to give its public issuers the choice between filing their financials using US GAAP or IFRS, it will face many of the resourcing issues that EU registrants faced in the run-up to the 2005 switch. IFRS is included in the ACCA Qualification syllabus, and ACCA has also introduced a Diploma in International Financial Reporting (DipIFR), but IFRS is not widely taught in the US (it is not covered in the CPA exams, for instance) and this lack of knowledge would make any move towards IFRS particularly challenging. As well as training staff to understand the differences between US GAAP and IFRS, listed companies would also need to modify their information systems and internal controls. In the run-up to 2005, Barclays Bank spent more than £50m in Europe on its IFRS convergence project. The associated activities take a great deal of planning, coordination, time and effort, and US listed companies will need to dig deep and start planning as early as possible. Clear as mud?So, can we expect to see IFRS become a truly global set of standards? ‘Eventually,’ says Martin, but there are still some barriers. Despite the worldwide convergence of financial reporting standards, there is still a chance that we will end up with too many variations on IFRS for standards to be really global. ‘There is an issue with the application of IFRS in some jurisdictions,’ says Martin. ‘We need to encourage the minimisation of differences and delays,’ he adds, ‘particularly in Europe.’ The EU may have spearheaded the move towards IFRS when it mandated their use for listed companies, but it has not been entirely happy with the international standards developed by the IASB. IAS 39, the standard that deals with the recognition and measurement of financial instruments, has been a particular stumbling block, because of EU concerns about macro-hedge accounting and fair value. So, rather than fully endorse IFRS as developed by the IASB, the EU has adopted a work around, resulting in financial statements which comply with ‘IFRS as adopted by the EU’. Because of this sort of tinkering, a set of financial statements prepared using country A’s GAAP is not automatically comparable with a set of financial statements prepared using country B’s GAAP, even if they both have been prepared using IFRS. ‘These differences must be eliminated,’ asserts Martin. ‘We need to be clear about IFRS in accounts,’ he says, adding: ‘They need to be the IASB standard, not a version that is pretty close.’ Lack of commonality also worries the SEC chairman, and when he announced the SEC rule change on reconciliation he made it clear that it would apply only to financial statements prepared using IFRS as issued by the IASB. ‘We’ve always said that our recognition of IFRS depends on it being a single set of internationally accepted accounting standards, and not a multiplicity of accounting standards interpreted differently in every country,’ he commented, and there is still a possibility that we will end up with at least three different versions: IASB IFRS, EU IFRS, and US IFRS.
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