Having sufficient consistency in the application of accounting principles so that investors and regulators can have confidence in financial statements, whether or not they are prepared in Amsterdam, Australia or the United States (U.S.), is certainly an attractive proposition. In this respect many believe that International Financial Reporting Standards (IFRS) must be that way going forward. However, before we see the full benefits of IFRS on the global stage one should recognise that there is still a long way to go before accounting can be considered to be ‘truly’ international.
Convergence of accounting principles can be compared to trying to piece together a very large and complicated jigsaw puzzle. At the moment, with more than 100 countries now requiring or permitting the use of IFRS or with plans to converge to IFRS, clearly we have made a good start, but there are some important pieces to this jigsaw puzzle that are currently missing, not least the U.S.
IFRS Convergence in the U.S.
In February 2010 the U.S. Securities and Exchange Commission (SEC) released a Statement on Global Accounting Standards that has paved the way for a 2011 decision. Based upon this statement the earliest that U.S. issuers would be required to report under IFRS would be 2015, with these companies being required to provide comparative financial statements for periods beginning as soon as 2013.
Despite the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) working hard towards convergence, the process has inevitably been beset with some delays. These delays combined with some recent divergence of opinions between the FASB and the IASB in certain areas, general uncertainties regarding conversion in the U.S market and wavering views of the ultimate benefits and associated costs of IFRS have inevitably not helped companies reap the maximum potential benefits of convergence as soon as was initially expected.
Out of the many advantages regarding convergence to IFRS one that is often quoted is:
“By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide.”
So what is stopping companies actually reaping this anticipated benefit? It should firstly be noted that not all the convergence difficulties lie in the U.S. Despite the perception that IFRS is now largely the “one accounting language” used by most countries outside the U.S., this is not entirely the case.
Is IFRS Truly International?
CPA firms may not easily fall into the trap of thinking IFRS is truly international. It was once said that “the European Union is a State under construction” and as a demonstration of this fact, and yet in practice harmonization of accounting rules is far from being achieved in the 27 member states in Europe. Currently IFRS is only required in Europe for consolidated financial statements if a company’s debts or shares are traded on a regulated market. Hence, for entity-level financial statements the likelihood is that each country will be using a different accounting framework (French GAAP, German GAAP, UK GAAP etc.). This will apply whether or not the company is a member of an international group.
Furthermore the simplified standard for private entities, the ‘IFRS for SMEs’ is also receiving a luke-warm reception in the European arena. A recent consultation on the use of the IFRS for SMEs in Europe highlighted significant different views between EC member states regarding the use of the IFRS for SMEs. As a result it looks like most European countries will continue to “hide behind” their national GAAP for many years to come.
One of the principal objectives of the International Accounting Standards Committee (IASC) Foundation has always been “to develop a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards through its standard-setting body, the IASB.”
While the Standards themselves are now largely meeting this objective, the problems have now taken a political focus. With a few cracks appearing in the road to convergence, more than ever one needs to believe that the pain is worth the gain and that the momentum towards common accounting principles needs to be maintained and core differences overcome.
What is clear is that the global economy has certainly become more complex and accounting cannot remain in the dark ages. The efforts being made by the Standard Setters to achieve a high quality set of accounting standards that are fit for purpose will inevitably mean that the only constant over the next few years in accounting will be change.
The use of IFRS has not yet made accounting truly international and convergence remains very much a work in progress. Nevertheless at this juncture we need to ensure that real benefits to companies do not get dragged into a political minefield and ultimately we need to make certain that one does not end up with a jigsaw with a few pieces missing!
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Steven Brice is a technical partner in the financial reporting advisory group for Mazars UK and provides his views on international convergence of GAAP and whether progress is really being made in light of recent developments. For U.S. IFRS, you can contact Remi Forgeas, CPA, who is an audit and assurance partner for Mazars in the U.S.
* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™