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US convergence of accounting standards`
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US convergence of accounting standards`
We are rapidly heading towards a world where there are two main financial reporting systems ? US GAAP accounting, used by the largest part of the global capital market, and International Financial Reporting Standards (IFRS), the system now being used as the benchmark in many other countries ? all of Europe, China, Australia, Malaysia and Egypt to name a few.
There has been controversy in certain quarters about whether the time and effort being put into convergence between these two reporting systems is worth it, and whether it will inevitably have an adverse effect on the quality of the international standards.
It may not come as a surprise that, given ACCA?s status as the world?s largest professional international accountancy body with over 370,000 students and members in 170 countries, we support the idea of global accounting standards. Convergence between IFRS and US GAAP is important in our view because: The harmonisation of financial reporting around the world will help to raise confidence of investors generally in the information they are using to make their decisions and assess their risks. The opposite is perhaps the clearer case. If accounting for the same events and information produces radically different reported numbers, depending on the system of standards that are being used, then it is self-evident that accounting will be increasingly discredited in the eyes of those using the numbers.
For individual companies it should be the case that the greater confidence in reliable and transparent information translates into a lower cost of capital ? reduced interest costs and higher share prices.
For those companies with joint listings in both America and another country, there should be substantial savings, particularly in terms of preparation costs. Obviating the burdensome US GAAP reconciliation statement required at present would be a worthwhile prize. Harmonisation of requirements also assists the international mobility of professionally qualified accountants themselves. Mobility of skilled labour can only be a good thing.
So where is the process currently? Encouragingly, good progress has been made so far. Some of the major sources of differences have been eliminated or are declining. For example, the issuing of IFRS3 meant that the treatment of business combinations and how to deal with changes in groups has been harmonised and, going forward, will be largely the same under the two systems.
This is an important development given the level of global merger and acquisition activity, the different treatments having been the source of the largest differences between the two accounting systems. In terms of share-based payments (including US executive stock option schemes), IASB issued IFRS2 which was comparable to the US standard SFAS123. Following that, the Americans in effect changed the status of SFAS123 from voluntary to mandatory.
Confidence</B>
Of course significant areas of difference remain. Impairment of property, plant and equipment ? the models for triggering when to do a test and then the model for measuring the impairment when it comes to it ? are different even though both models seem to work reasonably well. On revenue recognition, there are just a couple of IFRS standards that deal with this, by contrast to the 200-plus standards, interpretations and other statements dealing with the subject in US GAAP.
So how far do we need convergence to proceed ? We do not believe the capital markets need identical standards in every case. What is most important is the confidence that reporting has been done to a high standard and that there is equivalence in the different systems. This is the objective of the European Commission in its convergence discussions with the US ? mutual recognition of US GAAP and IFRS and the removal of the need for a reconciliation statement by foreign companies registered with the SEC.
What is sometimes overlooked is that, while the reporting by companies to stock markets is a critical activity for those businesses, the bulk of accounting and reporting takes place by unlisted companies and not to those sorts of investors. In this context, identical standards seem less critical and it would be sufficient if there were mutual recognition of the equivalence of quality of the two systems.
The good reasons why convergence with the US should be pursued have been noted. There is, however, a downside to all of this for IFRS ? a price in terms of costs and difficulties of the changes in the standards that convergence inevitably creates. These include: Extra costs in the preparation of financial statements by all IFRS companies ? implementing new requirements and restating previously reported numbers.
Changes have to be communicated and understood by all of those involved in preparing the accounts, auditing them and using them. Translations of the amended standards are required for the many languages in which IFRS are applicable.
The changes have to be approved by the various national endorsement authorities and often incorporated into their legal systems. Continuous piecemeal changes undermine the reputation of IFRS. Some might justifiably ask why high quality standards need such frequent amendment.
But we do not believe these problems mean that convergence should stop. Not at all. What it does mean is that changes to IFRS should always be justified by the improvement in the quality of the reporting that results.
<B>Loss of information</B>
Take for example the recent proposals to replace the international standard on segment reporting IAS14 with equivalent provisions derived from the corresponding US standard SFAS131. This is a convergence project pure and simple. The costs are clear. Companies (many applying IAS14 for the first time last year) will now have to redo their segmental disclosures. It is hard to see where the improvement and benefit comes. There appears to be a loss of information compared to the existing requirements. There seems more risk that there will be a biased or incomplete disclosure of data. Not all analysts will think this represents progress.
Nevertheless, what is very important is that major new developments in accounting standards are done jointly, so that the principles will be in step and new differences avoided. So, for instance, there is a need for a general standard setting out the principles of revenue recognition. There is too much sector-specific, issue-specific guidance in US GAAP on the one hand. On the other, for IFRS the existing guidance (IAS 18) is perhaps rather incomplete and out of date.
Convergence is a process of getting closer, which ACCA supports. However the current pursuit of convergence risks forcing a rapid and costly pace of change in IFRS and taking convergence further than is justified on clarity and quality grounds. Focusing on the backlist of standards is thus probably not right approach. A joint approach on all major new developments would be our preferred way forward.
<B>Richard Aitken-Davies </B>
<I>(Vice-President of ACCA). Richard Martin (ACCA Head of Financial Reporting).</B>
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