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International Financial Reporting Standards (IFRS) has been building momentum for a while now but has this actually changed the reporting picture at all? Is my pension pot getting bigger as a result of IFRS?

Go back less than 30 years and the concept of International Financial Reporting Standards (IFRS) was almost unknown. Today, things are very different with more than 70% of countries allowing or requiring IFRS use (according to IAS Plus).

So it looks like the idea of a common set of reporting standards is catching on. The problem, as always, is in the detail. Let’s start with several reasons why international accounting standards are a good idea – an idea that in theory I agree with:

  • Global comparability of reports;
  • Lower costs of capital (due to lower investor research costs);
  • Faster report preparation; and
  • Lower reporting costs due to consistency across an organization.

So if there will be lower accounting costs along with simpler and faster reporting to market that sounds pretty good to me (and my pension pot). The problems seem to come along when we look at the real-life practicalities.  Here are several fairly significant issues.

First of all no country really wants to give up any control. This highlights the simple issue that while there are a centrally controlled set of IFRS rules, each country that adopts IFRS often chooses to have their own version of them. Immediately there is the potential (even likelihood) that the rules will be different depending on what country you are in.

If you’re part of a multi-national organization the IFRS rules that will apply are what is applicable where the group is reporting. So in foreign subsidiaries you could end up in a weird situation where a different set of IFRS rules to the local ones may need to be applied.

Next let’s take a step back and get a wider view. The assumption underpinning IFRS standards is that everyone can get what they want from them. The big elephant in the room on this is the tax departments.

Generally IFRS use is only ever required of stock exchange listed companies. So the other entities can (and normally will) continue using the existing local GAAPs (Generally Accepted Accounting Practice).

This means that the tax department needs taxable income based on local GAAP as the most consistent set of rules across their taxpayers. So at the very least some auditable translation is needed from IFRS values to local GAAP values, or potentially as far as a parallel ledger.

If you think about this last point a little further, then IFRS is actually moving the cost of foreign investment from the investor to the entity being invested in (as they have increased reporting requirements). Are we sure that the overall net cost is lower and comfortable that domestic costs may be increasing to reduce the costs borne by foreign investors?

I have highlighted above a few examples of a large variety of concerns about the IFRS concept as it is being put in place at the moment. If we as a globe are going to make the concept of IFRS work then we need to seriously consider what we are doing:

  • Countries must be willing to adopt the standards as published centrally by the International Accounting Standards Board (IASB), otherwise there is not much difference  to running local GAAP;
  • If countries do insist on having their own take on the standards, then the IASB needs to publish the current state of adoption (by country) and the differences (otherwise we are back to every country having their own GAAP again);
  • Countries need to move towards all entities using IFRS, not just some entities. This will minimize the overall compliance costs to businesses and knowledge can be better utilized in domestic workforces.

So whatever way you look at this issue, there are currently some increased costs. Eventually we hope that these extra costs will disappear, but is that overall cost lower than the cost would be if every country had their own independent accounting rules?

 

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