Accounting a milestone for global markets

Updated: Jul 27 2006, 05:30am hrs
Since EU accepted the International Financial Reporting Standards (IFRS) in 2005, there has significant activity to make IFRS credible and acceptable across the world. The results are encouraging and many countries are achieving convergence of their national accounting standards with IFRS.

Executive search firm Russell Reynolds survey of chairmen across 145 European companies has found: (a) over half the chairmen of companies with US listings said they would consider de-listing because of Sarbanes-Oxley, in spite of the difficulties in taking shares off the US exchanges; (b) 70% of those heading companies not yet listed in the US said Sarbanes-Oxley would dissuade them from seeking a US listing.

With the relatively tighter regulation in the US, several large companies are understood to be evaluating other capital markets that accept IFRS. While such situations provide an opportunity for IFRS to flourish, it would still be inappropriate to stay limited to that perspective. This is because IFRS stands a fair chance on its own, with its acceptance by EU, and also given the fact that many countries have traditionally followed IFRS or IFRS-inspired national accounting standards.

On January 1, 2007, more than 1,100 Chinese companies will switch to new accounting standards that will bring their books in line with international norms. From next year, the companies will have to apply a new set of 38 standards, under the China Accounting Standards System, that are basically in line with IASB (International Accounting Standards Board) norms. But, there is far more at stake than improving accounting practices at Chinas listed firms. Chinese companies are increasingly looking overseas for funds and acquisitions. Adopting international standards will make this easier by increasing their transparency and credibility.

On Japan, Sir David Tweedie, IASB chairman said, The ideal of having one set of high-quality global accounting standards has been broadly accepted for many years. The world is now moving rapidly to make convergence on a single set of standards a reality. The IASB warmly welcomes the Accounting Standard Board of Japans (ASBJ) proposal to accelerate our convergence programme.

The IASB published a statement of best practice: Working relationships between the IASB and other accounting standard-setters. It identifies a range of activities that the IASB and regional and national accounting standard-setters believe they should undertake to facilitate the adoption of or convergence with IFRS.

Substantial convergence is targeted for 2009 across global capital markets
Nations adopting the standards face a of shortage of IFRS-trained resources
Multiplicity of standard-setters may mean delays & lack of direction in India
Welcoming the statement, Sir David Tweedie said, This statement is a further demonstration of the strengthening ties between accounting standard-setting bodies around the world, and of the growing commitment among them to the establishment of a single set of high quality global accounting standards. The statement will be a valuable aid to the growing number of countries, now more than 100, that have decided to adopt or converge with IFRSs, and it will provide both guidance and added impetus to those planning to do so in the future.

The US Financial Accounting Standards Board (FASB) and the IASB published a Memorandum of Understanding (MoU) that reaffirms the boards shared objective of developing high quality, common accounting standards for use in the worlds capital markets. Both boards believe that a common set of high quality accounting standards will enhance the consistency, comparability and efficiency of financial statements, enabling global markets to move with less friction.

Both the FASB and the IASB note that removing the current reconciliation requirements will require continued progress on the boards convergence programme. Accordingly, the MoU sets out milestones that the FASB and the IASB believe are achievable. Substantial convergence is targeted for 2009.

As per a news report from Reuters, SEC Commissioner Roel Campos said that the New York Stock Exchanges planned takeover of Euronext would not force US reporting rules on Europe, though some convergence is inevitable and welcome.

However, there are challenges that IASB and nations adopting IFRS need to address in the coming days. One big challenge for countries adopting IFRS is the shortage of resources and, particularly, IFRS-trained resources. With just six months to go before Chinas listed companies adopt IFRS, demand for accountants is rising and could run into millions in the coming years, if the new standards are rolled out for all of the countrys companies and not just the listed ones.

Accountants say that the challenge for China, as it scrambles to meet the accounting shift deadline, will lie in getting its over-1,100 listed companies to establish the appropriate financial reporting systems and in training enough qualified accountants by January. The risk is that some of these companies may fail to make the transition on time. Estimates reveal that China has a shortfall of 300,000 qualified accountants and is likely to require a further three million over the coming years to keep pace with its current rate of economic growth.

As mentioned in this column earlier, for India, the multiplicity of standard setters can also lead to delay and lack of direction. The increased complexity of the fair valuation models as prescribed by international standards requires extensive valuation/objective professional judgments, integrity and uniformity of approach, which may not be easily achievable across all countriesparticularly in the emerging economies.

IASBs challenge is to bring stability in the entire framework, provide clarity on a range of confusing issues, address the fair value criticisms and, most important, ensure that standards are interpreted and applied consistently, be it Asia, Africa or America.

The writer is CEO & country managing partner, Ernst & Young India