IFRS Convergence

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

The integration of global capital markets and the inevitable consequent need for harmonisation of accounting standards to facilitate cross-country listings as also meaningful transmission of information to investors / other third party users of financial statements have combined to lend a fillip to the reconciliation of various International Accounting Standards / US Generally Accepted Accounting Practices (IAS / US GAAP) issues.

In today’s competitive world the two questions that each finance manager / CEO would ask are:

What do they need: customer / client / investor?

What are the new sources of making profits within the regulatory framework?

Every entity and its competitors agree that they would benefit from the six freedoms:

  1. To enter the market
  2. To engage in competition
  3. To set prices
  4. To make profits
  5. To survive / fail
  6. To exit the market

For example:
It is claimed that the companies in the European Union are benefiting from reduced compliance costs associated with the removal of the need for the consolidation of different national accounts into a single statement to meet their home country’s requirements. Investors are able to make comparisons of companies operating in different jurisdictions more easily. Regulatory authorities are now more able to develop more consistent approaches to supervision across the European economies.

What is IASB?
The International Accounting Standards Board has been established in order to produce a single set of global accounting standards. This will make the financial statements prepared by countries across the world comparable and nullify the effect of man-made political borders between various countries.

The first hurdle which IASB has to cross in its endeavor is that these standards should be adopted by all countries. To achieve its goals, the Board works closely with national standard setters around the world. It has done a commendable job so far and today more than a hundred countries have adopted these standards.

If IASB achieves its goal of worldwide convergence then all accountants across the globe will speak the same language. This will enhance the utility of the financial statements and be really helpful to the various stakeholders (like shareholders, potential investors, suppliers) who use these financial statements.

However, there are a few implementation issues arising from the convergence process. The main contention is that the IFRSs are too complex to understand and hence difficult to implement.

The importance of IFRS is increasing with the increase in the number of countries who are adopting IFRS.

Progress with convergence

Several countries have substantially completed the process of convergence. More than 100 countries throughout the world, including the 27 European Union member states, require or permit the use of International Financial Reporting Standards (IFRS), developed by the IASB.

Europe adopted IFRS from 2005. The listed companies are required to follow IFRS in Europe.

Emerging and transition economies

The major emerging and transition economies of the world – Canada, Brazil, China, India and Russia – are adopting or considering the adoption of IFRS by 2011. This is a part of an effort to become integrated in the world’s capital markets and attract investment necessary to finance their development.

Japan

Japanese standard setters agreed with the shared goal of eliminating major differences between IFRS and Japanese GAAP by 2008, with the remaining differences to be removed till 30 June 2011.

Australia

From the year 2005 the Australian equivalent of IFRS has become effective.

As the leader in IFRS adoption, Europe is already reaping some of early benefits. Only last week, the Financial Times reported that Europe eclipsed the United States in stock market value for the first time since the early 20th century.

At times, IFRS was adopted after some changes were made to the standards to suit the local conditions.

Convergence with US standards

The IASB has agreed with the FASB (The American Federal Accounting Standards Board) to create a roadmap for convergence between the standards prepared by the IASB and the FASB

Other countries

More and more countries around the world are adopting IFRS. Chile, Israel, India, Canada and Korea have all recently announced their planned abandonment of national standards for IFRSs.
 
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