RSS feedsOne of the insights to come out of the implementation of international financial reporting standards is that the most interesting information is coming from the farthest flung parts of the business world. This will have a tremendous impact on investment strategies in future. And, quirkily, the UK market, which has probably had the most difficulties in implementing IFRS, will have a long-term advantage globally.
Let me explain. No one doubts the troubles UK companies have had. The recent KPMG report, IFRS: The Quest for a Global Language, sheds light on this. It is based on the experiences and thoughts of the main players in the changes that have happened. Peter Elwin, head of accounting and valuation research at JP Morgan Cazenove, said: “In the UK, IFRS has
been a slight step backwards in some respects.” He thought the real benefits were showing up elsewhere.
“There is greater comparability and more disclosure, and that is particularly true on the continent of Europe and across Asia,” he said. “There are some significant advances in the way things are being accounted for. There is a lot more information, for example, on pensions accounting or expensing stock options, than under the old local GAAP systems.”
In the UK, everyone thought that IFRS implementation would be relatively straightforward, though time-consuming and expensive. But the reality was that it was paradoxically harder to change highly sophisticated existing systems than it was in some countries with a less entrenched system. As Robert Herz, chairman of the US standard setter the Financial Accounting Standards Board put it in the report: “In many places, capital market reporting didn’t exist before. The figures were produced for a tax-based system, for example. The changes have been exactly what the capital markets needed.”
Even flawed accounting standards produced results in some jurisdictions where, frankly, no information had existed before. Sir David Tweedie, chairman o f the International Accounting Standards Board, which has brought this revolution about, said: “The biggest change we have seen with the implementation of IFRS has been the introduction of accounting for financial instruments, which in most countries was not previously done at all. Things which could destroy earnings had previously been invisible.”
That makes a huge difference. “Analysts and investors now have the ability to look at figures across the board and get the same answers,” said Tweedie, and, as a result, “the accounting risk is beginning to disappear.” With more than 100 countries using IFRS to a greater or lesser extent, and with that figure expected to rise to 150 in five years – and with the likelihood that US companies will, in the relatively near future, be able to use IFRS as well – the goal of relatively consistent global comparability can be seen to be in sight.
“An investor should be looking at the world as investable,” said Ken Lee, head of accounting and valuation research for Europe at Citi Investment Research. “At the moment, that’s not the case. IFRS has made a significant contribution to start that process.”
Peter Elwin provided an example of the transformation in comparability. “It’s actually there,” he said. “It has been a significant advance. For example, in the past, if you took a Hong Kong company and tried to compare it to a similar one in Malaysia and Singapore, you would have significant difficulties, but you are now able to make much more sensible comparisons.”
And that is not the only transformation in the global market. John Hegarty is the World Bank manager of financial management for Europe and central Asia. One of his roles is to help emerging and developing economies get to grips with IFRS – both the implementation and consequences. So he sees the issues from a standpoint which is not necessarily corporate at all. But, as he said in the report, he sees a huge difference post-IFRS. “Increasingly, the default position globally is that IFRS should become the benchmark for countries’ financial reporting frameworks,” he said.
It is quite easy for all this change overseas to be missed by financial directors in the UK. For them, IFRS has been a tough old slog. It has been an old-fashioned accounting exercise in many ways. It has been the changing of systems, the alignment of objectives, endless explaining to a sceptical and sometimes cynical board of directors – all the stuff which makes a finance function feel weary and unappreciated.
But, as the content of the KPMG report reveals, it has been a different story elsewhere. It may have been the expected hard work here in the UK, but the real revolution has been elsewhere and if, as a result, the world is really becoming, as Lee suggested, “investable”, the prospects for UK corporates are transformed. With the accounting risk greatly assuaged, investment strategies can take global flight. The world, as the IFRS revolution takes hold, becomes the UK corporates’ oyster.
