IFRS rules: views from the top

A KPMG report, International Financial Reporting Standards: Views on a financial reporting revolution, indicates that a number of issues remain to be resolved in order to confirm the success of the IFRS project.

Based on interviews with chief financial officers, auditors, regulators, standard setters, analysts and auditors, the report shares opinions on a range of topics.

US convergence

Many people commented on the need for the Securities and Exchange Commission to come to a swift conclusion on the issue of reconciliation. Sir David Tweedie, chairman of the International Accounting Standards Board, took an optimistic view, saying: “The SEC has said that as long as it knows and understands what we are doing and moving towards then that will be enough. It will mean that the reconciliation will be gone by the end of 2007 or early 2008.”

Jon Symonds, CFO of AstraZeneca, says: “The critical step is in the attitude of the SEC. It has always taken a legalistic view – form rather than substance. The SEC reviews, which take place in the first half of 2006, will set the tone.”

Concern over fair value

Many interviewees criticised the “creeping influence” of fair values in the standards. Symonds says: “I do want to know where the boundaries of fair value are. It’s just theoretical nonsense at times.” He adds: “I am very uncomfortable about the continuous stream of papers about fair values.” Martin Cubbon, group FD of Swire Pacific in Hong Kong, says: “Who would have thought that accountants would finish up valuing businesses. That’s what stock markets do.”

Rules versus principles

The interviews reveal an acknowledgement of the tension between an espoused desire for a principles-based system, while also achieving consistency. Michael Hughes, global head of audit at KPMG, says: “Some regulators assume consistency will come from judgements when inevitably judgements will produce an element of inconsistency. They need to acknowledge that absolute consistency can only come from a rules-based system.”

Consistency of interpretation

The danger of standards being interpreted differently in different regimes was also highlighted. Robert Herz, chairman of the Financial Accounting Standards Board in the US, argued for patience, saying: “With so many countries adopting IFRS there are bound, for a while, to be different versions. So there has to be patience first and then bring it to resolution within the set of principles.”

Looking at the situation of colleagues in the financial services sector, AstraZeneca’s Symonds says that “companies are implementing almost incomprehensible standards”. He adds: “And because there is no body of GAAP and no body of support, they are finding it difficult to interpret them.” Symonds looked partly to audit firms to be more proactive in interpreting standards, rather than everything being pushed up to the IASB’s interpretations committee to resolve. He adds: “We need to have accountability pushed back to the CFOs to apply judgement. Otherwise we will push judgement out of the system. That would be a disaster.”

Narrative reporting

Narrative reporting, such as in the operating and financial review and the US management discussion and analysis, is seen as a key way to explain complex accounting numbers. Symonds says: “For global accounts, you can’t encapsulate everything in the figures. You need the accounts. But you also need the notes to the accounts and the narrative, like the OFR, or the management discussion and analysis. You need all three. You cannot understand it without all three.”

IFRS adoption experience

Andrew Bonfield, CFO of Bristol-Myers Squibb, the US pharmaceutical and healthcare giant, drew on his experience as a non-executive director with BOC. He says: There has been a huge educational and training process. There have been a lot of policy changes as a result and the impact has been quite significant. But I am not sure there has been a huge amount of value added so far.”

AstraZeneca’s Symonds says that dealing with the company’s intellectual property issues and patents had caused some concerns: “We spent a lot of time getting to grips with the treatment of intangibles. It can lead to some very odd results… We are publishing numbers which appear more complex than they really are and which do not communicate the real underlying business.”