Accounting - The next wave of convergence

At the start of 2005, what should have been a moment of triumph – the introduction of international financial reporting standards into dozens of countries around the globe – has instead provoked a spasm of self-doubt and disagreement. There is always a certain degree of grumbling directed at standards setters, but it seems the criticism aimed at the International Accounting Standards Board has reached fever pitch.

The charge sheet against the IASB can be summarised as simply failing to take proper account of stakeholders – particularly in the way that it appears to be charging towards an aggressive fair-value model of accounting, moving rapidly and decisively away from the modified historical cost model that operated for many years.

These accusations are vehemently denied by those close to the IASB. The preparers claim the IASB is not listening to what users of accounts say they want. It is now a common perception that the IASB is introducing a fair-value model of financial reporting against the will of users, preparers and even regulators. Investors are saying they want to know more about cashflow, debt and how the earnings of the company are generated – the split between acquired, continuing and discounted operations. But instead of this analysis of the components of performance, the IASB seems to be concentrating on producing information on fair values which users don’t want. Indeed, there is a growing belief that the IASB is somehow trespassing on the territory of the analysts.

If the IASB is requiring companies to give information which is different from that requested by analysts and investors, the result will be an increase in pro-forma use of financial information, though it won’t be called that. Such a trend would suit no one. It would be ridiculous to have a worldwide system of financial reporting and then decrease the reliance on audited statutory accounts. But such a move is an implicit challenge to the authority of the IASB.

Mind you, if preparers are exasperated by the IASB, the feeling is mutual. As far as it is concerned, fair value is just one of a number of models up for grabs. It claims much of the fair value in use or being contemplated was either inherited from its predecessor body or invented and by national standards setters. And as for listening to their stakeholders, the IASB claims it listens aplenty and debates internally all of the issues. Part of the problem might be that the IASB has limited resources. It sees its overriding objective as producing high-quality standards that don’t allow the myriad options found in old international standards and which made stock exchange regulators recoil in horror. It has been so busy doing this that it has had little time to actually go out and speak to users, regulator and preparers.

Amidst all the rancour there is only one area where people agree. The next prize in financial reporting is the convergence between international GAAP and US GAAP. It’s hard to find anyone on either side of the Atlantic excited by that possibility. If you thought the rush to adopt IFRS in the European Union would be followed by the ultimate convergence at a similar speed, think again. Both preparers and standards setters think US/IASB convergence is a decade away. US and international generally accepted accounting principles may be converging, but they are still along way apart. There remain real differences between the approach of US standards setters and those in the rest of the world over a host of issues, not just conceptual frameworks. Europeans, for instance, have real worries over the complexity of both measurement and disclosure in US accounting. Remember the US system is designed exclusively for quoted companies, while many other jurisdictions, including Europe, still yoke public and private under the same regime. An international GAAP based on US complexity would cause countless problems for private entities.

Now that many countries are adopting IFRS it may be time for a period of consolidation and consideration. It may even be time to admit publicly that US/international GAAP convergence is on the back burner for the foreseeable future. The IASB still has much work to do on difficult areas such as pensions, leasing and insurance, and it is taking a forthright stance on the need to get these accounting issues right. Maybe now it has achieved so much it can afford to indulge in some peace talks with those who have genuine concerns about how they report their company’s financial performance.