Risk & Economy » Regulation » Corporate governance: One step forward

Robert Bruce

One 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’