Thursday, May 29, 2014

Sovereignty Challenge to Globally Congruent Accounting Standards Being Met says IASB Vice Chair

Noting  the globalization of capital markets and financial reporting, IASB Vice Chair Ian Mackintosh emphasized the high importance of having globally congruent international accounting standards. It makes no sense for each and every country to maintain its own different set of accounting standards, he averred, especially at a time when investors need cross-border comparisons, multinational companies need to avoid  the cost of multiple reporting requirements, and regulators need a globally consistent measurement of financial performance on which to base their initiatives. But in recent remarks, the Vice Chair said that sovereignty threaten the goal of globally consistent IFRS.

If each jurisdiction uses a different set of accounting standards, the basis for coming up with even the most well understood of numbers, such as revenue or net profit, can be very different. A famous example of this from the automotive sector occurred back in 1993 when Daimler-Benz switched from German accounting principles to US GAAP in order to become the first German company with a secondary listing in New York. A profit of around 600 million Deutschmarks that had been recorded using German GAAP turned into a loss of almost 2 billion Deutschmarks when reporting using US GAAP. This helps to explain why the G20 Leaders have consistently supported the work of the IASB and expressed their repeated support for global accounting standards and the goal of a global language for financial reporting.

For global IFRS to work,  noted the IASB Vice Chair,  each country must agree to stick to the internationally agreed standards and to resist the temptation to tinker with the standards. A failure to adopt a global standard, or a decision to amend or add to that global standard means it simply isn’t a global standard any more, reasoned the IASB senior official.

Recognizing that adopting verbatim the standards of an international body cuts across the notion of sovereignty, the IASB has been working diligently to develop a multi-national standard setting process that will allow a country to comfortably adopt IFRS without any tinkering. The Board has invested heavily in sophisticated outreach and stakeholder engagement programs to ensure that the views of all constituents across all parts of the world are heard as part of the standard setting process. Also, there are high levels of international diversity at all levels of the IASB. For example, the Board has almost thirty different nationalities among its technical staff, he pointed out, and the membership of various advisory bodies is also highly international.

Moreover, during 2013, the Board took further steps to emphasize the multilateral nature of the standard setting process. Central to this effort was the creation of the Accounting Standards Advisory Forum, to bring in national and regional bodies with responsibility for accounting standard setting within those jurisdictions.

In addition, he noted that there are safeguards in place to ensure that the IASB is not simply passing down diktats from an ivory tower. Many jurisdictions have implemented endorsement mechanisms to act as a form of sovereignty circuit-breaker. The existence of this mechanism avoids a situation where IFRS developed by the IASB are automatically written into jurisdictional law. Some of these endorsement mechanisms, such as the one in Europe, involve multiple steps and evaluations to assess whether the adoption of that particular new IFRS is in the interests of the jurisdiction.