We are on the verge of the period in which listed companies will be reporting their first full figures under international financial reporting standards, in Europe and around the world. For the hard-and-fast figures we have to wait. But it is clear from a survey published by KPMG, the accountancy firm*, this week that attitudes towards IFRS are changing. It found that much of the hostility that was so apparent during the implementation last year has abated. What are left are specific gripes over particular treatments.
But overall, participants in the survey are happy. In particular, the regulatory community around the world was cheered. Jeffrey Lucy, chairman of the Australian Securities and Investments Commission, describes the soft landing as “almost in the category of ‘beyond our wildest dreams’”. And Bob Herz, chairman of the US Financial Accounting Standards Board, describes it as “an incredible event in the history of accounting”. Veteran analyst Tony Good, of the UK Society of Investment Professionals, says “it is quite remarkable that we haven’t had any disasters”.
The process seems to have driven some tough decisions. “Some things were more difficult than I had expected,” says Jon Symonds, chief financial officer at AstraZeneca, the UK-based pharmaceuticals company. “But we haven’t had any surprises. We decided that our hedging was not economically necessary and we stopped it before implementation. We didn’t want to get involved with IAS39.”
There was also, for better or worse, a view that the figures were more complex. Mr Symonds says “there was less scope for common sense”. In particular there were problems with intangibles. “It can lead to some very odd results,” he says. “You scratch your head over some very different answers. We are publishing numbers that appear more complex than they really are and that do not communicate the underlying business.” But he also thought the overall integrity of the figures was “more robust”.
Charles Grieve, of the Securities and Futures Commission in Hong Kong, says “accounts are moving towards telling the truth and the whole truth, and the whole truth is complex”.
Mr Herz says “the key is not to dumb down the accounting. To keep the transparency you need to reflect the complexity in the accounting.”
But the big issue remains the conflict between the apparent security of a rulebook approach and the more useful application of judgment based on principles. “It is the big test,” says Sir David Tweedie, chairman of the International Accounting Standards Board and architect of the IFRS system. “Can people use judgment and can the regulators hold off?”
There is a difference here between what people would like and what they will do. Mr Grieve says: “People will chant the mantra of principles while asking for ever more rules.”
It is often seen as a conflict between the more rule-based, lawyer- dominated US system and the more pragmatic European approach. Andrew Bonfield, chief financial officer with Bristol-Myers Squibb, the US pharmaceuticals giant, and non-executive director of BOC in the UK, says: “Reducing the number of choices is always the best way. Having a good set of underlying principles, which is something the UK has always had, helps. In the US you have to drive around the rules and they can trip you up. Some of the principles that underpinned UK accounting were much better.”
Mr Symonds feels it is a central issue for CFOs. “We need to have accountability pushed back to the CFOs to apply judgment. Otherwise we push judgment out of the system. That would be a disaster, particularly for us because our entire accounting careers have been based on: ‘You make the judgment’.”
The other issue much on the minds of participants in the survey was the likely attitude of the US Securities and Exchange Commission. The SEC will be reviewing the results published under IFRS and it is hoped that
it will shortly afterwards remove the additional need for the figures to be reconciled to US Generally Accepted Accounting Principles. “Once we can abandon US GAAP throughout our organisation it will take away a huge burden worldwide,” says Robert Koethner, chief accounting officer for DaimlerChrysler, the German-US carmaker.
As to what the future holds, the survey suggests that it will be positive. Mr Herz says: “If you were to look back from the year 2020 to 2001 you would say ‘what chaos!’ and ‘what inefficient capital markets!’. It will be like we now say: ‘How did people get along without cellphones?’.”
■ Hostility to international financial reporting standards has abated
■ Regulators, analysts and chief financial officers are happier
■ Figures reported under IFRS are more complex, but they are seen as reflecting business complexity
■ CFOs prefer judgment rather than strict rules
■ American regulatory views are seen as crucial
*International Financial Reporting Standards: Views on a Financial Reporting Revolution, www.kpmg.com
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