25 Feb 2014
Nearly 10 years after IFRS became mandatory in the EU and Australia, how consistent has the world been in its interpretation of the standards? Christopher Nobes, Professor of Accounting at the Universities of London and Sydney, takes a look.
In 2012, the IFRS Foundation issued a strategy report. It revealed that the IASB, despite overseeing the massive uptake of its carefully devised standards in over 100 jurisdictions, didn’t really know exactly who the ‘consumers’ were, nor exactly how they were using the ‘product’. They were unable to respond to accusations that a number of national variations of IFRS existed around the world – and unable even to check that the process for translating IFRSs from the original English ensured a faithful replication in the new language.
The report concluded that the IFRS Foundation and the IASB needed detailed answers on exactly how the standards had been adopted, country-by-country. Without this information, the report said, the IFRS Foundation could not ensure its mission statement – to apply a single set of financial reporting standards in “the best interests of the global economy” and to prevent the kind of divergence from that single set of standards that “can undermine confidence in financial reporting”.
The Foundation set about creating ‘jurisdictional profiles’ which go some way to answering its questions on adoption, but they shouldn’t stop there because grey areas remain: even among companies that are all complying with the same version of IFRS, there can still be variations in practice.
How varied? Well, the answer is ‘quite’; and preparers, auditors and users need to be aware of this. In the pre-IFRS world, accounting was internationally different for good reasons – such as different national tax and legal systems. At its simplest, the whole purpose of accounting varied – from providing useful information for investors to calculating taxable and distributable income. Some of the differences have survived.
Other differences came about – and have stuck around – because IFRS itself deliberately includes a large number of options. Many of these were inserted in order to get enough votes to pass a standard in the days when countries sat on the Board of the International Accounting Standards Committee – the IASB’s predecessor. Probably the most famous option is cost/fair value for several types of assets.
More subtly though, there are many hidden options that mean IFRS can vary widely: scope for different conclusions over such matters as whether an asset needs an impairment test, estimates over tricky things like the dates that staff might retire, and vague criteria over things such as whether to capitalise development costs. Many of these hidden options are open to influence from the national accounting culture, so that one country might have different ideas from another about what is prudent.
Table 1 gives some examples of companies making particular choices. One message speaks loud and clear through the data: under IFRS, countries are largely continuing their pre-IFRS national practices – and although there aren’t many differences across the sector (except between financial/non-financial companies), the data in Table 2 show that the size of a company matters. Small listed companies show even more international variation in IFRS practices.
Table 1. Percentages of large companies choosing particular IFRS options
|Income statement by nature||35||5||11||24||36||81||96||11|
|Balance sheets starting with cash||100||100||10||26||14||29||22||10|
|Investment property at FV||93||36||20||5||94||0||0||68|
|Inventory cost, FIFO only||21||23||11||0||15||19||22||42|
|Proportional consolidation of joint ventures||6||55||71||17||0||38||70||25|
Table 2. Percentages of large/small non-financial companies
|Income statement by function||83||36||51||100|
|Proportional consolidation of JVs||19||43||21||42|
More comparability, but slowly
But is comparability increasing? Well, yes – but slowly. When companies first adopted IFRS (mostly in 2005), they had a free choice among IFRS policy options. After that, changes of policy are constrained by the rules and disclosure requirements of IAS 8. So you might expect little change since 2005. But this is only true for Australia and the UK. Companies in other countries, such as Spain and France, actually changed their policies more in the years after transition from their national GAAPs than they did during their transition. The changes are towards the policies of UK companies. So over time, the international differences in choices are reducing, as companies coalesce around international norms.
The IASB too has been slowly removing the options – but more need to be removed if we want international comparability. Policy choices at the moment do not largely reflect underlying economic differences: they are national traditions.
And does comparability matter? Absolutely. As former IASB member Paul Pacter pointed out: “The formation of the IASC in 1973 was based on a vision…that capital providers would not be forced to make back-of-the-envelope adjustments…to compare investment opportunities – or worse, so that capital providers would not end up making sub-optimal decisions because of false or misleading comparisons.” Protecting that vision is worth the effort.