As recently as the 1970s, the idea of a single global accounting standard seemed an impossible dream. But now, as Saudi Arabia prepares to join the 119-member club which uses the IRFS Standards, International Investment looks at how much of the world – apart from at least one major, G20 hold-out – has managed to agree, in large part, about how sales, profits and other business concepts should be accounted for on a balance sheet….
Unnoticed by pretty much everyone outside of certain accountancy industry circles, the Kingdom of Saudi Arabia quietly announced in November of last year that it would move to fully adopt the International Financial Reporting Standards (IFRS Standards) as its official financial accounting system, to be used by listed and unlisted companies alike going forward, beginning in stages over the next two years.
A few months later, this shift to the IFRS Standards was further explained in the context of Saudi Vision 2030, a Saudi Arabian government plan aimed at helping the country to reduce its dependence on oil revenues by building its economy in other areas, including financial services.
The plan was formally unveiled on 25 April by deputy crown prince Mohammad bin Salman, who subsequently travelled to Washington DC, New York City and Silicon Valley as he sought support for his ambitious plans.
In agreeing to adopt the IFRS Standards, Saudi Arabia joined some 119 other countries and jurisdictions that already require their use by most if not all publicly accountable companies.
The IFRS Standards are now required “in almost all of Europe, Latin America, Canada, large parts of Africa, the Middle East and Asia/Oceania,” according to a spokesperson for the IFRS Foundation, the London-based organisation which promotes the adoption of the IFRS Standards, and which is also the oversight body of the International Accounting Standards Board, in charge of the actual setting and maintaining of the IFRS’s standards.
This widespread adoption of the IFRS is, in many ways, a significant achievement on the part of a handful of people who pushed ahead with the idea of a single global accounting standard, even when it seemed impossible, over the past three decades.
Thirty years ago, accounting standards tended to determined by whichever country a business happened to be located in. It was inconvenient, messy and expensive, particularly as more and more companies were looking to do business internationally.
Thus it was in 1973 that a group of countries got together to form what they called the International Accounting Standards Committee, based in London – to create a global standard.
Among those leading the charge, beginning in the 1990s as chairman of the International Accounting Standards Board (which succeeded the committee), was a Scotsman named David Tweedie. Tweedie at this point had already made his name (and nailed a knighthood) for having pushed for British companies to be required to show their pension-fund liabilities on their books. (He was successful, and thus was instrumental in helping to show that some of the UK’s biggest pension plans were under-funded.)
By 2013, former UK chancellor Lord Lawson was referring to him, in a Daily Telegraph article, as the “father of [the] IFRS”.
Notable in its absence…
In addition to calling attention to the global take-up of the IFRS accounting standards, the recently-announced signing up of Saudi Arabia, as IFRS Standards jurisdiction No. 120, inadvertently highlighted something else: the fact that global accounting standards represent yet another international arena in which the US is determinedly sticking to its own way of doing things, rather than being like (almost) everyone else.
Because the US, thus far, is still holding fast to its “Generally Accepted Accounting Principles” – or US GAAP, as it’s known – rather than adopting the IFRS Standards, although talks aimed at achieving “convergence” have been going on between the US, via its Financial Accounting Standards Board (FASB) and IFRS officials for years.
(The US is, as American expats have been learning recently, the only country besides Eritrea which taxes individuals on the basis of their US citizenship rather than on the fact that they have US residency; and it is also, for now at least, one of the few countries that have chosen not to adopt the new, OECD system of automatic information exchange known as the Common Reporting Standard, arguing that it has its own information-exchange scheme, known as FATCA.)
While the US “does not permit its domestic issuers to use IFRS Standards in preparing their financial statements…[requiring] them to US GAAP”, an IFRS Foundation update on the US noted, a spokesperson for the organisation pointed out that IFRS standards are permitted to be used by foreign issuers on the American capital markets.
Often, the difference between the US and the IFRS approaches, and why they are so incompatible, is described as coming down to a “rules-based” approach to accounting (the US) vrs a less-rigid, “principles-based” approach (the IFRS).
To be fair, the US is not completely on its own in favouring its own way of keeping track of such things as how acquired intangible assets should be recorded on a corporate balance sheet, or whether an inventory write-down should or should not be regarded as permanent.
Japan, for example, allows voluntary adoption of the IFRS, but no mandatory transition date has yet been set, according to PwC, the accountancy firm.
How well do you know your IFRS Standards?
The IFRS Foundation, which oversees the IFRS accounting standards, has updated its online quiz, which is designed to test knowledge of the standards is inviting people to test their knowledge of the IFRS rules, and their use around the world. For more, and to find a link to the quiz, click here.
India, which has formally expressed support for the idea of a single accounting standard, continues to insist companies still use the so-called Indian Accounting Standards (Ind AS), which are “based on and substantially converged with [the IFRS]” but which have areas of difference that mean they’re not interchangeable, according to the IFRS Foundation.
Another outlier, at least for now, is China, although its accounting standard – the Accounting Standards for Business Enterprises (ASBE), adopted in 2006 – is said to be based on the IFRS standards. According to the IFRS Foundation, “all Chinese companies whose securities trade in a public market in China are [still] required to use [the] Chinese ASBE for financial reporting within mainland China”.
Meanwhile, even as the last countries that haven’t signed up to the IFRS Standards might well be considering making the move, as the Saudis have just done, some grumbling can be heard in the wings, as a new standard, known as IFRS 9 is set to come into force in 2018.
IFRS 9, which the IFRS Foundation prefers to call by its full name, IFRS 9 Financial Instruments, replaces an earlier standard known as IAS 39, was the IASB’s primary response to the financial crisis. In the IFRS Foundation’s words, it “provides much-needed improvements to financial instruments accounting, and addresses requests from the G20, the Financial Stability Board and others for a more forward-looking approach to loan-loss provisioning.”
But it seems the adoption of IFRS 9 is not being universally welcomed, at least, to judge by a recent letter to the Financial Times signed by eight UK-based financial services executives.
Actually, the signatories to the 18 May, 2016 letter – who included former Royal London chief investment officer-turned-independent director Robert Talbut, Sarasin & Partners head of stewardship Natasha Landell-Mills, and Local Authority Pension Fund Forum chairman Kieran Quinn – argued that any new IFRS standards, “such as IFRS9”, should be “put on hold until they can be shown to safeguard the public good”.
Their main concern, they wrote, was that financial accounts be prevented from enabling companies to overstate their profit and capital, “to constrain excessively risky behaviour” that could, especially in the case of banks, “destabilise the system”.
No one from the IFRS Foundation was keen to respond to letter, but a source familiar with the matter said that a group of UK-based investment professionals had been “generally critical of the IASB for a number of years”, and that the most recent letter in the FT was probably representative of this group and its thinking, rather than a direct attack on the standard itself.
Why a single accounting standard matters
Historically speaking, accounting standards tended to evolve locally, with each country developing its own way of doing things. By the middle of the Twentieth Century, these ways of doing things became known in many countries as that country’s “generally accepted accounting principles”, or GAAP.
West German accountants worked to the rules of West German GAAP, for example, Canadian accountants followed Canadian GAAP, and so forth.
The problems began to arise when companies doing business in more than one country had to meet local requirements for filing reports in foreign countries, while at the same time keeping a central set of books in their home market for the investors and tax authorities there.
In the US, for example, no matter how good their own bookkeeping systems were back home, foreign companies seeking to list their shares on American stock exchanges were required (and still are) to use US GAAP accounting methods, and to meet the same Securities & Exchange Commission requirements for regular and detailed financial filings of all American companies.
For small companies especially, all this double-bookkeeping can be an onerous burden.
Accounting standards board officials say that although globalisation contributed to forcing the need to “converge” accounting standards to come about, so that those considering buying companies in other countries might more easily assess their viability, it was the fall of the Berlin Wall in November, 1989, which, unexpectedly, hastened the global adoption of the IFRS Standard.
Explained one former FASB member: “[The West Germans] realised that their old model for raising capital would not be enough”, and, in need of foreign investment to re-build what had been East Germany, “they needed corporate balance sheets that met these foreign investors’ high expectations for information and transparency, which balance sheets produced under the then-prevailing West German GAAP standard did not.”
Once Germany decided to scrap the West German GAAP and replace it with an accounting system that potential international investors would prefer, this ex-FASB member added, “the rest of Europe began falling into line” behind the idea of a single standard.
The introduction of a single European currency in 1999 and the EU’s making it mandatory on the part of EU member countries further fuelled the accounting standards convergence trend, as did, some say, the growing sense that what once seemed an impossible dream (by accounting standards) might actually be achievable after all.
And so it was that by May 2006, all listed companies in some 96 countries, including the 25 EU member nations, had signed up to the IFRS Standards. And today, as mentioned above,120 countries fly the IFRS Standards flag.