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September 2010 
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TalkingPoint : Conversion To IFRS |
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August 2010 |
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FW moderates a discussion between Simon Wax at Buzzacott LLP, D.J. Gannon at Deloitte & Touche LLP and Sai Venkateshwaran at Grant Thornton on issues raised by conversion to International Financial Reporting Standards. >>
FW: Can you outline the key drivers behind regulators’ push for convergence on accounting standards? What progress has been made on this front?
Wax: I think the key driver behind the push for convergence has been the increased globalisation of corporations and finance. This has led to a growing acceptance among the international business community and regulators of the need to harmonise accounting standards. Also, a number of well-publicised cases have identified an urgent need for greater transparency, accountability and governance in business. The IASB and the FASB have set themselves a target date of June 2011 for convergence as a response to the G20’s recommendation for greater progress to be made towards a single set of quality standards. Although it was recently announced that this target date has been pushed back to December 2011, my feeling is that there is now more widespread acceptance that convergence has to happen.
Venkateshwaran: With the growing integration of global capital markets and increased flow of capital across markets, the harmonisation of accounting standards has become more of a necessity than ever before. The largest economies of the US and Japan are working towards global convergence and all other major economies, including the BRIC countries, have also moved or are moving towards IFRS. However, the most important of these convergence initiatives is the US FASB-IASB convergence project, which has gained further momentum after the financial crisis with the G20 leader calling for renewed efforts towards convergence. However, as the two boards work towards the June 2011 deadline, there is an unprecedented level of activity that’s taking place involving several complex topics. As a result there are concerns being raised on whether the standard-setters and the stakeholders involved in this process would be able to provide the high quality input that is required on important initiatives of this kind and in this context the IASB and FASB have written to the G-20 leaders seeking an extension on this timelines, which I believe is necessary to meet the objective of developing high quality standards.
Gannon: Over the last decade, the world’s standard-setters have been working on ‘converging’ local and global accounting standards. Central to these efforts has been the work of the FASB and the IASB to converge US GAAP and IFRS. The current convergence efforts were conceived at a time when IFRS needed significant improvement and were not used by many companies. Indeed, there was doubt about whether IFRS would ever be globally accepted. Today, the environment is very different. First, the quality of IFRS has increased significantly, which has been acknowledged by many, including the SEC. Also, by 2012, just about every jurisdiction around the globe will have incorporated IFRS in some way as a basis of financial reporting. I think what’s important now is the stability and transparency of the global standard-setting process, and how national standard-setters like the FASB may play a role in that process once IFRS is incorporated as part of the local reporting framework.
FW: In your opinion, what are the main benefits of moving towards IFRS on a global basis?
Venkateshwaran: The benefits of moving to IFRS include increased comparability, reduced costs of compliance, and easier access to capital markets. Further, IFRSs are largely principles based and therefore their use would lead to a better reflection of the substance of transactions. Ultimately, with use of a single financial reporting language, we can expect to see a far more improved accounting regulatory environment across the world. The benefits would accrue to the entity and all its stakeholders, including its investors, lenders, and regulators.
Gannon: The benefits of a single global standard are real, but often forgotten. One, we’ll have greater transparency in financial statements, allowing for increased comparability and better corporate governance with management acting more in the interest of investors. Two, there’s a greater emphasis on accounting for the ‘economics’ of transactions and events, resulting in more relevant information for financial statement users. Three, companies should see an improved dialogue with analysts about results of operations and financial condition, resulting in greater coverage and capital raising opportunities. Four, ultimately there should be less risk and costs in the long run for everyone. Finally, there won’t be any more arbitrage between standards, levelling the playing field for companies globally, and lessening the potential for political interference in the standard-setting process.
Wax: In this global economy it seems logical to me that we should have a set of standards that mean businesses can operate on a level playing field. Fundamentally, this would enable investors and other stakeholders to make informed investment decisions based on financial statements that are both comparable and consistent. Also, having a single set of high quality global standards would help regulators hold businesses to account in the future.
FW: Which option do you believe is best – adoption of IFRS or convergence with IFRS? What are the major concerns surrounding the switch from one accounting standard to another?
Gannon: It’s important to understand the context of the ‘convergence’ efforts as there often is confusion about what convergence is and what it isn’t.
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