Convergence on a Worldwide Standard
Where the IASC was part of a world of “harmonization”—or movement toward each other—the IASB is firmly committed “to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards” and “to bring about convergence of national accounting standards and IFRSs to high quality solutions” (Preface to IFRS, London: IASC Foundation). Though it has not focused exclusively on the United States, the IASB’s main driver is convergence with US GAAP. It entered into an agreement with the FASB in 2002 to pursue convergence through a joint program of removing differences and developing new standards together.
This program yielded a big prize in 2007. The Securities and Exchange Commission decided that it would recognize financial statements prepared under IFRS as issued by the IASB as equivalent to US GAAP. Until then, foreign registrants with the SEC were obliged to file annually either a set of accounts using US GAAP, or a reconciliation of annual earnings and equity at balance sheet date with how they would have been measured under US GAAP. This was a big burden to companies listed on the New York Stock Exchange or NASDAQ and a major disincentive to foreign companies to list there. In 2007 the chief financial officer of AXA told the SEC at a round table that the company budgeted $20 million a year to produce the reconciliation. Another part of the cost is that the companies end up publishing two, or even three, sets of figures (see the Cadbury case study) and then having to discuss with analysts and journalists which is the “correct” profit.
The removal of the reconciliation requirement means that, for example, European companies that are using IFRS can simply file with the SEC the same accounts that they file with their primary stock exchange. Of course the SEC has other requirements that still have to be complied with, including management’s discussion and analysis of results. However, companies no longer have to be able to restate their figures to US GAAP, nor retain teams to monitor US GAAP.
Convergence on IFRS is taking us to a bright new world where investors can indeed take their pick from around the globe, and where companies maintain a single accounting basis throughout their network. IFRS are already either compulsory or permitted for listed companies in more than 100 countries around the world. When the next wave of adopters joins in 2011, a large slice of the world economy will be IFRS conversant.
It will take time for investors to become confident about reading IFRS accounts—although that happened quickly within the European Union. But multinational companies should quickly reap the benefits of having uniform systems across the globe and will be able to exploit the opportunities of being listed on several stock exchanges at much lower cost.