This article was first published in Quantum magazine.
International accounting standards are vital to make allocating capital easier and more effective on a global scale. But there is significant variance in the pace at which they are being adopted, while regionalization threatens to change the shape of the market.
Increasing Influence of BRIC Nations
The unglamorous business of strip coalmining illustrates the imperative for the BRIC nations and other newly powerful countries as they seek to play an increasingly important role in setting global accounting standards.
China is by far the world’s largest coal producer, extracting no less than 3,000 million tonnes a year. But in mining nowadays commercial success rests as much on favorable accountancy treatments as on monster-sized earth-moving machines. In China’s case, having adopted the International Financial Reporting Standards (IFRS) two years ago, its strip mines must now conform to standards set internationally.
But recent proposals for the sector are, in the words of PricewaterhouseCoopers’s (PwC) Yvonne Kam, “completely impractical.” Put simply, an accounting treatment is under discussion on how to allocate the costs of stripping away topsoil against the value of the emerging coal. The IFRS interpretation committee planned to apportion the cost of removing specific lumps of soil against the value of specific lumps of coal. Kam says: “No operator can work like that.” A rethink is under way, proof enough that nowadays China has a potent voice in how things are done.
The BRICs and other countries have been comparatively slow to assume the mantle of global standard setters. Not so long ago the developed world could take it for granted that it would have a monopoly of influence. Indeed when, in the 1960s, accountancy bodies first embarked on what has proved a slow, tortuous, and still far from complete path to international accounting standards, just three countries were invited to frame them: Canada, the United Kingdom, and the United States.
IFRS, which has its headquarters in London, insists it is an independent, not-for-profit, private-sector organization “working for the public interest.” Its avowed objective is to develop a single set of “high-quality, understandable, enforceable, and globally accepted international financial reporting standards” through its standard-setting offshoot, the International Accounting Standards Board (IASB). The watchword is harmonization rather than standardization. One oddity is that the United States is still keeping everyone guessing about when and how it might, in practice, move to IFRS.
According to Frank Vibert, global governance expert at the London School of Economics, participating in international accountancy standard-setting has all the hallmarks of “soft power.” Rather than a treaty-based international institution, the IASB merely makes recommendations: official national accounting bodies must adopt and enforce them.
Argentina, Brazil, Canada, India, and South Korea are all due to switch to IFRS this year. Translation of English-language “exposure drafts” is still patchy, making it difficult to respond quickly. But the rising countries are gaining key posts. It is no coincidence that IASB now has a former Brazilian finance minister, Pedro Malan, as a trustee, and a past head of financial system regulation at the Central Bank of Brazil, Amaro Gomes, as a full-time board member.
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