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Global accounting standards for all
By Sir David Tweedie, chair, International Accounting Standards Board
The G20 leaders continue to support global cohesion in financial markets
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The financial crisis has provided one of the greatest demonstrations of the globally interconnected nature of capital markets. Everyone is part of one big, interdependent financial market in which capital no longer respects geographical or jurisdictional boundaries. This presents both benefits and challenges.
On the plus side, businesses are able to raise capital on an international basis, to locate subsidiaries where they are best suited or to benefit from extended supply chains that span continents. Investors now routinely seek investment opportunities all around the world. Even the most cautious funds seek out growth or income opportunities in parts of the world where few fund managers had previously trod. Emerging and developed economies are able to attract inward investment to fund growth, in turn helping their citizens create a higher standard of living.
The challenges are equally significant. Does a New York-based analyst really understand the accounts of a company in a far-flung region that he or she is about to invest in? Can a securities regulator fulfill an investor protection remit when so many domestic investors are investing internationally? Can prudential regulators apply common capital requirements for banks when banks have different reporting requirements? Can regulatory arbitrage be avoided when global markets transcend jurisdictional borders?
Part of the answer, recognised by the G20 leaders in their communiqués at the London, Pittsburgh and Toronto summits, is the move toward a single set of high-quality financial reporting standards, applied consistently across all markets.
Emerging research shows that the cost of capital is reduced in markets where everyone speaks the same financial language. Companies no longer have to reconcile the accounts of multiple subsidiaries at each reporting period. Regulation can be applied on a consistent basis. The practice of shopping for favourable accounting treatment is eliminated.
In short, efficient global markets require a common language to describe financial performance. International financial reporting standards (IFRSs) are rapidly becoming that language.
The International Accounting Standards Board (IASB) was established in 2001, following intense discussions that included the European Commission and the US Securities and Exchange Commission (SEC). The IASB inherited a set of international accounting standards that few major economies used and that were criticised as being insufficiently robust.
Progress since then on both quality and use has been rapid. The standards were improved in time for the first wave of countries, led by the European Union, to adopt IFRSs in 2005. A second wave of countries establishing timelines to adopt those standards began shortly afterward. More than 120 countries now require, permit or are in the process of permitting the use of IFRSs for listed companies. Most of the remaining major economies of the world have established timelines to adopt or converge with IFRSs in the near future.
The IASB has collaborated with the US Financial Accounting Standards Board (FASB), the standard setter in the United States. Their joint work to improve IFRSs and US generally accepted accounting principles, and to bring about their convergence, achieved a major milestone in 2007 when the SEC permitted non-US companies to file under IFRSs without reconciliation back to the US accounting principles.
The IASB and the FASB are now working to finish their convergence programme. While some differences still exist, the bulk of the work will be completed in 2011. The SEC has indicated that this convergence work will be one element in its making a decision in 2011 on the possible domestic use of IFRSs.
The IASB has also undertaken a comprehensive response to the financial crisis. While IFRSs seem to have withstood the onslaught of the crisis, there is always room for improvement.
At the request of the Financial Stability Board as well as the G20 and others, the IASB has accelerated planned projects to reform financial instruments accounting, to provide additional guidance on the application of fair value measurement when markets become illiquid and to guide the accounting for off-balance sheet activities. It is in the final stages of many of these projects. A detailed summary of this work and of the IASB’s overall response to the G20 conclusions is available at the IASB website.
Encouraged by the G20 and others, the IASB has significantly broadened the involvement of stakeholders in the development of IFRSs, particularly among emerging economies. While IFRSs are primarily developed with financial investors in mind, the standards do not exist in a vacuum. The IASB continued to deepen its cooperation with prudential regulators, including the Basel Committee on Banking Supervision.
While the objectives of standard setters (transparency) and prudential regulators (stability) are different, they are not mutually exclusive. Enhanced transparency has the potential to enhance financial stability.
This cooperation has helped both organisations to understand better, for example, the interaction between the IASB’s ‘expected loss’ approach to provisioning and the Basel Committee’s work on cushioning for expected losses via bank capital requirements.
The next 18 months will be critical for achieving the goal of global accounting standards. The dividing line between success and failure is thin.
First, in completing its convergence programme the IASB continues to ensure that quality is not sacrificed for expediency. The acceleration in its work programme has been at least matched by a corresponding increase in the intensity of outreach and consultation. The openness and transparency of the IASB’s work has received international recognition. All meetings are held in public and broadcast live on the internet. The IASB seeks broad input, debates openly and reports back on how feedback was considered. The end result is standards of the highest quality that have benefitted from extensive consultation.
Second, the IASB will do everything possible to advance its convergence activities in a way that results in improved financial reporting and in common approaches under both IFRSs and the generally accepted accounting principles in the United States. This convergence work will facilitate the adoption of a single set of standards in order to provide the level playing field sought by the G20 leaders.
Finally, global standards need to be applied and enforced on a consistent basis. Selective application of the standards or adaptation to local requirements will only serve to undermine the reputation of IFRSs in those countries that have fully applied the entire set of standards.
The potential of global standards is real. The world is within touching distance of achieving them. I greatly appreciate the continued support of the G20 leaders in this endeavour.
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