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Global Views: Converging on the Language of Financial Reporting March/April 2003 (Financial Executives International) The financial events of the last year have certainly made it clearer than ever that a common worldwide language of financial reporting doesn't simply belong on a wish-list. It is a necessity. The good news is that the majority of countries recently surveyed support this need. According to the latest findings of "GAAP Convergence 2002," the third in a series of surveys by major accounting firms aimed at encouraging convergence of national accounting standards with those issued by the International Accounting Standards Board (IASB), the world is moving closer to that standard. The complete survey is available at www.ifad.net.
Majority report
Of the 59 nations that participated, 90 percent acknowledged plans to adopt International Financial Reporting Standards (IFRS) issued by the IASB or to converge their national accounting standards with them. In fact, the survey shows that a majority of the countries surveyed not only intend to converge with IFRS, but have formally stated this intent. This is, indeed, a major step forward for all in the business, government and investment worlds who have a vested interest in making reporting as clear as possible. No one can deny that comparability of investment targets is critically important, and in today's environment, it must be on a global rather than a domestic scale. A common set of high-quality accounting standards would facilitate cross-border comparisons, and, equally important, would reduce costs and much of the complexity for international companies.
Further evidence
If further evidence is required that progress towards this end has been made in the past years, a look at the surveys carried out in 2000 and 2001 should provide that confirmation. Those surveys were "status reports" of the extent to which national accounting standards in various countries differed from international standards.
While the 2001 survey-showed some progress was made, it also revealed that many national standards continued to have a number of major differences from IFRS. In that report, the major accounting firms encouraged standard-setters and regulators to work harder to identify differences from international standards and to remove those differences.
Challenges ahead
The 2002 survey was then designed to learn more about the plans -- or lack of plans -- in countries to promote and achieve convergence with IFRS. As already explained, the findings are gratifying, since they find a greater willingness than ever before for countries to converge their rules with internationally accepted standards. Yet, obstacles to convergence still exist. In some of the countries surveyed, for example, there are disagreements with the requirements of several significant IFRS, including the financial instruments standard and other standards based on fair value accounting. Other countries perceive the complicated nature of some standards as a barrier to convergence.
While we do not want to undermine the rights of the individual nations, we must encourage them to get beyond these concerns and work with the IASB to bring the world into one set of rules. IFRS also must be interpreted consistently worldwide, with the IASB's interpretive body, the International Financial Reporting Interpretations Committee, as sole interpreters of the standards.
Active participation by all
This is not to say that all the work ahead is for the nations in our survey. The accounting profession in each country, for example, must not stand on the sidelines; it must play its appropriate roles in moving convergence forward and assisting governments and standard-setters in formulating and enacting convergence plans. Regulators must set up efficient and effective enforcement mechanisms to increase the consistency and quality with which IFRS are applied. The IASB needs to address concerns about the complexity and operational practicality of IFRS. In short, all participants need to actively participate in the accounting standard-setting process.
Other findings from "GAAP Convergence 2002" are also critical elements for the success of convergence. These include such items as increasing the coverage of IFRS in the education and training of professional accountants. In addition, timely national language translations of IFRS, including Interpretations, need to be made available.
Admirable intentions
The survey concludes that each country's intention to adopt IFRS or converge with IFRS is highly admirable and to be applauded. But, as the saying goes, "Hell is paved with good intentions." Only with a joint effort in each country will we achieve a common accounting framework that can be interpreted and applied consistently. The complexity of this task is undeniable, but the job must be accomplished. In a world where "globalization" has become a common part of the language, no country's separate priorities should come first. In such an environment, it's clear that global standards are a necessity.
-- Contributed by: Danita K. Ostling, Partner, Ernst & Young Global
Professional Practice Department, London Subscribe to Financial Executive! The flagship publication of Financial Executives International (FEI), this premier magazine provides senior financial executives with financial, business and management news, trends and strategies to help them work better, faster and smarter. For more information about FEI, visit www.fei.org.
Return to FEI's column
2003 Financial Executives International. Reprinted with permission.
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