FT REPORT - INTERNATIONAL ACCOUNTANCY
Blueprint of change fosters revolution.
By JENNIFER HUGHES
Financial Times - 10/09/2007
Accountants make unlikely revolutionaries. The popular image of the profession has more to do with notions of dry, dusty number-crunching obsessives. But the introduction of international financial reporting standards, or IFRS, was nothing short of a revolution.
Two years have passed since the standards were first applied in Europe, and the impact is still being felt as the system beds down. The revolution is not over yet, but it is now possible to discern its early effects. Like most big changes, it was hardly pain-free.
"There were horror stories about not meeting reporting deadlines but those all vanished," says Will Rainey, global head of IFRS at Ernst & Young. "From the surveys we've done, it's clear that the transition has been a resounding success. The feedback has been very encouraging in terms of the quality of the information and also the timeliness."
It certainly was not easy. Finance teams had to re-jig their systems to provide information they did not necessarily have, or even if they did have it, to present it in different ways.
"There were a lot of issues around interpretation - it all looked clear until it was actually applied to you," says Ken Wild, global leader of IFRS at Deloitte. "That's not completely in the past tense and interpretation is still an issue. There will be a narrowing over time, there's a learning curve, but that's simply change management, really."
The changes did not fall evenly, either. For countries such as the UK, used to a system designed to inform investors, the switch was largely about swapping one set of standards for another, although the actual details proved frustratingly tricky. But elsewhere, it meant a wholescale shift in the focus of reporting and the need to almost create a new way of thinking.
"In the UK, it was about moving across to something not dissimilar to what we had. In other countries in Europe it had to do with changing the whole focus of accountancy and what it was for," says Peter Holgate, senior technical partner at PwC.
Nicholas Veron, research fellow at the Bruegel Institute, agrees: "It was much more a revolution in countries such as France or Germany because they had such a different structure. French accounts, for example, had been enormously impacted by the need of the state in terms of statistics and tax considerations. IFRS is much more investor-orientated."
"A lot of continental Europe was driven from a tax point of view and they're only now getting used to information just because the market feels happier when its got it - that's the biggest difference," adds Mr Wild. "The other big point is that it's a global language, you don't have to speak the local language and almost wherever you go, you know they're largely going to speak the same one as you."
It might be technically the same language, but it comes in a range of dialects and accents - after all, it is not possible to change the bedrock of the financial system overnight and expect it to function seamlessly.
"Compared with what investors expected, the differences are larger than they had thought and that's a bit disappointing," says Mr Veron. "The question is whether these will disappear over time or will they stay."
Allen Blewitt, chief executive of the Association of Chartered Certified Accountants (ACCA), believes it is too early to say.
"We've got to go through a couple of iterations of dealing with real live data and saying, 'Here it is, how do we report it?'. National standard setters are still fine tuning and we will get these dialects, it's partly a washing through the system of the div- ersity that was there beforehand."
But experts are careful to warn against assuming IFRS will come out with one voice at the end of the current process.
"There are a lot of forces towards convergence - a lot of people think that with work between companies, auditors and regulators, we will see more stable interpretations," says Mr Veron. "But personally, I doubt we will see real convergence because there's not sufficient authority in the European system - we're still organised on national lines."
Even at the pan-European level, there are concerns. European politicians famously agreed a "carve-out" on the controversial IAS 39 standard for financial instruments.
This means that a handful of European companies use "European IFRS" instead of full IFRS. Further carve-outs could risk derailing the move towards one global language.
"The European parliament can potentially intercede in the adoption of standards," says Mr Blewitt. "Even the accountancy profession and deep technical experts have trouble with standard setting - and to get parliamentarians involved who are neophytes on this, is dangerous."
One much-touted benefit of a single system was the potential for a lower cost of capital for businesses. Investors, it was reasoned, would reward companies using this single global language, making cross-border comparisons, and therefore investing, much simpler.
"This will be fuelled by global investment - if you can't produce accounts under IFRS, you're going to pay more in interest," says Tom Jones, vice-chairman of the International Accounting Standards Board. "For example, you could never have thought about a deep, pan-European equity market, while you had a dozen different accounting systems."
But real evidence on the impact is hard to find so far. "Everyone talks about the cost of capital but it is one of those things that is very difficult to measure," says Mr Rainey. "In talking to clients, there probably is better access to markets because everyone is talking the same language."
Mr Blewitt admits: "There's no substantive evidence yet but we need a longer time horizon before we can really draw conclusions."
A study commissioned by the ACCA ahead of the introduction of IFRS showed UK companies, with their tradition of reliance on equity financing, had enjoyed a lower cost of capital for the 10 years up to 2005 than their continental rivals. It also showed that German and Swiss companies that switched to IFRS ahead of time had already seen slight benefits in terms of lower equity risk premiums.
But it has not been all good news for investors. Accounts are becoming longer under IFRS and famously, in the UK this year, postmen were limited as to how many copies of HSBC's 454-page, 1.5kg tome they could carry at a time.
"Even if you ignore the big banks, since they're at one end of the spectrum, accounts are still typically longer," says Mr Rainey. "You have considerably more complexity and disclosure. You have to ask if this is helping investors focus on what is essential in their decisions. I'm not convinced it is."
"What is becoming more and more important is the front end of the report and narrative reporting. This is because the back end is less intelligible, its a source document for what you want to say, but its not laid out how you'd say it."
But investors are increasingly unhappy with thequality and the contentof the "front end" as it too gets longer and more complex.
It seems that the accounting revolution still has some way to go.