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The Bruce Column — The challenges of the year ahead

19 Jan 2011

The year unfolding ahead of us, in the world of financial reporting, is one of enormous opportunities.

It is a time when the benefits of critical mass will accelerate. The decade since the establishment of the IASB has seen enormous strides made towards a global financial reporting language. It was slow at first but has been a period of headlong, and sometimes chaotic, growth ever since.

More and more jurisdictions and the vast majority of the world's most advanced economies around the world are now either operating under IFRS or moving steadily and reasonably methodically towards that goal. The only exception is the US where a process of assessment of IFRS continues.

But we are now reaching the stage where the financial reporting world has moved beyond amazement at how fast the process of take-up has been and into a stage where the accumulation of security, certainty and shared knowledge and practical experience will increasingly pay dividends. For listed companies in Europe, for example, they have been using IFRS since 2005. The novelty is long-past. IFRS have become the norm rather than the new frontier. And this, inevitably, brings a change in mindset. Using IFRS day-in, day-out, for half a decade has brought greater understanding. Before those years of experience all manner of views on the financial reporting issues could thrive. Once the critical mass of shared knowledge has started to kick in people may still hold many different and divergent views. But they will have gained a greater insight into all sides of the arguments and from all the different practical effects they will have experienced. So it is easier, even if people disagree with a particular treatment, to understand why it has been implemented. And people find it easier to see other people's point of view and take it on board.

This is, in a way, a very important revolution. Finance chiefs and their teams are no longer feeling their way. IFRS and all their quirks have become close to second nature. Much of the work will have moved from being something which people feel they have to grapple with to just something they do ordinarily and engage in fully.

And this revolution works on the other end of the relationship as well. Analysts and investors around the world no longer see IFRS figures as a novelty. For companies in most countries around the world they are now the norm. It is simply what the investment community expects companies to be doing. Much of the rationale behind the whole-scale introduction of IFRS was that it would reduce the cost of capital across borders. Now these advantages no longer seem revolutionary. They have simply become what happens.

But all this critical mass, all these advantages, still do not include the US economy. The process of bringing the US corporate world into the community which, originally promoted by Europe, now extends around the world, is still not a done deal.

Just before Christmas Jim Kroeker, the Chief Accountant at the SEC, the US regulatory body in whose hands the decision lies, said that "we are working aggressively to pursue the broad goal of a single set of high quality standards, to do so in a way that protects US investors and our capital markets, and to consider approaches to achieving both of those goals in ways that are as cost effective as possible. Once again, what we do here must be done in a way that places an emphasis on investor and public trust".

And there we should probably leave it. The US has its own road to follow and we must hope that by the end of the year it will have found its own way to IFRS.

For the rest of the world where, by and large, IFRS holds sway it will be a year of great change. Last year was a year of exposure drafts. This year will be one of final standards and plans for their implementation. It is always a harder process to put things into place rather than simply arguing about their nature. The issue of leasing still remains a furious battleground, for example. And further big issues will unfold with eagerly expected proposals on impairment and the final insurance standard.

And in the wider IFRS context the world is becoming a more integrated place. The early stories of 2011 year focused, for example, on the way that IFRS is being rolled out in India. And the great power in the east, the Asian-Oceanian Standard-Setters Group, (AOSSG), is coming of age and flexing its muscles. The response it sent in to the IASB just before Christmas on leasing made its message plain and also continued the process of asking where Islamic finance fits in with the established structure. In a message released by the AOSSG Chairman and Vice-Chairman at the end of last year they talked of 'a new wind from Asia-Oceania to IFRS' which, as they put it: 'blows sometimes as gently as a breeze and other times as strongly as a storm'.

It is all part of the process of the economies of the world coming together in the IFRS space as equals. And what they need is standard-setting which reflects this. The year ahead is already set to be one of change amongst standard-setters. But change is required in attitude as well as structures.

At the FASB a new Chairman, Leslie Seidman, has been appointed. And at the beginning of July at the IASB Hans Hoogervorst, a pragmatist with a regulatory background, will become Chairman while Ian Mackintosh, a solid driver of the technical issues, will become Deputy Chairman. Before the confirmation of her appointment Seidman emphasised at the Deloitte IFRS Summit in New York late last year that working together with IASB was a central part of her policy. For standard-setters a new world is opening up. The Tweedie era was one of first creating a solid set of standards and then encouraging and building support around the world.

For the Hoogervorst-Seidman-Mackintosh alliance it will be a time of strengthening what exists, adapting the solid core of work to a changing world, and trying to sand down the remaining rough corners. It should be a quieter time. But that, of course, never happens.

Amidst this changeover of power and attitudes amongst the standard-setters there is also change ahead in terms of accountability and purpose. The untimely and sad death of Tomasso Padoa-Schioppa, the Chairman of the IFRS Foundation, just before the end of the year was a heavy blow. He was powering a review process which was looking at the whole area of accountability at the IASB. The work will continue and a new Chairman will be found. But the issues are the real ones to tackle as the world comes together in the IFRS fold. The pressing need to create global accountability within the standard-setting world remains. And the questions of precisely who IFRS are for will be asked once again. Are they there for the investment community alone, or should prudential regulators be seen as direct rather than tangential users?

This is the year when financial reporting and IFRS will come of age on the global stage. What is needed to complement this is a framework of global accountability that everyone can feel comfortable with. There is much hard work ahead.

Robert Bruce
January 2011

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