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The Bruce Column — Uncertain weather ahead

14 Jan 2013

Robert Bruce, our regular, resident, columnist takes a look at a new report on ‘The Future of IFRS’, and assesses the prospects for the year ahead.

Is there a silver lining? In London, where the IASB is headquartered, this is the gloomiest time of the year. The weather is, at best, plain grey. It is a time of the year when the name of the US brand of winter coats, London Fog, just about sums it up. At the back end of last year Hans Hoogervorst, chairman of the IASB, devoted several speeches and public appearances to expressing his worries that progress in international standard-setting could be set back by a whole range of issues such as challenges to the IASB’s independence. He was, quite deliberately, issuing warnings and implicitly urging a strengthening of support.

Even the latest comprehensive report on The Future of IFRS, from the financial reporting faculty of the Institute of Chartered Accountants in England & Wales, (ICAEW), admits that ‘not everything in the IFRS garden is rosy’. It doesn’t talk of an assured progress ahead. It talks of how ‘supporters of a single language of accounting should not be unduly dismayed by the inevitable setbacks’. It points out that ‘the current suite of IFRSs is far from perfect’.

There are several issues here which are contributing to the uncertainty. Forget the issue of what the report calls ‘the hesitancy of the US to commit to IFRS’. That, frankly, has been factored into the debate for a long time. The real issues now are different ones.

The first is the one which Hoogervorst has been speaking about recently – the influence of the regulatory community around the world. This is the back-up which he feels needs to be better felt. Or as the report puts it: ‘The IASB needs more active support, including through IOSCO, and regulators around the world need to work together more closely to deliver consistent enforcement’.

And that in turn leads on to another concern: ‘Each regulator needs to ensure that it does not stifle the exercise of professional judgement or stray into the area of general interpretation’, the report says. But regulators too are uncertain. The spread of IFRS around the world is no longer quite the shoe-in it once was. The report points out that two-thirds of the G20 countries either allow or require their listed companies to use IFRS, or national standards closely based upon them. It is all very well for the G20 countries to sign up to the idea. But if they had the political and regulatory confidence they would do more than simply endorse the idea. The report suggests that G20 countries should play a more decisive role. As well as continuing long-term support for the idea of a single set of global accounting standards the report points out that ‘ the most practical way of achieving this in the short term is for all G20 members to allow optional use of IFRS in their capital markets’.

That would be a simple and logical step. But it has not happened. And another section of the report provides the clue. In a word: complexity. ‘The complexity of IFRS reporting requirements may discourage some countries from fully embracing international standards’, says the report. ‘The IASB should strive to minimise unnecessary complexity in its standards and hold fast to the vision of principles-based standards that require a reasonable degree of judgement’.

That, as we all know, is much easier said than done. The more complex the environment the more complex standards become. And when it comes to the most fought-over topics the complexity, inevitably, becomes inextricable. The result has been a standard-setting process which produces outcomes which outsiders cannot understand and which then produce financial reporting which is less than obviously understandable. With shareholders and the investment community taking a more public interest this has made IFRS more vulnerable.

As usual this year will not be without its challenges. But no one ever said it would be easy. And as we said at the outset of this column even the faculty report suggested we should not be unduly dismayed by the inevitable setbacks. The fog may lift. The sun will probably have its moments too.