"One size does NOT fit all"
On 13 June, the Accounting Standards Committee of Germany (ASCG) celebrated its 15th anniversary. It did so with a symposium entitled ‘National standard-setting in the national, European and international context’ which saw a presentation by Prof. Dr. Christian Leuz of the University of Chicago Booth School of Business, followed by a round of questions and answers and a panel discussion with IASB chairman Hans Hoogervorst and the chairmen of the national standard-setters of France, Italy and the United Kingdom: Jérôme Haas, Angelo Casò and Roger Marshall. The discussion was moderated by the president of the ASCG, Dr. Liesel Knorr.
Professor Leuz discussed the challenges for standard setting and the global convergence in financial reporting. He focused on two questions in particular: first, the extent to which there is evidence of convergence and second, whether IFRS adoption brought the desired effect. He introduced the audience to research he had conducted in the field which showed that even the question of whether IFRS adoption brought global convergence and had the desired effects cannot be answered easily. IFRSs were originally developed from an Anglo-American viewpoint and were thus made to fit an Anglo-American historical and legal context. (Hans Hoogervorst later picked up this point in the panel discussion and pointed out that the IASB has since become much more multinational. The latest move in that direction was the creation of the Accounting Standards Advisory Forum (ASAF), a body of 12 standard-setters from all over the world).
Thus, Professor Leuz argued, the approach pursued seemed to assert that once the product (i.e., the standards) had been sufficiently refined it would fit all jurisdictions and purposes. However, Professor Leuz hinted at differences in history, in the legal context, and even in ways of thinking. (Later in the question and answer session the buzz word of “culture” was brought up.) So Professor Leuz pointed out that even though the same standards might be adopted across many jurisdictions, this would by no means allow for the conclusion that reporting practices in these jurisdictions converged. On the contrary, application of the very same standards might actually lead to very different results, as they might not fit a jurisdiction-historical or legal context or they might not fit easily into the local way of thinking about accounting, which is generally driven by the local way of doing business and contracting. He concluded: “One size does not fit all.”
Professor Leuz also looked at the promise that IFRSs would bring more easy access to capital markets and an enhanced means of financing. Research conducted in this area showed that the results differed vastly and more often than not showed no changes. He explained that the effect of an IFRS adoption was difficult to isolate, as the adoption rarely occurred as an isolated event. Usually, jurisdictions would also introduce other measures, such as enhanced transparency requirements or an effective enforcement mechanism. His research suggests that, it is not so much IFRS adoption, but concurrent changes in financial reporting enforcement that played a crucial role for the observed capital-market effects around IFRS adoption.
Similarly, when looking at voluntary IFRS adoptions around the world, not all firms appear to see benefits. Primarily those firms that adopt IFRS because they have strong incentives to be transparent and to communicate with the capital markets appear to benefit.
Based on this research Professor Leuz came to suggest an interesting approach: Would it not, he asked, be an idea to achieve greater convergence by not trying to adopt IFRSs across all jurisdictions and all companies in that jurisdiction but rather to apply IFRSs only to those companies that demonstrably would benefit from an adoption? Greater convergence, he claimed, could much more easily be achieved if one concentrated on large, internationally-oriented companies that want to and need to operate in an international context anyway. A U.S. multinational has much more in common with, for example, a European multinational than with some small listed company deep in the heart of mainland America. Instead of trying to make one size fit all, he concluded, convergence might prove much more successful when keeping the size one is trying to fit something to in mind.
In the panel discussion this point was quickly picked up as well. The chairmen of the large European standard-setters described how they had experienced the adoption of IFRSs in Europe and in their jurisdictions. One point was whether IFRSs should completely replace local GAAP at some point of time (Italy requires IFRSs also for separate and individual financial statements, the UK has recently introduced FRS 102, a standard that is based on the IFRS for SMEs), or whether it could, in fact, do so given the differences in culture and history. A point was made that adoption of IFRSs in some of the major economies not yet on IFRSs (e.g. India, Japan, and the U.S.) might actually be held back with reference to the fact that the one-size-fits-all approach did not work well in some of the major economies that did chose it. When asked directly, Hans Hoogervorst conceded that he did not expect the United States to adopt IFRSs for all entities. His expectations were, he said, that the Unites States would make IFRSs an option for large, internationally-oriented companies – in this regard he picked up the suggestion that Professor Leuz had made at the end of his presentation.
The idea of one-size-does-not-fit-all was also taken up when the question of the business model in accounting did come up. The president of the French standard-setter argued that the business model needed to play a bigger role and would need to be incorporated into standard-setting, beginning with a definition of the business model. The IASB chairman countered this by pointing out that the business model does already play an important role in standard-setting. He pointed at IFRS 9 where different business models were already considered and led to different accounting treatments within the same standard. Thus, the business model was already considered – it was just not called a “business model”. However, all parties agreed that defining a business model, considering how many business models a company might reasonably have etc. was a difficult task, and could potentially lead to labeling something a business model that, in essence, would be nothing else than management intent.
The symposium ended with questions from the audience to the panel members and the general feeling that much food for thought had been offered and critical open questions had been pointed at.
The ASCG has published on its website notes taken during the symposium and the slides used by Professor Leuz during his presentation (both documents available in German only).