The ‘Global Player Segment’ – A new approach to global reporting convergence
Although International Financial Reporting Standards (IFRSs) are being adopted in more and more jurisdictions there still seems to persist a feeling that there are different “flavours” of IFRSs around the world and the promised capital-market effects seem not to have materialised in every case and to the extent expected. Professor Christian Leuz of the Booth School of Business of the University of Chicago has done extensive research into the issue and allows us kindly to present his most recent research papers outlining a suggested new approach or 'thought experiment' in relation to convergence.
Scepticism regarding uniform application and enforcement of IFRSs has often been raised. The Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers published by the Staff of the US Securities and Exchange Commission (SEC) in July 2012 for example finds that “enforcement structures around the world differ widely by jurisdiction” and adds that “rigorous enforcement is important to avoid false comparability where the requirements of the standards in each jurisdiction are the same but the interpretations and practices are inconsistent.”
Professor Leuz’ research (links to all papers below) suggests that these concerns are well founded (his paper Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why is quoted in the SEC report). However, he also shows that enforcement differences are not the only reason for reporting variation – he has identified many other institutional differences across countries “in capital markets, securities regulation, investor protection and economic development, to name just a few” that influence reporting practice and will continue to contribute to non-comparability despite of continuing IFRS adoption around the world.
Further research also showed that it is even doubtful whether the expected capital market effects that were observed in some cases when countries adopted IFRSs can indeed be attributed to IFRS adoption, i.e., the new accounting regime. In Mandatory IFRS Reporting and Changes in Enforcement the authors come to the conclusion that the change in accounting standards seems to have had little effect on market liquidity. They show that the liquidity benefits are found only in a few countries and that these countries concurrently or later tightened their enforcement of financial reporting. Furthermore, the authors show that similar liquidity effects occurred around enforcement changes in Japan without having first moved to IFRS. Thus, the results suggests that changes in reporting enforcement appear to play a critical role for the observed liquidity benefits, rather than IFRS adoption.
In light of this and other research, Professor Leuz suggests a new and different approach to global accounting convergence. The basic idea is to focus only on those companies for which international comparability is likely important and going to yield positive capital market effects. He proposes to create a ‘Global Player Segment’ (GPS) in which firms would be required to use the same reporting rules (i.e., IFRS), face the same enforcement mechanisms and have the same incentives for transparency in their reporting. These would be firms that operate internationally and (seek to) raise money in international markets. Importantly, firms would opt to become members of the GPS and on joining (and after a screening) would submit to strict reporting regulation and enforcement established within the segment for all members. Letting companies choose for themselves is likely to enhance the credibility of firms’ commitment to transparency but also addresses concerns that not all firms equally benefit from globally converged reporting standards.
Professor Leuz has outlined this approach and makes more detailed suggestions how it could be implemented in a short paper with the title A New Approach to Global Reporting Convergence: The Global Player Segment. He has also presented his ideas to the public on two occasions recently and has kindly allowed us to post corresponding slide decks.
The understanding that especially global players benefit from IFRS adoption has also been picked up in discussions about possible IFRS adoption in the US. At recent event in Berlin that also saw the presentation of the GPS proposal, IASB chairman Hans Hoogervorst conceded that he did not expect the United States to adopt IFRSs for all entities and that his expectations were rather that the Unites States would make IFRSs an option for large, internationally-oriented companies that would benefit from an IFRS adoption.
Please click for Professor Leuz’ papers and presentations referred to:
- A New Approach to Global Reporting Convergence: The Global Player Segment (also available in Spanish translation)
- Slightly modified slide deck presented at the 74th Annual Meeting of the German Academic Association for Business Research (VHB) in Bozen/Bolzano (slides in English)
- Slide deck presented at the symposium held in celebration of the 15th anniversary of the German Accounting Standards Board (GASB) in Berlin (slides in German)
- Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why published in Accounting and Business Research (ABR)
- Mandatory IFRS Reporting and Changes in Enforcement (available through SSRN)