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The Bruce Column — Going global, and positive

  • Robert Bruce Image

06 Sep 2011

With summer coming to an end minds will start concentrating again on the decision, due towards the end of the year, on whether the US will move across to IFRS.

And perhaps a good starting point would be some of the recent submissions that have arrived at the SEC's offices in response to their staff paper on a possible approach to IFRS adoption.

Many of these submissions take the view that the idea of moving from the tried and trusted US GAAP to the IFRS system which has taken a hold around the world should be dismissed. Companies cite the perceived costs of doing so. They argue that they don't see the point of such a move and they argue, understandably, that within the internal US market alone there is no need for it.

But at for many multinational companies the submissions are more focused on the global outlook.

You could start with the comments from CalPERS, which runs the largest US public pensions plan. If you want the views of investors this is a pretty good place to start. And what CalPERS wants is simple. It is the big bang approach, or as they put it: 'A single effective implementation approach to ensure comparability'. And they cite the obstacles to that goal: 'Uncertainty is costly; lack of clarity in the timeline makes it hard for investors to know when and how to prepare and is an obstacle to committing resources towards movement to IFRS'. And from the investor perspective the big bang version of implementation would simply 'allow investors and issuers to be better prepared and able to provide retrospective data for analysts'.

And it also points clearly to the improvement in US financial reporting which would follow a decisive SEC move towards IFRS. 'The focus on investors and investor representation, where standards are consistently interpreted and applied to ensure comparability —with consistent audit application and enforcement — are integral to adoption of one set of high-quality, global accounting standards', it says. 'CalPERS believes that the SEC has the opportunity to effectively improve accounting standards, and to regain and increase investors' trust in financial reporting'.

And CalPERS would find its views endorsed by another submission, this time from a powerful group of preparers in their comments to the SEC. A joint paper from seven important corporations, including the Ford Motor Company, Kellogg, Bank of New York Mellon Corporation, Archer-Daniel-Midland, and United Continental Holdings, provides equally forthright views, though they are closer to flexibility than big bang when it comes to implementation. But they also emphasise that anyone who wishes to adopt IFRS on a voluntary basis ahead of the end of any transition arrangements should be allowed to do so. In other words those who wish to act with urgency should be allowed to do so.

As multi-national organisations they are naturally in favour of dealing with the same accounting rules wherever they are operating. That is a simple truth running through all of their comments. 'In today's global economy', they say, 'companies such as ours often are involved in business transactions that must be accounted for and reported using multiple methods as a result of differences between the requirements of local and US GAAP. Having to account for a single business transaction using multiple accounting methods drives unnecessary cost, including systems and process complexity, which can ultimately put US registrants at a competitive disadvantage in the global marketplace. In certain instances, parties to a business transaction may even find that conflicting interests during negotiations are driven exclusively by differences in financial statement outcome under local and US GAAP'.

They elaborate on this: 'As multinational companies, we also engage in cross-border strategic funding transactions', they say. 'A number of companies have faced limitations on access to global transactions or funding opportunities based solely on the inability to produce carve-out financial statements for foreign affiliates under a universally accepted set of financial reporting standards. We believe a common platform such as IFRS is critical to enhancing capital formation that will allow us to compete most effectively in a global economy. A global accounting language will facilitate our ability to effectively participate in the globalization of capital markets, and enhance our ability to access the cross-border flow of funds. Furthermore, we believe the adoption of a universally-accepted financial reporting language is an important step in providing a common platform for investors to more easily compare the financial health and operations of our companies'.

That sums up the current plight of many companies which operate out of the US and around the world. These are among the organisations which would stand to benefit the most from adopting IFRS. What they are looking for is a firm commitment from the SEC. 'Uncertainty', they point out, 'is a significant cause for delay, and delay will only increase the cost of implementation'. On the other hand: 'Certainty will enable us to develop detailed implementation plans, negotiate agreements, design systems architecture and establish processes and procedures once in a cost efficient and resource effective manner'.

And they dramatise what they are up against. 'We believe', they say, 'that the introduction of one global financial reporting standard will provide global enterprises with significant tangible benefits, including the reduction of conflicting accounting standards, simplification of business operations, elimination of multiple instances of operating systems, and more efficient leveraging of resources, while standardizing internal controls and enhancing communications with investors'.

The parameters of financial reporting and the reach of organisations in the US which will be affected by the upcoming SEC decision are huge. They extend from the global giants to sizeable companies which operate in the US market alone.

Supporters of IFRS believe that investors will be better served by shifting to IFRS. And they feel that using IFRS is critical to allow US companies to compete most effectively in a global economy. But that cannot be allowed to outweigh the domestic US opposition to IFRS. 'We recognise that some companies with exclusively US operations may find the cost of conversion to IFRS outweigh the benefits', say the preparers in their submission. 'We believe the SEC will best accommodate the needs of a diverse US market by providing flexibility in the transition'. In other words those companies which operate globally should have the advantage of IFRS, and soon.

Robert Bruce
September 2011

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