The Bruce Column – 2011: A year of growing optimism over IFRS

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16 Dec, 2011

Robert Bruce, our regular, resident columnist, takes a look at a global survey which shows that acceptance of IFRS is bringing stability and lower costs. The year could be coming to an end on a note of optimism.

Amidst all the debate over technical arguments in the world of IFRS one larger point is often missed. Draw back from the cut and thrust over the minutiae of standard-setting and you can see a growing and very important trend. In the words of Helen Brand, chief executive of the global accounting body, ACCA: 'As countries have gained experience in using global accounting standards, their support has tended to increase'.

She made this point in her introduction to a recent ACCA report called 'Toward Greater Convergence: Assessing CFO and Investor Perspectives on Global Reporting Standards'. And she went on to say that she hoped that SEC would take this into account as it approaches its decision over US adoption of IFRS because adoption would, she said: 'give a tremendous boost to the cause of financial reporting and, more importantly, the world economy'.

It is this economic argument which tends to get lost in the technical detail. 'As more and more countries use IFRS', says Ian Welch, Head of Policy at ACCA, 'companies have got to grips with it and are now getting the benefits. Both users and preparers are seeing the benefits which flow through in terms of reducing the cost of capital and it is encouraging that they are seeing such practical value'.

All this is the result of time and experience. And oddly the process has been helped by the financial crisis of the past few years. That has demonstrated the nature of global integration and the need for global regulation. And you can't have that without global standards.

The ACCA survey covered 163 senior executives, mostly CFOs and investors, and in-depth interviews with nine further senior people from around the world. And the findings show IFRS as having well and truly come of age. 'About two-thirds of investors and more than half of CFOs say they view IFRS more positively in the wake of the crisis', says the survey. And Russell Picot, chief accounting officer at HSBC, made a more specific point. 'One major effect of the global financial crisis is that the US moved to a basis of consolidation which is much closer to IFRS', he said. 'US accounting practice previously permitted more structures to be held off balance sheet than IFRS and during the crisis this caused users some confusion. European banks were on one basis and US banks were on a fundamentally different basis'.

And the survey also shows that the financial crisis really brought home to people the costs of not being on IFRS and how the implementation costs were worth the effort in terms of the benefits derived. 'We are all very good at being able to identify costs and put a price tag on conversion', said Anne Simpson, head of corporate governance at CalPERS, the giant US investor vehicle that is the California Public Employees Retirement System. 'But should we be visited by horrors like the financial crisis and realise we've not invested sufficiently in quality accounting and auditing, then the cost runs to billions. Billions were wiped from the CalPERS portfolio. These are the sort of numbers we should be looking at when people complain about costs'.

And the hidden costs of not using IFRS are huge. Russell Picot of HSBC said that 'a significant cost reduction' would arrive from operational streaming when IFRS and US GAAP eventually become properly harmonised. 'In the US they run the operation with IFRS numbers', he said of HSBC. 'But they have an unusual technical issue in that they present their business segments using IFRS numbers and then reconcile to US GAAP'.

The survey also underlined the advantages that accrue to mature users of IFRS. James Singh, CFO of Swiss food giant Nestle, pointed out that: 'Where the benefit comes is in using a single standard for performance measurement both inside and outside the company. From a regulatory standpoint it's an efficient way of preparing accounts'.

And it is all about consistency. 'As a multinational company', said Singh, 'we can't afford to have different accounting standards in different locations'. 'One of the great benefits,' said Picot, 'has been a single set of numbers by which the group is run. It's done away with the Tower of Babel of different reporting and accounting languages that we had before'. It is also all about simple but useful disclosure. 'We don't have much sympathy for those that say disclosure is too much like hard work', said Anne Simpson of CalPERS. 'This is all information that management should have and it should be available at the touch of a button'.

The possibility of integrated reporting also entering the mix looks, from the survey, as though it is being investor-led. 'Investors', the survey found, 'are twice as likely to believe that this would encourage better decision-making'. On the other hand CFOs reckoned it provides a clearer picture of overall performance. 'Investors and the analyst community are more inclined and influenced on a cash-flow basis, whereas companies like ourselves are influenced by cash flow and by performance measurement that sooner or later ends up in the balance sheet', said Singh of Nestles. 'We have to have the right kind of focus to drive sustainable performance in the business. If you're only cash-flow focused, you are more short-term oriented'. And some CFOs, like Anders Pehrsson of Swedish engineering giant, Atlas Copco, simply recognise and provide what the market wants. 'We've taken the initiative and are issuing reports instead of being chased by investors for information', he said.

There is a growing feeling that a no-nonsense, grown-up, approach is what is required all round. 'We are seeing high quality accounting and auditing as a market fundamental, something that has a systemic benefit', said Anne Simpson of CalPERS.

This year has been an uncertain year. But IFRS has come through as a mature system. A length of familiarity with IFRS reduces the arguments about difficulty. Companies, particularly those in Europe, have largely settled into a growing knowledge of its usage and the extended benefits which flow from that. There is an optimistic feel to the markets moving forward, as people as diverse as Anders Pehrsson in Sweden and Anne Simpson in California show.

Robert Bruce
December 2011

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