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IFRS – White Knight or Dark Horse?

August 13th, 2009

            With our recent travails in the financial markets, there’s a large number of folks who are starting to point their fingers in the direction of IFRS with claims that this new reporting structure could very well be a solution to all that has happened. Really? Let’s be clear in that IFRS is merely another measurement platform and a basis of financial reporting for a group of nations that are within direct proximity to each that never had a common financial reporting platform.  First, let me qualify my background in addressing this topic in a bit more detail and tabling my opinion on the topic. I spent 4-years working with a France-based manufacturing company and coordinated the North American effort for the company’s IFRS implementation in 2005.  I worked closely with our global finance group in Grenoble, attended numerous coordination meetings in Grenoble, worked with Moss-Adams and Mazars in those efforts, and produced all parallel GAAP/IFRS reporting.  We were working under a very definitive timeline for our company, which was operating under the time mandate of the European Union for implementation.

            Let’s throw a little more history in the mix. The evolution of U.S. accounting standards has been a gradual, almost 7-decade process since the first auditing standards were implemented in 1939. Without going into exhaustive detail, U.S. standards evolved over the next 7-decades to bring us to the point we’re at now. Many of the new standards implemented over the last decade have been a reaction to crises that have been encountered in the open markets. These standards have included the massive Sarbanes-Oxley regulation, Revenue Recognition standards, Reg FD on the disclosure of corporate information, and the list goes on. Let’s keep in mind that full European implementation of IFRS only happened in the last handful of years. While the planning window was longer, it has been in effect for less than 5-years. It was a necessary set of reporting standards that was previously absent for a large number of nations, each with their own stock exchange, and no common set of standards for the average investor to refer to.

            Back to an IFRS versus GAAP consideration. The evolution of the U.S. system has been in reaction to continual developments and introductions of new financial tools introduced into the market, an increasing complexity in the types of companies conducting business over the decades, and the increasing need to maintain integrity within the U.S. financial markets, as well as protect private investors. The U.S. is an absolute rule-based system whereas IFRS is more principals based.  IFRS allows a much higher degree of discretion in applying the IFRS standards.  While I haven’t directly addressed why this is not our white knight for solving the financial reporting issues in the U.S., it’s an intro for the next post I will write.

            In my next posting I’m going to address IAS 36 and the latitude that is given to a company for the reversal of a previously recognized impairment of a tangible asset. Think about the potential dilemma this creates for an investor when they’re trying to compare companies, determine the quality of earnings, yet companies have the ability to write down…and then subsequently, increase the value of an asset. We’ll look at an example where a company can alter their income levels through the revaluation of assets.  I’m certainly not implying that our own U.S.-based system is problem free and doesn’t allow for some level of indiscretion in reporting, but it still appears laughable that we’re going to abandon a system that has been developed over a handful of decades in favor of one that is newly introduced for a group of nations where no standards previously existed.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

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