Kris Peach examines whether the promised benefits from the 2005 move to International Financial Reporting Standards have materialised.
Australia, and much of the world, is nearly a decade into one of the largest accountancy changes ever known – the 2005 move to the use of International Financial Reporting Standards (IFRS). But the road has not been smooth, with persistent criticisms of disclosure overload, over-complexity and of the standards not reflecting economic reality. With the decision by the US not to adopt (or endorse) IFRS and the ending of the convergence projects between the International Accounting Standards Board (IASB) and its US equivalent, the Financial Accounting Standards Board (FASB), it is time to reflect on whether the benefits Australia was promised of increased global convergence, higher quality standards and more efficient capital markets have been achieved.
On disclosure overload, there is good news. IASB, which sets IFRS, issued an exposure draft to assist preparers and auditors address the potentially detrimental effects of overwhelming useful information with immaterial disclosures. The focus will squarely be back on directors, as there will be more freedom to present information in tailored ways. The IASB is working on a broader framework to help domestic standard setters and account preparers focus on the key disclosures that really matter to investors. IFRS has not been blameless, but is hardly the only contributor to disclosure overload - consider the remuneration report!
Even ahead of the IASB’s move, we have seen much interest from Australian companies keen to “cut the clutter” and simplify their accounts. We believe significant numbers of pages could potentially be trimmed without losing anything material. And, with corporate reports now going into hundreds of pages, this is not to be sniffed at. KPMG’s recent S&P/ASX 51-100 research has also, encouragingly, found companies making better use of Operating & Financial Reviews (OFRs) in the first year since the Australian Securities and Investments Commission issued guidance. More are seeing the benefits of explaining their story, which the OFR specifically, but corporate reporting in general, should be about. Perhaps the question directors should be contemplating is how they can use the existing regulations to tell their stories better. There is still scope for improvement.
A separate KPMG study of the ASX 50 shows that 76 per cent choose to report a non-statutory (i.e. non-IFRS) profit. Does choosing to present alternative numbers suggest something is wrong with the accounting standards? We would assume that IFRS is reflecting what actually happened during the period under review and that non-IFRS numbers are often designed by management as a means to help others consider future performance.
Certainly current accounting standards are not perfect. Accusations of complexity and failing to reflect economic reality often reflect the mix of fair value and cost models and, in some cases, compromises made to gain acceptance. For example, it was often argued that a simple financial instruments standard would say “fair value all financial instruments and recognise the movements in profit and loss”. But such a suggestion was, and remains, unacceptable for users, preparers and regulators, so instead we have IFRS 9, still exceedingly complex and really only understood by experts.
Yet there is some good news on this front. Recent amendments to hedging requirements represent an important victory for the aviation industry, manufacturing sectors and others that have to manage significant commodity price exposures. Their financial statements will now be able to reflect hedge accounting more closely aligned with the risk management outcomes economically driving management.
It is important that directors do not look back to Australian accounting pre-IFRS with rose-tinted glasses. As a reminder we did not have standards on financial instruments (other than disclosures), share based payments, accounting for defined benefit superannuation plans, intangible assets, or rigorous impairment testing. These were significant gaps that needed to be addressed. It is interesting to note that the alternative accounting standards in these areas from the US are broadly the same. Also, IFRS 15, Revenue, issued jointly by the IASB and FASB on one of the most important of financial reporting metrics, is expected to provide greater global consistency in how transactions are recognised.
Given IFRS is not perfect, did we back the right horse? More than 100 countries now use IFRS as their prime source of accounting guidance. The US, Japan and India are the only major economies holding off, although the US Securities and Exchange Commission accepts IFRS for foreign companies seeking to raise capital in the US. The only other serious choice is US Generally Accepted Accounting Principles (GAAP). Do we really want to have all the rules and regulations that US accounting entails? IFRS does have rules, but it is far more principles-based and thus requires more judgement.
Could we have continued setting our own standards? The costs of independent standard setting are significant. Even before adopting IFRS, Australian standard setting was “harmonising” with IFRS – the power of capital markets! Analysts do not look favourably on having to understand standards specific to and relevant for a small subset of the market. To avoid any confusion, directors now sign off that they comply with Australian Accounting Standards and IFRS. So in reality, not really a choice. The holy grail of one set of international accounting standards is now dependent on capital market forces ultimately persuading the US. Until then, the only realistic choice is IFRS or GAAP. For me, IFRS is still the one!
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