Diversity in Convergence – The IFRS Story

The reality of jurisdictional diversity in the road towards global IFRS convergence
 
International Financial Reporting Standards or IFRS have come a long way in its journey towards being a set of high quality standards.  While the adoption of IFRS by the European Union (EU) came as a shot in the arm for gaining global acceptance, the joint efforts of the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) (the Boards) in improving and converging major global accounting standards has also helped IFRS reach where it has. 

Global Efforts at Convergence

From the signing of the Norwalk Agreement by the Boards in 2002 to the Memorandum of Understanding (MoU) agreed in 2006 and subsequently updated in 2008 and 2010, the Boards have identified several short term and long term projects aimed at bringing significant improvements to IFRS and US GAAP and also in narrowing the differences between the two frameworks.  These efforts have also been driven by the support from the G20 group of nations, in particular post the financial crisis, for a single set of global accounting standards as a means for strengthening the global financial market infrastructure.

Current Status of Convergence Projects
 
In the past few years, several of these short and long term projects have been completed, including the more recent standards on consolidation, joint arrangements, fair value measurements, investment entities, etc.  There also seems to be convergence on the Revenue Recognition project, the final standard for which is expected in Q3 of 2013 and on Leases, where converged proposals have been exposed for comments.  Now as the 2013 deadline is nearing, it is evident that several areas of diversity still remain, in particular in the area of financial instruments and insurance contracts. 
 
In their recent update to the G20, while referring to the challenges in reaching a consensus on the Impairment Project (forming part of the broader Financial Instruments project), the Boards have acknowledged that ‘it has been a challenge to bring together the different perspectives of the boards’ respective stakeholders and the different markets in which such stakeholders conduct their primary business activities’(i).  Even with so much focussed effort towards convergence, it is evident that there is diversity in the thinking between the two major standard setters, as they deal with these rather complicated projects.

IASB Consultation on Future Priorities

Now as the convergence process draws to a close, IASB has also concluded its public consultation on its future agenda by releasing a Feedback Statement (ii) that maps out its future priorities.  The Feedback Statement sets out five broad themes that emerged from the consultation in relation to the strategic direction and overall balance of the IASB’s future work programme: first, that a decade of almost continuous change in the IASB’s financial reporting requirements should be followed by a period of relative calm; second, to prioritise work on the Conceptual Framework, in order to provide a consistent and practical basis for standard setting; third, to make some targeted improvements that respond to the needs of new adopters of IFRSs; fourth, to pay greater attention to the implementation and maintenance of its Standards; and finally, to improve the way in which it develops new Standards, by conducting more rigorous cost-benefit analysis and problem definition earlier on in the standard setting process.

Single set of high quality accounting standards – a reality in the making?

So while the FASB-IASB convergence process is coming to a close and the IASB future priorities have been set out, the key question remains – has IFRS become that single set of high quality accounting standards, or is it just one of the many?
 
While IFRS is currently used in over a 100 countries, in order to graduate from being ‘a’ set of high quality accounting standards accepted globally to being ‘the’ single set of high quality accounting standards accepted globally, it needs much wider acceptance and use from the largest of jurisdictions.  When one looks at major jurisdictions other than the EU, there is still ground to be covered. 
 
In the United States, when the Office of the Chief Accountant of the Securities and Exchange Commission (US SEC) released their Final Staff Report - Work Plan for the Consideration of Incorporating International Financial Reporting Standards Into the Financial Reporting System for U.S. Issuers, it was hoped that it would bring to an end the uncertainty regarding the commitment of United States towards the use of IFRS as a global accounting standard.  Unfortunately, there is neither a recommendation by the US SEC Staff as to whether the United States should move to implement the use of IFRS by domestic issuers nor a timetable for transition should the US SEC vote to fully accept it.  Therefore, the uncertainty still remains. 
 
While Japan has permitted some level of voluntary use of IFRS, there have been reports that mandatory adoption wouldn’t be required before fiscal year ending 31 March, 2015 and that a period of five to seven years would be provided for preparation once a decision on mandatory adoption has been taken.  More recently in June 2013, Japan’s Business Accounting Council (BAC) deliberated about the use of IFRS in Japan, and their report notes that it is not the appropriate time to decide on mandatory use of IFRSs in Japan, and that discussions shall continue among constituents, based on future review of the results of the initiatives in the report (including the increase in IFRS users in Japan) and in light of the international environment such as developments in the United States and standards development by the IASB.  Here again, it doesn’t appear that IFRS would be widely used anytime soon. 
 
Coming to China, it went through one around of convergence in 2007 and it published a roadmap for continued convergence in 2010.  As part of that convergence programme, during 2010 their existing standards were to be revised together with the incorporation of the implementation guidance and explanatory guidance.  Once complete, all large and medium-sized enterprises were to be required to use the revised standards as of 2012.  While the extent of and the current status of this convergence process needs to be seen, the continued commitment of China towards convergence with IFRS could possibly wane, specifically in light of the developments in the US and Japan. 
 
Finally, in India, the government had committed to a process of convergence from 2011, which was subsequently deferred due to strong resistance from the corporate sector, on a variety of issues, including relating to tax impact of the transition, lack of overall preparedness, uncertainty on use of IFRS in US and Japan, etc.  India has also chosen to go through a process of convergence with IFRS, as against adoption, thereby retaining their right to prescribe standards that they deem fit for local conditions, and the draft of converged standards published has several deviations from IFRS both on the accounting requirements as well as their applicability.  However, the government remains committed towards its convergence with IFRS and there are reports of a new roadmap being drawn up for transition from 2015 or so. 
 
With these four countries not currently using IFRS, and these countries representing over 40 per cent of the world’s GDP (as per world bank data(iii) and over 50 per cent of the GDP of the top 20 countries in the world, it remains to be seen if IFRS, as the single set of accounting standards can become a reality or not. 
 
The reason for these large jurisdictions not embracing IFRS is due to their varying economic and business environments.  This challenge of bringing together different perspectives referred to earlier is not true just for the impairment proposals, but on a wider basis, all efforts towards the development of a single set of global accounting standards.  While the world, from a business perspective, has almost become one without borders and one big marketplace, there is no denying that there are different challenges and circumstances that apply in each jurisdiction and these challenges are greater in the larger jurisdictions. 

Diversity in Convergence – the reality of the day

Ultimately, financial statements are meant to provide useful financial information to decision makers, and therefore needs to be both relevant and provide a faithful representation.  And considering the reality that business is being carried out across the world in different environments, with their own set of challenges, it may be difficult, if not impossible, for a single set of standards to meet these criteria of relevance and faithful representation for most, if not all, situations, and address the needs of preparers and users of financial statements across all these environments. 
 
Till a time comes when stakeholders from across the world can agree on a set of standards that provide a relevant and a faithful representation how business is done, there will be divergence, hopefully within the broader framework of convergence.  Diversity in convergence – that’s the reality of the day. 
 
Sai Venkateshwaranis a Partner and Practice Leader for Financial Reporting Advisory Services practice of the Firm.  He has extensively advised several Indian and multinational companies on large and complex engagements on financial reporting.  Sai is experienced in U.S. GAAP and SEC regulations, and has worked with various foreign private issuers including U.S. IPOs. 
 
He is also actively involved in various technical initiatives, both in India and internationally.  Sai has been a member of the National Advisory Committee on Accounting Standards (NACAS) constituted by the Ministry of Corporate Affairs, Govt. of India and was actively involved on the IFRS convergence initiatives.  He is also a member of Grant Thornton International's IFRS Technical Group.
 
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