The movement towards International Financial Reporting Standards (IFRS) as a basis for financial reporting is a global trend that is no longer easily dismissed. More than 113 jurisdictions now permit or require financial reporting under IFRS. Hong Kong implemented it in 2005, China last year, member states of the European Union in 2005, India, South Korea and Japan will implement it from 2011 and the United States is working towards converging its standards with IFRS in 2014. In Hong Kong recently, to discuss fair value accounting and the new financial reporting model, Robert Hodgkinson, executive director, technical, of the Institute of Chartered Accountants in England and Wales (ICAEW), said the implementation of IFRS across 25 national member states, each with their own accounting standards, was a bold move from the European Commission (EC). 'There was the potential for disaster because the EC could pass a directive that said all companies should apply international accounting standards and then find that five member states hadn't done so and the other 20 had done it in different ways that allowed for various forms of backsliding and exceptions,' he said. 'If the vision was to create confidence that all European companies were accounting in the same way this would not create it.' To limit the potential for disaster, the EC proposed to pass a law that was applicable in member states. The International Accounting Standards (IAS) regulation requires the use of IFRS as adopted by the EU (IFRS-EU) in the consolidated financial statements of publicly traded companies established in EU member states. It would override national law in each state, Mr Hodgkinson said. He added that this move was 'sold on the vision' that it would be for listed companies and only their consolidated accounts. 'That meant roughly 7,000 companies and it didn't affect the accounts they filed for tax purposes,' he said. 'It was just their consolidated accounts.' The ICAEW subsequently performed a post-implementation study for the EC to establish compliance with IFRS. It examined the financial statements of 200 companies with at least two companies from every member state. Academic research into the reactions of stock markets and stock prices to IFRS information was commissioned and an online survey for invited investors, preparers and auditors to note what they thought of IFRS. What the ICAEW found was widespread agreement that IFRS had made financial statements easier to compare across countries, across competitors within the same industry sector and across industry sectors. Some 63 per cent of investors thought that IFRS had improved the quality of consolidated financial statements and 41 per cent said the move to consolidated IFRS financial statements had influenced their investment decisions. More than half of preparers were either very or fairly confident that fund managers and analysts fully understood the impact of IFRS. According to the survey, 69 per cent of preparers used IFRS accounting for internal reporting and 25 per cent stated that IFRS financial statements had impacted the way the business was run. The overall message was that IFRS implementation had been challenging but successful and was generally seen as a positive development. Hong Kong's accounting standards have closely followed IFRS for much longer than European Union countries because before 1997 it was aligned with British international accounting standards, which later transitioned into IFRS. Hence the implementation of IFRS for all companies in the city in 2005 was less of a 'big bang'. 'The implementation in Hong Kong was a small bang and we were only transitioning to IFRS, we didn't scrap our old accounting standards and rewrite them from scratch,' said Yvonne Kam, partner, accounting consulting services, PricewaterhouseCoopers. 'I think the market has reacted positively to the implementation. 'In the beginning I didn't like fair value accounting at all. From the auditing perspective it adds a lot of burden to the auditors and to the companies and to valuers. And it's less tangible than historical cost accounting. But for users of the resulting financial statements, fair value gives them a readily available number of how the company is performing based on today's prices.' Ms Kam said that when investors analysed the financial statements of a company, they ought to understand the quality of earnings, that was what results were derived from operations, which were sustainable, and what derived from external market factors that the company had no control over. It, therefore, became critical that investors understood the accounting rules. Stephen Taylor, an audit partner at Deloitte China, said that having one global accounting standard had created confidence in the financial statements of companies because the users of the information now only had to understand one set of rules. They did not have to understand the reconciliation differences between Chinese and South Korean accounting standards, for example. 'Before IFRS was implemented in China, you could see a company that produced under IFRS making a loss, but producing the same set of numbers under China accounting standards it made a profit. This didn't leave you with much confidence. Now there is only one language to learn and to be able to interpret,' he said. Mr Taylor said it was important to make sure that global accounting standards were implemented consistently and monitored to ensure compliance. He said that the mainland was a good example because since the implementation of IFRS last year it had put much emphasis on education and training its finance professionals. 'China's biggest issue is getting a sufficiently able body of accounting technicians who have been through the process and understand how to apply these standards. The Big Four auditing firms have been involved in many of the larger corporations so they can help out here,' he said. When asked whether IFRS was the perfect solution to standardising accounting principles in Europe, Mr Hodgkinson said no, but added: 'Given that its purpose was to bring some substance to the idea of a single European capital market, if it means that we have a better flow of capital and confidence has been maintained anything else is a kind of detail.'