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.