Use IFRS or not: Accounting issue from Brexit

Britain photoWith Brexit, the question now is whether the British lawmakers would ask the British companies to file their financials using a different set of accounting rules than the current International Financial Reporting Standards. Some British politicians and investors have been heard saying that the IFRS has compounded the financial crisis and that these rules lack rigor.

I wouldn’t say that IFRS lacks rigor, as IFRS is more principle based it could lead to different interpretations for similar transactions which might lead to different accounting presentations by different companies. IFRS doesn’t necessarily define everything in the standard, it lets accountants use their judgment.But it doesn’t lack rigor, it is more open to interpretation and judgment.

If the listed companies in Britain do not use IFRS, then there are multiple issues. One being what would the new standards be, then implementing those standards and recreating the financials. As with change of standards, one would have to show prior period numbers under the new standards as well. It would be an accountant’s biggest nightmare. Considering that year end is nearing, this should be resolved quickly and in favor of status quo.

The other thing to consider is, if Britain moves away from IFRS, then the International Accounting Standards Board which is the standard setting board and is the one that issues IFRS will have to move from its current headquarter location in London to another country in the European Union. If Britain stops using IFRS, it puts a big question mark on the future of the standard itself. Also considering that for the past few years both FASB (Financial Accounting Standards Board- the board that works on US Generally Accepted Accounting Principles) and IASB have been working on the convergance project, it puts a question mark on the future of the project as well.

Setting a deadline for the deadline

When the financial crisis was at its peak in 2009, the G20 group met to set a date for the worldwide convergence of the financial standards by end of the year. The deadline got postponed to mid-2011 and then again mid-2013. In a recent report from the SEC which made it clear that the IASB cannot be the lead, the convergence project is in doldrums now.

The G20 met again this week to talk about the deadline. The update is that The Financial Stability Board, a G20 task force, will request by no later than end June 2013 a joint IASB-FASB report on all outstanding items with a specific timetable for completion.

Let’s hope that there will be some resolution on the convergence project before there is another financial crisis.

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IASB fights back

In response to the July report issued by US SEC (which did not give any idea as to whether and when would the SEC decide on adoption of IFRS by its constituents), the IASB issued its own analysis of the situation.

According to the International Accounting Standards Board, in the absence of SEC making a decision on the adoption of IFRS , IASB believes that the decade of convergence may now be followed by a few years of divergence. The report of the IASB also provides a point-by-point response to the SEC’s study.

The chairman of the IASB trustees, Michael Prada, said “While acknowledging the challenges, the analysis conducted by the IFRS  Foundation staff shows that there are no insurmountable obstacles for adoption  of IFRSs by the United States”.

Let us see now whether the SEC /FASB comes back with any comments to the new report by the IASB.