With 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.
Even though FASB (Financial Accounting Standards Board) has been working with the IASB (International Accounting Standards Board) towards convergence of US GAAP with IFRS since 2002, the SEC (Securities and Exchange Commission) has only recently in 2010, started to study whether or not to move from US GAAP to IFRS.
The SEC’s decision holds significant weightage as US is one of the biggest economies and its adoption of IFRS would truly make the international standards global. But a recent staff report from SEC made it clear that the IASB cannot be the lead. The report released in July talks about several areas in which the two accounting approaches differ, such as impairment models for property, plant, and equipment, inventory and intangible assets. Another point the report mentions is the cost that will be incurred by large and small corporations for switching from GAAP to IFRS. This might be a good point to put in use the cost benefit convention- that relaxes GAAP requirements if the cost of reporting it under GAAP exceeds the benefit. The question here will be whether the cost of switching to IFRS will provide more benefits to the involved parties.
The coming few months will through some more light on what the future of the convergence project will be from the US point of view.
Recently the Financial Accounting Standards Board and the International Accounting Standards Board said they were on track to finish writing the new accounting standards for financial instruments, revenue recognition, leases, comprehensive income, and fair value measurement by June 2011 or earlier. The IASB is also on target to align its disclosure requirements for derecognized assets and other off-balance-sheet risks with U.S. rules and to finish its updates for consolidations and insurance contracts by the same date.
Due to the push to get these projects completed by mid 2011, some of the other joint projects the two boards are undertaking have been pushed back. Those projects include an effort to reorganize the entire presentation of financial statements, a new standard for financial instruments that have characteristics of equity, and new rules for emission trading schemes and the consolidation of investment companies. The boards also are putting off further work on their conceptual framework.
Even though some projects are getting pushed back, there is definite headway being made on some of the key convergence standards.