Trouble in IFRS Paradise

Survey of says finance executives have in Europe about cost and effectiveness of IFRS

Convergence of accounting standards may be on its way, but finance executives in the U.S. don’t seem overly thrilled by the prospect. What’s more, these skeptics may be on to something—if the views of their counterparts in Europe are any indication.

Indeed, a survey of 749 finance managers in the U.S. and Europe uncovered a number of misgivings about the melding of the standards put forward by the Financial Accounting Standards Board with the rules set forth by the International Accounting Standards Board. Admittedly, over half of the U.S.-based CFOs, controllers and chief accounting officers who were surveyed—and 76% of those in Europe—said that accounting rules should be developed on the international level.

But many respondents in the U.S. seemed vexed about the actual switchover, which is aimed at developing one set of global accounting rules.

For starters, finance managers in the U.S. were extremely concerned about fair-value accounting. Over 60% of those who responded to the survey, which was conducted by Duke and Oxford Universities, think IASB is moving toward fair-value accounting. But nearly the same percentage said the adoption of fair-value accounting is a bad idea.

In addition, the respondents see big hurdles to convergence. When asked whether international accounting standards and GAAP are largely identical, about 40% of U.S. respondents said no. That raises questions about whether harmonization of accounting standards is even possible. About 43% of the finance managers surveyed in the U.S. said regulators are unlikely to achieve a set of unified global accounting rules and practices because legal environments and business cultures differ too much across countries and regions.

That’s hardly an encouraging result for IASB. It’s probably not good news for the Securities and Exchange Commission, either, which has firmly placed its weight behind convergence. Under the road map the SEC issued in November, all U.S. public filers would be required to report their results using the IASB’s rules by 2014. At least 110 public companies in the U.S. will be eligible to report using IFRS as early as next year.

Those managers contemplating early filing may first want to consider what their counterparts in Europe say about IFRS. The Duke/Oxford survey revealed that, while U.S. finance executives have worries about convergence, they tend to have a much higher opinion of the effectiveness of IASB standards than managers who actually use the rules.

Case in point: Only 4% of the U.S. respondents said that IFRS does not improve the transparency and usefulness of accounts to shareholders, investors and creditors. But in the U.K., which switched to international reporting standards three years ago, fully 53% of respondents said IFRS was not effective in improving financial transparency.

Likewise, only 6% of the surveyed finance mangers in the U.S. said IFRS would not improve public confidence in the markets. But nearly half of the U.K. respondents said international accounting standards were not effective in boosting public confidence in the markets.

What’s more, fully 60% of the respondents in Europe said the cost of convergence outweighed the benefits. That figure jibed exactly with the responses from U.S. finance chiefs: six out of 10 said the cost of switching to international accounting rules offset the benefits.

According to a recent study conducted by the SEC, the cost of convergence with IFRS will likely cost U.S. filers about $32 million each over a three-year period.

Despite concerns about costs, the move to harmonized accounting standards appears to be a done deal. Mike Lloyd, a partner at Deloitte who is in charge of the global treasury and capital markets team in London, said he is more confident now than he was a few years ago that the U.S. will adopt IFRS and that there will be a single set of international accounting standards.

But Mr. Lloyd, speaking today at a conference on treasury trends, added that one thing that could possibly derail convergence is if the European Union pressures IASB to change standards and ends up creating its own set of accounting rules. “But otherwise, it’s highly likely we’ll move to international standards,” he said.
By John Goff at Financial Week