Feature

The Way to Business Empowerment

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Published May 22, 2013, in Feature

CGMA_logo

CIMA and the AICPA report finds that management accountants play a vital and growing role in driving advancements at some of the world’s most innovative companies.

The whole world is engulfed in revolution; the advancement of technology, population and economic pressures, companies are out to recruit the most talented individuals. CIMA accountants are equally equipped to pave the way to business empowerment.

In those businesses, the CFO and finance team are deeply embedded in the process of innovation and have a clear framework to let new ideas take shape. They partner early with other departments to identify concepts with market potential, replace rigid financial metrics with staged measurements to avoid eliminating ideas too soon, and accept that failure is a tolerable outcome for projects along the path to commercialisation.

The conclusions are captured in a new CGMA report, “Managing Innovation: Harnessing the power of finance” and based on interviews with global finance leaders at companies including Coca-Cola, Royal Dutch Shell and BT Group.

Royal Dutch Shell CFO Simon Henry FCMA, CGMA, explains:

Simon Henry FCMA, CGMA, Royal Dutch Shell CFO

Simon Henry FCMA, CGMA, Royal Dutch Shell CFO

A finance function needs to be able to understand the business well enough to know what is a worthwhile activity but also, in this part of the business, to have a bit more of an open mind. It is less mechanistic and has the ability to live with ambiguity, to identify risk and to manage it.

Doug Bonthrone, Director of Global Services Strategy at Coca-Cola added:

There’s an art to innovation but there needs to be some science that goes with that; understanding the forward-looking side of strategy and being able to scope the opportunity in all these areas, the management accountant is really critical. Whether it’s a new product, process or business model, the management accountant can help assess the results, evaluate how things have gone and learn lessons.

The report recommends five areas where finance professionals should take action:

  • Create an innovation-centric mindset. Develop a framework in which innovation can thrive and accept that sometimes projects will fail.

  • Nurture creativity. Explore ideas like ring fenced budgets that offer more flexibility for the innovation process.

  • Prepare the path to profits. Finance can be a valuable part of innovation teams – for example, helping build more robust business cases to secure further backing.

  • Match metrics to the stage of development.  Finance leaders shouldn’t put metrics used in the operational business around nascent or experimental initiatives. Consider a phased approach to give an idea room to breathe.

  • Take a balanced view on innovation risk. Companies increasingly employ a portfolio of strategies to drive innovation. Management accountants should seek to create an opportunity framework that promotes clarity, transparency and discipline across the total portfolio.

Can Google Predict the Stock Market?

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Published April 25, 2013, in Business, Feature

An analysis of changes in Google query volume for search terms related to finance reveals patterns that could be interpreted as early-warning signs of how the stock market moves.

Tobias Preis, of Warwick BusGoogle Global Accountantiness School, Helen Susannah Moat, of University College London, and H. Eugene Stanley, of Boston University analysed changes in the frequency of 98 terms, such as ‘revenue’, ‘unemployment’, ‘credit’ and ‘nasdaq’, in Google searches from 2004 to 2011. (see graph)

Preis, Moat and Stanley found that using these changes in search volume as the basis of a trading strategy investing in the Dow Jones Industrial Average Index could have led to substantial profit.

The team of academics demonstrate that trading on the basis of the number of queries on Google using the keyword ‘debt’ could have brought in returns of up to 326% (see graph).

Dr Preis, Associate Professor of Behavioural Science at Warwick Business School, said:

“We found that changes in the volume of certain Google search terms could be used as early warning signs of subsequent stock market movement.”

The research supports the idea that drops in the financial market may be preceded by periods of investor concern. Investors may search for more information about the market before they are prepared to sell at lower prices. Conversely, the researchers found that drops in interest in financial topics could be used as a signal for subsequent stock market rises.

Dr Moat of University College London said:

Analysis of Google Trends data may offer a new perspective on the decision making processes of market participants during periods of large market movements

“It’s exciting to see that online search data may give us new insight into how humans gather information before making decisions – a process which was previously very difficult to measure.”

Dr Preis added:

“We are generating gigantic amounts of data through our everyday interactions with technology. This is opening up fascinating new possibilities for a new interdisciplinary ‘computational social science’.”

The study was developed as part of the IARPA Open Source Indicators program, which aims to develop methods for continuous, automated analysis of publicly available data in order to anticipate significant societal events.

Graphs:

Google search term ‘debt’.

Google search terms used and their effectiveness as a trading strategy.

Consultation Draft of the International IR Framework

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Published April 16, 2013, in Feature

Consultation Paper IIRC Global AccountantThe global evolution of corporate reporting has taken another significant step forward with the release of the Consultation Draft of the International Integrated Reporting <IR> Framework on 16 April 2013.  The Framework creates the foundations for a new reporting model, which will enable a business to provide future looking rather than past analysis and how it creates value over time.

The 50+ institutional investors are currently involved in shaping and testing the Framework these include: Deutsche Bank, Goldman Sachs, Natixis, APG and Norges Bank.

IR differs from the current reporting landscape in a number of ways, in particular through the introduction of the concept of six capitals being and not in any particular order financial, manufactured, intellectual, human, social and relationship, and natural.

IR responds directly to the challenge faced by providers of financial capital, including investors, that intangible factors, such as intellectual property, brand, talent and environmental resource use are insufficiently integrated into the strategic decision-making and reporting by businesses, leading to the potential for a misallocation of resources and a higher cost of capital.

Speaking at the South African launch of the Consultation Draft at the Johannesburg Stock Exchange, Professor Mervyn King SC, Chairman of the IIRC, said:

Prof. Mervyn King, Chairman IIRC

Prof. Mervyn King, Chairman IIRC

“The world today faces two critical and interconnected dangers: financial instability and unsustainability.  Both of these dangers pose threats to the livelihoods of communities across our planet – to their wealth and welfare.  They are risks that have been under-managed and under-reported for too long.  The corporate reporting landscape has not kept pace with the scale of the changes that have taken place in the world economy, business and society in recent decades.

“Businesses and investors have a central role in making capital allocation decisions that will ultimately determine the resilience of our financial system and the success of the economy over the short, medium and long term.  Integrated Reporting brings businesses and investors to the centre of this debate.  It charges them with the responsibility to communicate how they create value over time.  It empowers them to create new tools and mind-sets that will improve the quality of decision-making by businesses and investors.  And, crucially, it will lead to changed behaviour, a focus on the future as well as the past and a reporting model that reflects and communicates the reality of business, its operations and its impacts, in the 21st Century”.

Speaking at the New York launch of the Consultation Draft at NASDAQ, Paul Druckman, Chief Executive Officer of the IIRC, said:

Paul Druckman, CEO, IIRC

Paul Druckman, CEO, IIRC

“Over the last three years, the IIRC has built consensus around the idea that the current corporate reporting model must change to meet the needs of today’s business and investment environment.  The Framework is the product of business and investor input and testing involving over 300 individuals and organizations.  The IIRC has recruited businesses and investors to its Pilot Programme in 25 countries.  So when I say this initiative is international in scope, and market-led in spirit, I mean it.

“That is why today we are issuing an invitation to businesses, investors, the accounting profession, regulators, standard setters and other interested parties to contribute to the consultation and shape this corporate reporting evolution which matters so much to the future of business and the global economy”.

The goals of Integrated Reporting are to:

  • Achieve a more cohesive and efficient approach to reporting.
  • Inform capital allocation decisions.
  • Enhance accountability and stewardship.
  • Support integrated thinking.

Important features of the Framework include:

  • Fundamental concepts, such as the capitals, business model and value creation.
  • Guiding principles, such as strategic focus and future orientation, connectivity and materiality.
  • Content elements such as organizational overview, opportunities and risks, strategy, performance and future outlook.

The Framework has been developed in a transparent way, with input from businesses, investors, regulators, standard setters, accounting bodies and NGOs.  It seeks to build on existing financial and non-financial reporting practices, and responds to two current trends:

  • The need for business transparency and responsiveness to stakeholders;
  • The need for material information that guides corporate strategy, risk management and resource allocation.

The Framework will now be the subject of extensive consultation until 15 July 2013. You can download the Consultation Draft Here.

Half of Small Businesses Turned Away by Banks

By:
Published April 2, 2013, in Feature

Simon Carter, Director of Touch Financial

Simon Carter, Director of Touch Financial

More than half of small businesses in the last six months have been refused funding by their bank, with a third given no justification or explanation for how the decision was made.

In a new survey, conducted by commercial finance broker Touch Financial, almost two thirds (59%) of businesses questioned had applied for additional funding, such as a bank loan or an overdraft, at some time in the past six months. Furthermore, four in five (80%) of those businesses refused bank funding were not given any information on alternative sources of funding.

The survey to expose the current absence of adequate funding provision for SMEs, and the impact on business confidence confirmed that an overwhelming majority of small businesses do not feel supported by UK banks, while almost all agree that the Government could and should be doing more to help.

Perhaps unsurprisingly, in answer to the question ‘Do you believe that banks are supporting small businesses?’ more than four in five (81%) of businesses responded ‘No’.

Simon Carter, Director of Touch Financial, is concerned that the help that the Government has promised has not been forthcoming:

Touch Financial Support Global Accountant“Any business, regardless of size or sector, should be given access to finance, if not through ‘traditional’ bank lending, then via a number of alternative funding solutions that are available”

When asked ‘Is the Government doing enough to support small businesses?’ only 2% responded ‘Yes’; the highest awareness was for Start Up Loans, which only a third (33%) of respondents had come across.

“Small businesses simply aren’t getting the information and the support that they need if they are to be the primary engine for growth as the Government has suggested,” Simon concludes.

  • 55% of SMEs seeking a loan from their banks have been declined and 31% given no reason
  • 98% of SMEs says the government should do more to support small businesses

Audit Quality Forum: Spotlight on Audit Committees

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Published March 21, 2013, in Events, Feature

ICAEWThe ICAEW delivered an outstanding and informative event titled “Spotlight on Audit Committees: A Step Change in Transparency”.  The event presented at the Department of Business, Innovation and Skills attracted senior members of the audit community investment fund managers and business decision makers.

Charles Bowman ICAEW Global AccountantCharles Bowman, Audit Quality Forum Chair and Chairman of the ICAEW Audit and Assurance Faculty, opened the evening by reminding the audience that the audit industry remained under the spotlight for decades and with the recent study reports published by the Competition Commission the markets had refocused their attention yet again on the industry.

Jo Swinson, Minister for Employment Relations, Consumer and Postal Affairs delivered a keynote emphasising the importance of audit quality, independence and concentration of the audit market in the FTSE 100.

Jo Swinson MP said:

Jo Swinson MP Global Accountant“Audit quality underpins trust and confidence which leads to investment and growth. Investors should be able to trust the information published by companies”

“Independence is crucial to maintain trust in the industry however, the perception of auditor independence is equally important”

The Honourable also said that companies needn’t restrict themselves to the top four but explore the possibilities of other firms.

ICAEW had already signed-up to the initiative to promote woman to represent 25% of its boards by 2015 and would encourage all FTSE 100 companies to do the same to improve diversity and skill contribution at board level.

Melanie McLaren, Director Codes and Standards FRC, took on Audit Committees and said their reports were largely boilerplate which needed improving and highlighted the difficulty the industry faced in facilitating engagement between shareholders and the auditors.

Melanie said:

Melanie Mclaren FRC Global Accountant“to do this FRC will provide a platform to look at the usefulness of audit committee and auditor reports from an investor viewpoint and audit quality purposes”

Ian Richards, Head of Governance and Responsible Investment, came in with a contrasting speech criticising  the financial reporting standards and their effectiveness.

Ian said:

Ian Richards Threadneedle Investments Global Accountant“We have concerns around the reporting quality under IFRS and that audit committee reports are very poor and not useful as one would expect”.

“Investors look for usefulness and a proportionate report; not a three hundred page document that mainly has been a “cut-and-paste” from previous years with change in numbers”

Ian suggested what will be useful to include in the subject reports:

  • Key decision taken by boards

  • Internal Controls and accounting system improvements that remedy previous issues

  • Key decisions taken that have material impact on operation and financials and

  • Discussions that have taken place with auditors and how they have satisfied the necessary requirements as auditors.

Steve Barber, Audit Committee Chair, Next Plc. took the stage opening his speech by criticising the Competition Commissions’ attitude and report.

The Next Plc., Audit Committee Chair said:

Steve Barber Next Plc Global Accountant“The Competition Commission report suggests Audit Committees are not doing their job. This has no truthfulness and does not reflect the facts.”

Steve continued his speech by stating and agreeing to an extent with Ian Richards comments that “Less is more”. And issued a warning to Audit Committees that they should “stick to the fundamentals, so the purpose of the Audit Committee Report is not lost”

Andrew Ratcliff, PWC Partner, also joined the evening, demonstrating his industry experience and insight into auditing.

Andrew confessed that auditing, accounts and corporate reporting are complex exercises, nevertheless, required to be coherent and was surprised by the fact, why the Competition Commission Report underplayed the importance of non-executive directors’ role on boards.

Andrew suggested,

Andrew Ratcliffe PWC Global Accountant“More time is needed to improve Audit Committee Reporting and the Competition Commission report is not conclusive”

Andrew agreed that, “auditor reports should indeed include how auditors have dealt with risks rather than just numerating materiality”

The insightful evening came to a close with a Q&A with the audience.

Britain’s Workers Still to be Convinced on Pension Saving

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Published February 27, 2013, in Business, Feature

Aviva calls for sustained and ‘personalised’ employee engagement to create a lasting savings culture

Britain’s workers remain undecided on pension saving – 37% of employees say they will opt out of automatic enrolment, and 28% are undecided. Affordability is a key obstacle – almost half (45%) of employees who do not currently take up the pension they are offered say they don’t have the cash. Only a third (37%) of employees are confident about their financial situation. Two-thirds of employees (65%) say their key workplace concern is how their pay compares to the cost of living. Nearly two-thirds (60%) of employees lack confidence in the UK economy.

Britain’s workers remain undecided on retirement saving despite growing awareness of the government’s reforms, which will see millions of people automatically enrolled into a pension for the first time – Aviva’s second Working Lives report shows.

The success of the new workplace pension changes, which started to roll out in October 2012, hangs in the balance as many workers focus on making ends meet in challenging economic times, the research into UK private sector employees and employers outlines.

Aviva Workplace Savings

Compelling, relevant and ‘personalised’ communications and engagement within the workplace will be critical to convincing employees to prioritise retirement saving.

Mark Noble, Aviva’s Managing Director Health and Corporate Benefits, said:

“Getting millions more people saving for retirement for the first time during difficult times is a real challenge – but automatic enrolment presents us with a once in a generation opportunity to get this right.
“It’s about understanding the needs and the circumstances of the actual employees in each business, not as a single group but in an individual way through face-to-face conversations and personalised planning tools.”"Automatic enrolment will only become game-changing if employers, their advisers and the wider industry create sustained communications and engagement in the workplace to encourage employees to save.

Awareness about automatic enrolment increases – but doubt remains

Employee awareness about automatic enrolment (59%) has almost doubled compared to 31% in May 2012 when the first Working Lives report was released. However, Britain’s workers do not show any more sign that they are likely to actively start saving for retirement.

Overall, 37% say they will opt out when they are automatically enrolled, which is unchanged from May 2012, and an increasing number (28%) are undecided (up seven percentage points from 21% in May 2012). Slightly fewer employees plan to stay in their employers’ schemes (36%, down seven percentage points on 43% in May 2012).

Aviva Awerness BarDespite this uncertainty, there are early signs that Britain’s workers can see the benefits of the pension reforms, with almost two-thirds (65%) saying automatic enrolment will encourage saving.

However, almost half (45%) of employees who do not contribute to a workplace scheme they are currently offered say they simply cannot afford to. Nearly one in five (19%) say they do not save into a pension because they are repaying debts and 17% are saving for other things, such as a house or a holiday.

‘Personalised’ communication is the way forward

Aviva Private Sector Pie

When asked about the types of communication that would encourage them to save more for their retirement, almost a quarter (23%) of employees say being ‘personally’ shown what they need to save. This compares with 14% who say being shown the benefits of saving would make the difference, and 12% who say being shown how to manage their money better.

Money is king for employees – but can businesses respond?

Two-thirds of employees (65%) say their key workplace concern remains how their pay compares to the cost of living (up from 53% in May 2012), and 65% say their salary is the most important aspect of their job (up 15 percentage points on 50% in May 2012).

For 55% of employees – a pay increase would encourage them to save more. However, rather than focusing on pay increases, a third of employers (32%) are looking for ways over the next year to motivate employees without unduly increasing remuneration.

As they tighten their financial belts, an increasing number of employers (19%) are concerned about cutting jobs (up from 6% in May 2012), and over the next 12 months 20% are focused on maintaining headcount despite the economic downturn (up eight percentage points on 12% in May 2012).

Confidence in the UK economy is lower among employees than employers, with 60% of workers saying they are ‘not very’ or ‘not at all’ confident, compared to 45% of employers.

Only 37% of employees are confident about their personal financial situation, whereas 68% of employers are ‘extremely’ or ‘quite’ confident in their businesses’ financial situation.

IFAC SMP POLL: Economic Uncertainty, Cautious Optimism and Issues Facing the Accounting Profession in 2013

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Published January 31, 2013, in Feature

The latest IFAC SMP Quick Poll, conducted in late 2012, showed that the smallest accounting practices and their clients are not immune to macroeconomic instability. With the continuing sovereign debt crisis, a double-dip recession in the Eurozone, and rising inflation in some regions, economic uncertainty pervaded many of the responses to the poll of small- and medium-sized accounting practitioners (SMPs).

IFAC_name_rgb

Despite these concerns, SMPs remain cautiously optimistic, showing their resilience and perseverance during challenging times.

After keeping up with new regulations and standards, three issues related to the health of the economy—attracting and retaining clients, pressure to lower fees, and rising costs—topped the list of challenges faced by SMPs. Similarly, respondents indicated that their clients, small- and medium-sized entities (SMEs), are most challenged by regulations followed by economic uncertainty. Respondents generally expect little change in business performance in the coming year; however, slightly more SMPs (5 points more) indicated they expect business to improve in the coming year compared to those who said the same at the end of 2011. They expect this growth primarily to be driven by revenue from new clients.

While respondents identified the reputation and credibility of the profession as a top issue facing the profession in 2013, they generally ranked public perception of the profession in their country/jurisdiction as average to above average and expect this perception to improve by 2025.

“As drivers of growth and development, small businesses are extremely important to the health of local and global economies. We must not underestimate the value of this sector and the role that accountants play in supporting SMEs as trusted business advisors. Therefore, regulators and standard setters need to be mindful of the impact their requirements have on SMPs and SMEs; as the poll results show, this is an area that continues to challenge both small businesses and their accountants,” said SMP Committee Chair Giancarlo Attolini.

Down_Global_AccountantThe poll report includes notable variations by region and size of practice in addition to trend data based on previous polls where available. See the full report in the SMP Committee area of the IFAC site: www.ifac.org/SMP.

The year-end 2012 poll received 3,767 responses and was conducted in 17 languages from November 21 to December 31. The poll, conducted twice in 2012, is intended to take a snapshot of key challenges and trends influencing SMPs globally; since the responses were not geographically balanced, the results are not necessarily representative of SMPs on a global or regional basis. IFAC wishes to thank the many member and regional organizations that helped with translation and distribution of the poll.

Top Tips for Business Leaders to Build Resilience

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Published January 23, 2013, in Feature

A global survey carried out by the CIMA and AICPA alliance brand CGMA indicate businesses around the world believe the US debt crises will indeed repeat itself.

The survey reveals CFO opinion that organisations must be more resilient and less susceptible to macro-economic volatility.

CGMA Business Pulse Global Accountant

The survey key findings:

  • 31% of respondents believe the ongoing US debt crisis will ultimately push the global economy towards recession.
  • 53% expect higher U.S. interest rates and 70% anticipate a weaker dollar which in turn reduces the buying power of the worlds largest consumer market. Indeed this has its knock on affect in developing [supplier] Asia.
  • 60% of respondents said that business is too sensitive to economic crises.
  • 57% agreed that their organisation must seek new ways to be resilient and less susceptible to macro-economic volatility.
Charles Tilley, Chief Executive CIMA

Charles Tilley, Chief Executive CIMA

Charles Tilley FCMA, CGMA, Chief Executive, CIMA, said:

“There will always be another U.S. debt crisis, Arab Spring or Eurozone disaster just around the corner and uncertainty simply cannot drive business strategy.”

“Indeed the seizing of opportunities is key to long-term survival and so we must all plot a suitable course between risk and innovation, managing the approach and mitigations put in place to address these uncertainties.”

Five top tips for business leaders to build resilience:

Businesses may find employing tools which detect business risks at an early stage may find themselves in a position where they are better prepared to manage those risks before they are faced with the gloom of uncertain economic outlook; the impact on their investments, future growth and ultimately their strategy. This will build resilience in the face of ongoing economic uncertainty.

  1. Understand your business model. What creates, and could potentially destroy, value in your business? 

  2. Harness the power of transparency. Create a line of sight between capital sources and how it will be invested in the sustained success of the business, beyond the short-term.

  3. Ensure robust information flows. Build confidence in the right information that drives investment and risk mitigation decisions.

  4. Go beyond defining a risk appetite. Have a risk attitude that empowers all in the business to take appropriate risks that drive growth and opportunity. 

  5. Be clear on the skills and talents you need now for tomorrow. Identify and close potential skills gaps you may have when considering your future business model, markets and innovation agenda.

To find out more about the survey please download the paper here:

CGMA Pulse Survey

Auditors: Over-reliance on like-for-like sales data in the retail sector

By:
Published January 15, 2013, in Feature

Auditors of retail companies have cautioned against too much reliance on like-for-like trading figures, saying they are not always consistent nor directly linked to profitability. For the first time, they have shared insights and expertise gained from their audits of the UK’s retailers in a report that identifies critical issues for the sector.

ICAEW_Logo

The Audit Insights: Retail report from ICAEW’s Audit and Assurance Faculty highlights three flags for the retail sector as seen from an auditors’ point-of-view. These are:

  • underdeveloped IT and data management systems, which makes it difficult to get a proper understanding of profit drivers and manage working capital;

  • the changing retail landscape’s impact on retailers’ management of their property portfolio and understanding of value of store sales compared to online sales; and

  • lack of consistency in producing the sector’s key performance indicators.

Julie Carlyle, a member of the ICAEW working party that prepared the report and head of retail at Ernst & Young, said:

“Recent years have seen a seismic shift in how the retail sector operates, driven by changes in technology and consumer behaviour. Against the backdrop of a difficult economic climate, it continues to be a challenging time for retailers.

“Like-for-like sales figures are one key way of judging retailers’ performance. This key performance indicator gets a lot of attention, yet how it is prepared can vary. It is not always a reliable indicator of how a business is performing. While investors will understand that, the wider public may not appreciate it. Greater transparency around judgements made could benefit investors and a standard method for calculating like-for-like sales would create a far more reliable tool for decision making.

“The trend of heavy discounting has changed the relationship between sales data and profitability. More sales don’t necessarily mean higher profits. Sales volumes can be driven at the expense of profitability.”

The Audit Insights: Retail report also identifies some practical ways and benefits of enhancing retailers’ IT and data management systems and the challenges linked to managing property portfolios, resulting in onerous lease provisions, impairments of fixed asset, difficulty in assessing profitability across stores and cash flow.

The report is the first in a series of sector-specific reports to be published in 2013, aimed at making the expertise and insights of auditors – gained through their unique view of businesses of all types and sizes – available more widely without compromising client confidentiality. It summarises key issues auditors have identified and reported back on to audit committees and senior management in a way that has not been done before.

Charles Bowman, chair of ICAEW’s Audit and Assurance Faculty, said:

“This series of reports will allow a greater part of the public to benefit from the understanding and insights auditors have into their clients and the sectors in which they operate. Audit plays an important role in strengthening accountability, reinforcing trust and providing confidence in business through providing an independent opinion to shareholders on the truth and fairness of a company’s financial statements.”

Nigel Sleigh-Johnson Talks Convergence

By:
Published December 21, 2012, in Feature

ICAEW Convergence Global Accountant

The Future of IFRS report by the ICAEW urges the IASB to ‘end the era of convergence’. The accountancy body also suggests that all listed companies around the world should have the option of applying IFRS.

The development of a global set of accounting standards has, over the past decade, focused heavily on the convergence project between the IASB and the FASB of the US. However, ICAEW says it is now time to end the era of convergence, notwithstanding the lack of a joint solution in some key areas.

nigel-sleigh-johnson Global Accountant

Nigel Sleigh-Johnson
Head of Financial Reporting Faculty

Global Accountant asks Nigel Sleigh-Johnson questions about adoption of the reporting standards by companies worldwide.

Q1. Are international standards flexible enough to cope with all the differences of accounting principles and standards between countries?

Today well over 100 countries, including more than two thirds of the G20 countries, require or allow their listed companies to prepare their financial statements using IFRS or national standards based closely upon them. This fact alone is testament to the fact that IFRS is flexible enough to be used widely in diverse jurisdictions. Nonetheless, some people – including SEC staff – have questioned how consistently these jurisdictions are applying IFRS.

Ultimately it is impossible to write standards that please all of the people, all of the time

It is highly unlikely that we will ever see everybody around the world using IFRS as published by the IASB. It is inevitable that some countries will wish to amend or abridge the standards. Similarly, countries will sometimes feel the need to issue interpretations to enable international standards to be applied effectively within their own jurisdictions. This isn’t ideal. But we should not expect complete uniformity across the planet. It’s important to recall that as the use of IFRS has grown, financial information has become more transparent and more comparable. For international investors, in particular, the spread of IFRS reporting has been transformational.

Q2. SEC recently issued its Final Staff Report on IFRS and its work plan. One noticeable comment was the acuity of benefits which included investor readability of financial statements. However, the SEC did emphasise that it is critical that consistency is enforced. Are adequate regulatory and other supports necessary to ensure proper implementation of standards?

Once they have been developed, IFRSs need to be endorsed, implemented, audited and enforced on a globally-consistent basis. Robust enforcement is a critical aspect of good financial reporting. Without it, there will be no certainty that information reported under IFRS will be sufficiently reliable or comparable. But it is not the IASB’s job to enforce its standards. It needs more active support from regulators, including through IOSCO, as only they can ensure consistent and coordinated enforcement of the standards internationally.

Regulators around the world have an important role to play in the success of the IFRS project. They need to work together more closely to exchange information, share perspectives and experiences and ensure enforcement is consistent. In turn, the regulators need the clear support of G20 governments in this matter.

Q3. What will happen if the US does not adopt the standards in its entirety?

It appears unlikely that the US will adopt IFRS in its entirety. It is more likely that it will introduce some sort of endorsement mechanism whereby it incorporates individual standards into US GAAP on a case-by-case basis. But despite what some may suggest, this will not be a disaster for the IFRS project.

There does not, in any case, seem to be any evidence to suggest that the coalition of countries that supports IFRS will fall apart. Among the first wave of adopters – including the European Union, Australia, New Zealand and South Africa – IFRS has become the accepted language of accounting at least for listed companies, and in some cases, for many other companies. The benefits of improved comparability in their financial reporting are increasingly taken for granted. For them, and for many other jurisdictions, adopting US GAAP or returning to their old domestic GAAPs – which increasingly look as if they belong to a simpler, bygone age – are simply not realistic options.

Q4. What should companies be doing now?

Until the SEC makes a clear decision that would allow US domiciled registrants to adopt IFRS, there is perhaps little that US companies should do other than closely monitor developments. But switching to a new accounting framework will present businesses with considerable costs and short-term challenges.

  • Accounting policies need to be assessed and updated
  • Information systems need to be upgraded or replaced
  • Controls need to be redesigned
  • Employees need to be trained, and
  • Investors need to be educated

An ongoing awareness within the organisation about these future challenges when making business and accounting decisions may well ease the eventual transition.

Q5. ICAEW recently urged the IASB to “end the era of convergence and all listed companies around the world to be given an option to adopt IFRS”. Is having an “option” part of the problem?

No. In our view allowing major companies an option to adopt IFRS would be a way to aid comparability rather than reduce it. After all, over half of the Fortune 500 companies now prepare their financial statements using IFRS. Does requiring US registrants to use US GAAP really aid comparability if, in some cases, their key competitors around the world prepare their financial statements using IFRS?

Of course, some say that the transition will be challenging, while others say that businesses do not want to make the change because it will be too costly, especially given the economic uncertainty that prevails in much of the world. That’s one reason why we advocate at least giving companies the option to choose to use IFRS. We say: let the market decide. For now, where there are uncertainties about switching wholesale to IFRS, let companies assess for themselves whether the benefits of transition outweigh the costs.

For more information about COnvergence and IFRS download:

The Future of IFRS the report by ICAEW

 

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