You are on page 1of 44

International Financial

Reporting Standards
View s on a financial reporting revolution
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page FC1
Contents
O verview by Robert B ruce 3
The interviews
A ndrew Bonfield 10
M artin C ubbon 12
Tony G ood 15
C harles G rieve 18
Robert H erz 21
M ichael H ughes 24
Robert Koethner 27
Jeffrey Lucy 29
Jon Sym onds 32
Sir D avid Tw eedie 35
Zhang W ei G uo 39
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page IFC1
The pressure of regul ati on on busi ness 1
Forew ord
In 2002, the European U nion (EU ) chose International Financial
R eporting Standards (IFR S) as the com m on financial reporting
language for listed com panies from 2005. This radical step w as
one elem ent of the creation of a single capital m arket in Europe
and prom ised m ore com parable financial reporting across
Europe and increased transparency, leading to low er costs of
capital for com panies.
The EU ’s decision has been a catalyst for change and m any countries have chosen
also to adopt IFRS. O thers have pledged to converge w ith IFRS: Japan, C anada
and, m ore recently, C hina. Indeed, the w idespread adoption of, or convergence
w ith, IFRS is view ed by m any as the gatew ay to a single global set of financial
reporting standards, w ith easier access to global capital m arkets, including the U S.
In this publication, w e have asked a num ber of leaders in the fields im pacted by
the w idespread introduction of IFRS — standard-setters, preparers, users,
regulators and auditors — for their experience so far, and for their hopes and fears
for the challenges that rem ain.
M uch has happened since the EU chose IFRS:
•The IASB com pleted the “stable platform ”of standards for 2005 and
introduced interim standards in areas such as insurance w here long-term
projects could not be com pleted in tim e. They have also issued a num ber of
quick fixes to correct problem s identified w ith the stable platform .
•The EU gradually adopted the standards for use in the EU , in doing so ensuring
their translation into around 20 languages. It also decided that one elem ent of
financial instrum ent accounting (IAS39) need not be applied by EU com panies.
The adoption of new and am ended standards and interpretations continues.
•Preparers have invested significant tim e and effort to understand and apply the
requirem ents of IFRS. For m ost they represent a significant change, both in
term s of culture and specific requirem ents, from the national standards w ith
w hich they w ere fam iliar. M ost im portantly, preparers have been com m unicating
restated IFRS inform ation to the m arkets and explaining their im pact.
•U sers, notably analysts, have been preparing to interpret and analyse
unfam iliar IFRS inform ation — understanding restatem ents of 2004
inform ation, then interim s and now annual inform ation for 2005 year ends.
•Regulators identified the significant challenges that arise from the application
and interpretation of the sam e standards in different jurisdictions, requiring
international cooperation and co-ordination of a degree never before necessary.
Mike Rake
Chairman, KPMG International
Senior Partner, KPMG LLP (UK)
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page 1
Vi ews on a fi nanci al reporti ng revol uti on 2
•Auditors have been in the vanguard of turning a largely untested financial
reporting fram ew ork into a basis for financial reporting in m ore than 90
countries. In recent years, KPM G m em ber firm s have trained their professional
staff across the w orld and assisted m any com panies to m ake the transition to
IFRS. O ur m em ber firm s’interpretative guides, illustrative financial statem ents
and regular briefings are part of the developm ent of a shared understanding of
IFRS, essential to im proving the consistency of its application across the
w orld. This drive for greater cross-border consistency has required increased
international consultation and cooperation. A s identified by som e interview ees,
in the short term this m ay have increased the tim e needed to provide
guidance on som e of the m ore com plex technical issues.
The first financial statem ents prepared in accordance w ith IFRS in the EU and
elsew here are now available. B ut this is far from the end of the story: despite the
significant progress m ade, there are a num ber of difficult issues rem aining.
Even before financial statem ents prepared in accordance w ith IFRS first becom e
w idely available, IFRS continues to change. A significant influence on those
developm ents is the convergence project betw een the IASB and the U S Financial
Accounting Standards Board (FASB ). This convergence effort is also part of the
roadm ap to the elim ination of the U S Securities and Exchange C om m ission
(SEC )’s requirem ent for a reconciliation to U S generally accepted accounting
principles (G A A P) by EU com panies that apply IFRS as adopted by the EU .
C onsistency of application has also been identified as an im portant factor in the
elim ination of the reconciliation requirem ent. Expectations of consistency m ust be
realistic. Principles-based standards need to be applied by preparers and auditors
w ith integrity and judgem ent. Regulators w ill need to avoid second-guessing such
judgem ent, placing em phasis on an acceptable interpretation in every case; not
the sam e interpretation.
H ow ever, the com plexity of a num ber of the existing standards is a significant
barrier to developing consistency of application. Balancing continued convergence
w ith sufficient stability to allow consistency to develop is a m ajor challenge for
the IASB and regulators.
A s the IASB continues to develop new standards, constituents are debating
fundam ental issues concerning the future direction of financial reporting, for
exam ple the w ider use of fair value for the m easurem ent of assets and liabilities.
It is essential that constituents, particularly users and preparers, play a full and
active part in the future developm ent of IFRS.
Financial reporting has seen a period of unprecedented change. W e m ust all now
w ork to ensure that that change delivers the intended benefits to com panies and
investors. In the pages that follow , the thoughts of those that have experienced
that change first-hand m ay help us to do just that.
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page 2
Vi ews on a fi nanci al reporti ng revol uti on 3
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
O verview by Robert B ruce
The im plem entation in 2005 of IFR S as the reporting language
for all listed com panies in the European U nion and m any others
around the w orld has been the biggest revolution in the
accounting w orld for a generation.
B y m id-2006 w e w ill have m ost of the figures published and out for assessm ent
by investors, analysts and, perhaps m ost im portant, regulators. In the m eantim e
this report focuses on the experiences and thoughts of those involved in this
historic change. The view s expressed in this report com e from C FO s, from
regulators, from standard-setters, from analysts and auditors. They are draw n
from around the w orld. A t this critical tim e in the accounting w orld the ideas and
thoughts w ithin this report reveal how the accounting w orld is undergoing a
seism ic change. It show s how view s on the im plem entation issues have changed
sharply in only a short period of tim e. They reveal w orries about convergence of
standards around the w orld. They show how the vision of a com m on global
accounting language is being realised. A nd they provide a candid look at w here
this historic process m ay have taken us in five years’tim e.
Implementation fury reversed
Late in 2005 critics of the im plem entation process w ere at their m ost furiously
vocal at the height of the practical difficulties of introducing the new system .
N ow it looks as though those view s have been reversed just a few m onths later.
Probably m ost relieved at the soft landing post-IFRS im plem entations are the
standard-setters and regulators. ‘It is alm ost in the category of “beyond our
w ildest dream s”’, said Jeffrey Lucy, C hairm an of the Australian Securities and
Investm ents C om m ission. ‘IFRS has gone sm oothly. M any countries in A sia are
now focusing on adoption’. The C hairm an of the m ain U S standard-setter, Bob
H erz of the FASB, w as equally ebullient. ‘To m e it is an incredible event in the
history of accounting’, he said, ‘so m any countries, not just in Europe, adopting it
en m asse. I just tip m y hat to those w ho did it’. A nd the m an w ho oversaw so
m uch of the process, Sir D avid Tw eedie, C hairm an of the International Accounting
Standards Board, w as equally relieved and happy that the process had ‘gone
surprisingly w ell’. H e had been slightly taken aback by the am ount of criticism
from U K corporates in late 2005. ‘W hat surprised m e w as the U K getting grum py
w ith people thinking it w as all m ore involved than they had expected’, he said. B y
contrast he rather liked the approach taken elsew here. ‘In Australia, for exam ple,’
he said, ‘the approach is one of “decision-m ade, stop bitching, get on w ith it”’.
M ichael H ughes, G lobal H ead of Audit and partner in KPM G in the U K, w hile
m aking the point that ‘in the U K the process of im plem entation of IFRS has gone
better than expected’, also pointed to a positive w hich had em erged. ‘IFRS brings
m ore discipline and m ore rigour’, he said. Veteran analyst Tony G ood of the U K
Society of Investm ent Professionals drew on the sam e point. ‘It is quite
rem arkable w e haven’t had any disasters’, he said. ‘It has show n the strength of
the original U K G A A P as w e have transferred across to IFRS’. A m ore dow nbeat
Robert Bruce
Leading commentator on accounting,
financial reporting, corporate
governance and management issues
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page 3
Vi ews on a fi nanci al reporti ng revol uti on 4
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
view cam e from M artin C ubbon, G roup Finance D irector of Sw ire Pacific in H ong
Kong. H e w as unhappy about the end result. ‘It produces som ething w hich is
increasingly irrelevant to m anagem ent, investors and other stakeholders’, he said.
A nd he w orried about the process. ‘The IASB could have listened to a broader
range of view s and not been driven by w hat seem ed from the outside to be
academ ics from the profession’. Robert Koethner, C hief Accounting O fficer at
D aim lerC hrysler, m ight agree: ‘The rules need to be m ore practicable and m ore
acceptable for preparers’, he said. ‘Som etim es w e feel that they only com e up
w ith answ ers for the academ ics. W e need m ore focus on the preparers’.
Complexity becomes more understandable
There w as also strong debate about the issue of w hether the com plexity of IFRS
reporting had som ehow com prom ised the integrity or understandability of the
figures. O ne of the m ost respected C FO s on the circuit, Jon Sym onds of
A straZeneca, said that he thought that ‘there w as less scope for com m on-sense’.
In particular the treatm ent of intangibles gave him pause for thought. ‘It can lead
to som e very odd results’, he said. ‘You scratch your head over som e very
different answ ers. W e are publishing num bers w hich appear m ore com plex than
they really are and w hich do not com m unicate the underlying business’. O n the
other hand he thought the overall integrity of the figures w as im proved. ‘They are
m ore robust’, he said. C harles G rieve, of the Securities and Futures C om m ission
in H ong Kong, agreed. ‘Accounts are m oving tow ards telling the truth and the
w hole truth’, he said, ‘and the w hole truth is com plex’. H e thought the days of
easy num bers like traditional earnings per share num bers w ere over. ‘There w ill
no longer be easy num bers for people to look at’, he said. ‘B ut the figures w ill
rew ard study’. B ut M artin C ubbon w ould disagree. ‘W e need to report under
m ore m eaningful accounting standards w hich w e can all relate to’, he said. B ut
Bob H erz of FASB m ade a virtue out of the com plexity. ‘Som e of the com plexities
just reflect the com plexities of the com pany’s transactions’, he said. ‘The key is
not to dum b dow n the accounting. To keep the transparency you need to reflect
that com plexity in the accounting’.
Rules versus principles unresolved
The crucial issue as the process m oves forw ard is the attem pt to rein in the
tendency to revert to a rule-book rather than going for a principles-based system .
‘This is the big issue from now on’, said Sir D avid Tw eedie. ‘It is the big test. C an
people use judgem ent and can the regulators hold off?’The difficulties w ere
articulated by M ichael H ughes of KPM G in the U K.‘Som e regulators assum e
consistency w ill com e from judgem ents w hen inevitably judgem ents w ill produce
an elem ent of inconsistency’, he said. ‘They need to acknow ledge that absolute
consistency can only com e from a rules-based system ’. O ne of the regulators,
C harles G rieve in H ong Kong, sum m ed it up w ell. ‘People w ill chant the m antra of
principles w hile asking for ever m ore rules. W e are betw een the devil and the
deep blue sea’, he said. A nd the difficulties inherent in the U S approach w ere
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page 4
Vi ews on a fi nanci al reporti ng revol uti on 5
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
m ade clear by A ndrew Bonfield, C FO w ith pharm aceutical and healthcare giant,
B ristol-M yers Squibb. ‘Reducing the num ber of choices is alw ays the best w ay’,
he said. ‘H aving a good set of underlying principles, w hich is som ething w hich
the U K has alw ays had, helps. In the U S you have to drive around the rules and
they can trip you up. Som e of the principles w hich underpinned U K accounting
w ere m uch better’. ‘C om ing from a principles-based Europe I feel w e are better
off’, said Robert Koethner of D aim lerC hrysler. ‘IFRS are international and have to
apply internationally. The principles-based approach is the right one’.
Waiting for the SEC
The need for the U S regulator, the Securities and Exchange C om m ission, to com e
to a sw ift conclusion on the issue of reconciliation w as upperm ost in m ost
people’s m inds, in particular in the corporate sector. The ability of com panies w ith
a U S listing to file IFRS accounts w ithout going through the hoops of having to
produce further figures to com ply w ith the SEC requirem ent for agreem ent w ith
U S G A A P, w as agreed to be the real goal behind the IFRS im plem entation
process. ‘The critical step is in the attitude of the SEC ’, said Jon Sym onds. ‘They
have alw ays taken a legalistic view , form rather than substance. The SEC review s
w hich take place in the first half of 2006 w ill set the tone’. Sir D avid Tw eedie w as
optim istic: ‘The SEC has said that as long as they know and understand w hat w e
are doing and m oving tow ards then that w ill be enough for them ’, he said. ‘It w ill
m ean that the reconciliation w ill be gone by the end of 2007 or early 2008. It w ill
ease the burdens on com panies. People are fed up w ith constant change’. ‘O nce
w e can abandon U S G A A P throughout our organisation it w ill take aw ay a huge
burden w orldw ide’, said Robert Koethner of D aim lerC hrysler. ‘M utual recognition
w ould m ake life easier’, agreed M ichael H ughes of KPM G in the U K. Bob H erz of
FASB w as also optim istic. ‘O ne of the goals of the SEC staff is to be able to lift
the need for reconciliation betw een IFRS and U S G A A P for IFRS filers but only
after there is consistency’, he said. ‘They w ill need to be able to see w here there
is truth in the labelling. A nd so be sure that w here countries say they are using
IFRS they really are’, he said.
The downside of convergence
The issue of convergence, bringing financial reporting rules together around the
w orld, still creates doubts in the m inds of m any. There are easily identifiable
advantages. ‘The prize of a single global language is an im portant one and one
that’s w orth investing tim e to effect’, said Jon Sym onds of A straZeneca. ‘It’s a
m ajor step to im proving financial reporting’. Sir D avid Tw eedie has his eyes fixed
on the long view . ‘It rem oves an investm ent risk’, he said. ‘International investors
are terrified that they have m isread the accounting in em erging econom ies, for
exam ple. B ut providing the auditing and regulation is good then you can invest
easier — a m ajor risk has been rem oved’. B ut the doubts are clear. ‘I’m an
old-fashioned bean-counter’, said M artin C ubbon of Sw ire Pacific. ‘I do laud the
idea of com m on accounting standards across the w orld but not if it produces
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page 5
inform ation w hich the general public are unable to use’. Zhang W ei G uo, C hief
Accountant w ith the C hina Securities and Regulatory C om m ission, m ade the
point that: ‘N o m atter how high the quality of an accounting standard, there w ill
not be high quality and com parable accounting inform ation w ithout reasonable
and consistent interpretations, and strict enforcem ent’. Jon Sym onds identified
the real problem : ‘There should be relatively straightforw ard convergence
betw een U S and U K G A A P’, he said, ‘but w e have now got into conceptual
issues like perform ance reporting and fair values, for exam ple. A nd there are big
conceptual issues betw een w here the U S is and w here the IASB is trying to
travel to’. A nalyst Tony G ood agreed. ‘There is a real danger that w e could end up
w ith a set of standards w hich m ight satisfy neither FASB nor Europe’, he said.
A ndrew Bonfield, from his U S vantage point, looked to a w ider constituency.
‘C onvergence w ill help m ake the financial m arkets even m ore global though
there w ill be a m ore m arked effect on the m ore im m ature financial m arkets’, he
said. ‘It w ill help com panies in those m arkets becom e m ore recognised in
Europe and the U S’.
Concern over fair value
W hat m any people see as the creeping influence of fair values in the standards
cam e in for m uch criticism . ‘I do w ant to know w here the boundaries of fair value
are’, said Jon Sym onds. ‘It’s just theoretical nonsense at tim es’. M artin C ubbon
reflected a m ore straightforw ard objection. ‘W ho w ould have thought that
accountants w ould finish up valuing businesses’, he said. ‘That’s w hat stock
m arkets do’. Such doubts are underm ining support in the corporate sector. ‘I am
very uncom fortable about the continuous stream of papers about fair values’, said
Jon Sym onds. ‘I am not sure I w ant convergence if it has all that stuff in it’.
Uncertainty on interpretations: a ‘disaster’ for CFOs?
The dangers of standards being interpreted differently in different regim es w ere
highlighted. ‘This is a central issue at the heart of the IFRS project as it beds
dow n and m atures’, said M ichael H ughes of KPM G in the U K. ‘Regulators have
started to get involved in interpreting standards. The only people w ho set
accounting standards should be the standard-setters, and not auditors or
regulators’. Bob H erz of FASB argued for patience. ‘W ith so m any countries
adopting IFRS there are bound, for a w hile, to be different flavours. So there has
to be patience first and then bring it to resolution w ithin the set of principles’.
A nd Sir D avid Tw eedie urged people to avoid chasing their tails at this stage.
‘The changes that people now w ant are sm all’, he said. ‘B ut everyone w ants
different sm all changes. A nd w e can’t have endless changes. People w ould
becom e dem ented’, he said. Jon Sym onds of AstraZeneca took a strong line.
Looking at the situation of his colleagues in the financial services industry he said
that ‘com panies are im plem enting alm ost incom prehensible standards’.
‘A nd because there is no body of G A A P and no body of support they are finding it
difficult to interpret them ’. Partly he looked to the audit firm s. ‘The audit
Vi ews on a fi nanci al reporti ng revol uti on 6
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:32 Page 6
Vi ews on a fi nanci al reporti ng revol uti on 7
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
profession has been slow in interpreting the standards and has pushed everything
up to IFR IC (the interpretations com m ittee of IASB )’, he said. H e also felt that this
sort of behaviour w ould change the w orld of C FO s. ‘The m ore people w ant
interpretation the m ore rules w ill appear’, he said. ‘The IASB needs to resist the
m any things being pushed up to IFR IC . W e need to have accountability pushed
back to the C FO s to apply judgem ent. O therw ise w e w ill push judgem ent out of
the system . That w ould be a disaster, particularly for us because our entire
accounting careers have been based on: “You m ake the judgem ent”’.
Warning to regulators
The drive tow ards certainty puts regulators in an aw kw ard position. They need
certainty. B ut an over-zealous attem pt to create certainty w ould w eaken the IFRS
process. ‘The regulators need to understand’, said Sir D avid Tw eedie, ‘that they can
w reck this by dem anding restatem ents if a com pany m eets the principle by using
one m ethod w hile the regulator prefers another. People’, said Tw eedie, ‘need
certainty’. C harles G rieve in H ong Kong sum m ed it up. ‘Reputational dam age has
been so huge that everyone w ants certainty’, he said. ‘People on both sides of the
fence w ant certainty. B ut at the sam e tim e people have to deal w ith com plex
issues w hich dem and judgem ent’. The result, he thought, w as ‘a huge clam our for
m ore rules’. ‘The auditors w ant certainty in their application of the rules, as do
com panies. A nd the regulators w ant certainty so that w hen they have the guys up
against the w all they know they w ill be proved right. A ll three groups say they w ant
principles-based accounting and financial reporting but all of them prefer the easy
life and that m eans precise rules to get certainty’.
The role of auditors
Sir D avid Tw eedie of the IASB w as clear w hat the IFRS effect should be on
auditors. ‘It puts the onus right back on the auditors and the C FO s’, he said.
B ut som e doubted that this w as being achieved. A nalyst Tony G ood thought that
‘there w as a huge learning curve going on in the B ig Four them selves’leading to
delays in advice com ing back from audit firm s’technical departm ents. Jeffrey
Lucy in Australia, m eanw hile, believed that auditors had been ‘instrum ental in the
sm ooth adoption of IFRS’. H e m ade a w ider point. ‘W e need a consistent
approach to auditing’, he said. ‘W e need the highest standards consistently
applied around the w orld’. H is view w as that the B ig Four w ere ‘global in branding
but local in ow nership’. That, he said, ‘puts a strain on the efforts to provide
consistent auditing in all locations around the w orld’.
And what about investors?
IFRS provide m ore inform ation for investors. B ut it w ill be harder w ork extracting
the inform ation. ‘IFRS are com plex so users need to be pretty good analysts’, said
M ichael H ughes of KPM G in the U K. ‘For the w ell-trained analyst there is m ore
inform ation’. ‘It is the shock of the new ’, said analyst Tony G ood. ‘In tim e, for those
people w ho do sit dow n w ith accounts and think about w hat the figures tell them ,
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 7
Vi ews on a fi nanci al reporti ng revol uti on 8
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
the concerns w ill drift aw ay’. C harles G rieve agreed. ‘The inform ation is there to
serve the infrastructure w hich serves investors, though they m ay feel that it is
m uch harder w ork’, he said. A nd it w ill w iden the resources available to investors.
‘G lobal investing is often done by sectors’, said Bob H erz of FASB, ‘com paring
com panies in one part of the w orld w ith another. A global language for the
num bers enables that and reduces costs greatly’. A nd regulator Jeffrey Lucy in
Australia concurred. ‘IFRS w ill be m ore com parable around the w orld’, he said.
‘B ut it w ill take a little tim e for the investing public to adjust to IFRS results’.
‘Financial reporting is m ore com parable’, said Robert Koethner of D aim lerC hrysler,
‘B ut it m ight not be m ore understandable’. B ut Tony G ood added a proviso relating
to the w ork on the IASB ’s C onceptual Fram ew ork. ‘The prim acy of the ow ner is
being underm ined’, he said. ‘There is a hierarchy of users of accounts, from
investors, the ow ners, to em ployees and to a w ider society. B ut there has to be a
central focus and that has to be the ow ner. If you lose that then you lose the
focus of IFRS. You need a back-stop of the prim ary user. If that is lost then you
start getting som e very funny answ ers from the figures. W e are tip-toeing dow n a
path w ithout know ing w here w e are going’, he said.
The rising importance of narrative reporting
O ne w ay past im penetrable figures is to concentrate m ore on narrative reporting
like the O perating and Financial Review , (O FR ), in the U K and the M anagem ent
D iscussion and A nalysis in the U S. ‘The O FR w ill becom e m ore and m ore
im portant’, said Sir D avid Tw eedie of the IASB. ‘M anagem ent com m entary w ill
becom e critical for com panies w hen they say that, for exam ple: “W e have a
pensions deficit”and investors ask “W hat are you going to do about it?”
A detailed narrative explanation of actions to be taken is the answ er. The O FR
w ill becom e m ore and m ore im portant’, he said. ‘For global accounts’, said Jon
Sym onds, ‘you can’t encapsulate everything in the figures. You need the
accounts. B ut you also need the notes to the accounts, and the narrative, like the
O FR , or the m anagem ent discussion and analysis. You need all three. You cannot
understand it w ithout all three’.
What the future holds
O pinion w as divided but surprisingly optim istic about how the global financial
reporting arena w ould look in five years’tim e. For M ichael H ughes of KPM G it
w ould be: ‘C onvergence at a m ore sedate pace. IFRS bedded dow n and m utual
recognition’. Bob H erz of FASB agreed. ‘I’ll take an optim istic view ’, he said.
‘IFRS w ill be adopted in m any m ore countries. The issues w ill have been ironed
out. C onvergence w ill be substantially further along. A nd that m ay allow the SEC
to lift its reconciliation needs’, he said. ‘M y vision of w here w e w ill be in five
years’, said Robert Koethner of D aim lerC hrysler, ‘is that there w ill be one global
standard called IFRS w hich w ill be accepted w orldw ide. A nd that m eans in U S
G A A P territories and accepted by regulators, like the SEC , w ithout
reconciliations’. Jon Sym onds said that: ‘W e w ill have clarity in the direction in
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 8
Vi ews on a fi nanci al reporti ng revol uti on 9
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
w hich w e are going. B ut the dow nside is that w e could have both European IFRS
and U S IFRS and it is on a knife edge as to w hich w ay that w ill go’. C harles
G rieve in H ong Kong thought that ‘in the end, as w e all know , there is nothing
new under the sun. The sam e issues, like goodw ill, w ill be floating around and
being argued about’. M artin C ubbon of Sw ire Pacific thought ‘w e w ill still be in a
state of flux’. ‘M aybe Sir D avid Tw eedie w ill have com m on standards by then so
that at least w e can all be equally confused,’he said. It fell to Bob H erz to take a
longer view . ‘If you w ere to look back from the year 2020 to the year 2001 you
w ould say “W hat chaos!”and “W hat inefficient capital m arkets!”’, he said.
‘It w ill be like w e now say: “H ow did people get along w ithout cell-phones?”’.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 9
Vi ews on a fi nanci al reporti ng revol uti on 10
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
A ndrew Bonfield
A ndrew Bonfield is C hief Financial O fficer w ith B ristol-M yers
Squibb, the A m erican pharm aceutical and healthcare giant.
H e is also a non-executive director w ith B O C .
From his U S perspective A ndrew Bonfield describes the im plem entation of IFRS as
‘a non-event’. ‘N ot m any people have focused on it’, he said. ‘People here are
probably not aw are of w hat has been going on’. ‘B ut looking at it from the
standpoint of also being on a U K board at B O C , it has been a huge deal’, he said.
‘There has been a huge educational and training process. There have been a lot of
policy changes as a result and the im pact has been quite significant. B ut I am not
sure there has been a huge am ount of value added so far’, he said. ‘A t B O C , the
analysts are having to w ork off tw o different sets of accounts to understand the
operating perform ance due to the exclusion of joint ventures and associates’.
A s for the issues w hich surprised him during the process he m entions ‘em bedded
derivatives’. ‘They have been an issue for everybody’, he said. ‘They caused the
m ost anxiety and w orries’.
Pension problems
W ith hindsight he believes that several issues should have been handled
differently. ‘I think that som e of the changes had a m arginal im pact’, he said,
‘and I think one of the dangers is seeing the debate on pensions, for exam ple, get
to w here it is. It has created a societal problem w hich is not necessarily a reality.
W e’ve created publicity about a balance-sheet liability w hich m ay not be real,
as it is based on a discount rate w hich does not reflect the expected return on
equities. The consequence is that it has exacerbated the decline in defined benefit
plans w hile I am not sure the accounting is still that right.’
H e also thinks that the regulators did not help. ‘I think that having the
im plem entation of Sarbanes-O xley 404 (S-O 404) alm ost sim ultaneously w ith the
im plem entation of IFRS w as a real problem ’, he said. ‘So the regulators w ere not
very helpful there. The idea of a delay on im plem entation of S-O 404 should have
been recognised by the Securities and Exchange C om m ission earlier’. H e has
other w orries. ‘I think that the breakdow n betw een the assets and liability sides
of the balance sheet is an issue’, he said. ‘A nalysts w ill have to focus on cash
flow s to understand w hat is going on’.
H e is also forthright on the question of achieving the balance betw een arriving at
consistent interpretation w ithout producing too rigid a rule-book. ‘Reducing the
num ber of choices is alw ays the best w ay’, he said. ‘H aving a good set of
underlying principles, w hich is som ething w hich the U K has alw ays had, helps.
In the U S you have to drive around the rules and they can trip you up. Som e of
the principles w hich underpinned U K accounting w ere m uch better’.
“W e’ve created
publicity about a
balance-sheet liability
w hich m ay not be real.”
Andrew Bonfield
Chief Financial Officer,
Bristol-Myers Squibb
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 10
Vi ews on a fi nanci al reporti ng revol uti ons 11
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
Slow process for the US
A s for the effect of convergence Bonfield sees that as being largely in the hands
of the U S. ‘It all depends on w hen the U S gets m oving’, he said. ‘It w ill occur.
The C hairm an of FASB, Bob H erz, is very clear on this. B ut it w ill be very difficult
to m ove the U S aw ay from a detailed rules-based system . W e have been talking
about it for fifteen years. I think it is another ten years aw ay given the tim e it
takes to change accounting standards over here. The only thing w hich could
speed it up is if there is a real change of heart from both FASB and the Securities
and Exchange C om m ission’.
H e looks forw ard to the effects of convergence. ‘The effect of convergence w ill
be to produce m ore com parable operating results’, he said. ‘B ut m ost analysts
already get dow n to doing their ow n adjustm ents to achieve that. C onvergence
w ill help m ake the financial m arkets even m ore global though there w ill be a
m ore m arked effect on the m ore im m ature financial m arkets. It w ill help
com panies in those m arkets becom e m ore recognised in Europe and the U S’.
To the question of w hether financial reports are m ore understandable as a result
of the im plem entation of IFRS he has a very blunt answ er. ‘N o’, he says. ‘A n
em phatic “N o”. The biggest concern I have is that w e have disconnects. People
w ill increasingly be pushed tow ards cash flow . W hen you start having lots of
volatility in the profit and loss account, people w ill start to strip it out. It doesn’t
show the econom ic reality of how people m anage a business’.
Getting round the rules
O n the questions of w hether the figures have greater integrity now and w hether
or not investors are better served he also has doubts. ‘There w ere im provem ents
needed around off-balance sheet financing’, he said. ‘B ut that w as really about
reporting in the U S w here people designed w ays to get around the rules.
Technically, for exam ple, som e of Enron’s accounting w as correct. B ut things have
becom e harder to understand’. H e contrasts this w ith elsew here. ‘In the U K
financial reporting w as alw ays at a very good standard anyw ay’.
B y the year 2010 Bonfield thinks there w ill have been im provem ents. ‘W e w ill be
slightly closer to convergence’, he said. ‘B ut w e w ill still be talking about w hen the
U S w ill fully agree w ith all of IFRS. The process w ill w ork in the longer term ’, he
said, ‘but not until IFRS is a com prehensive set of financial reporting standards and
has everything that the U S has, w ill they just be able to m ove over’.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 11
Vi ews on a fi nanci al reporti ng revol uti on 12
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
M artin C ubbon is a practical m an. H e is G roup Finance D irector of
Sw ire Pacific in H ong Kong and is thus ultim ately responsible for
the oversight of the financial affairs of everything from the airline
C athay Pacific to the provision of C oca-C ola in seven provinces in
m ainland C hina. H is view s on IFRS are trenchant.
A s for the im plem entation of IFRS he feels that the process has ‘gone relatively
sm oothly’. B ut he expected that. ‘I have a large group of able and diligent
accountants to ensure that it goes sm oothly’, he said. It is the end result w hich
w orries him . ‘It produces som ething w hich is increasingly irrelevant to
m anagem ent, investors and other stakeholders’, he said. The cost of going
through the process w orried him as w ell.
The issues w hich he and his team encountered during the im plem entation
process didn’t surprise him . ‘M any of the m ore controversial issues w ere w ell
flagged in advance’, he said. B ut that didn’t prevent certain aspects of the
standards causing confusion and consternation. For exam ple although there are
no capital gains taxes in H ong Kong the new standards require property
com panies to provide deferred tax on property valuation gains. The net effect in
Sw ire Pacific accounts is an additional x billion dollars in deferred liabilities in
respect of a tax that does not exist. ‘W hy on earth are w e providing for it?’, he
asked. ‘N obody operating in H ong Kong can see quite w hy this should be. It is
nonsensical’. O ther H ong Kong groups have taken an audit qualification for
ignoring the accounting standard and producing w hat they feel are m ore sensible
figures. Sw ire Pacific chose not to follow that route. ‘W e took the stance that w e
should m ake clear our differences of opinion w ith the standard-setters but then
com ply’, he said.
Credibility problem?
W ith the benefit of hindsight he doesn’t think that m uch could have been done to
m ake the process different. ‘I am not sure hindsight w ould have helped’, he said.
‘B ut the IASB could have listened to a broader range of view s and not been
driven by w hat seem ed from the outside to be academ ics from the profession’.
C ubbon agreed w ith the intentions of the IASB but not the w ay it w ent about it.
‘C om m on global standards is a sensible goal to be targeting but it should not
com e at any price’, he said. ‘IFRS have a credibility problem now . The IASB clearly
doesn’t listen to corporate interests’.
The standard setting process is far from perfect, being dom inated by academ ics
and representatives of the profession w ho have the m ost to gain from ever m ore
com plex and difficult to com pile public accounts.
“I do laud the idea of
com m on accounting
standards across the
w orld but not if it
produces inform ation
w hich the general public
are unable to use.”
Martin Cubbon
Group Financial Director,
Swire Pacific, Hong Kong
M artin C ubbon
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 12
Vi ews on a fi nanci al reporti ng revol uti on 13
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
The w ider question of how you arrive at a consistent interpretation w ithout sim ply
creating a rigid rule-book takes C ubbon back to the basics of w hat he sees
accounts to be for. ‘I’m an old-fashioned bean-counter’, he suggested. ‘I do laud
the idea of com m on accounting standards across the w orld but not if it produces
inform ation w hich the general public are unable to use. M anagem ents of
corporates certainly don’t use it. So a parallel reporting system has to be created’.
W hile the significant (10 to14 percent) increases in audit fees is unw elcom e
enough it is the very significant increase in m anagem ent tim e required to
produce parallel inform ation that concerns him .
B ut C ubbon has a m ore fundam ental gripe: ‘I don’t think that the num bers in the
resulting accounts are right. U nder historical cost accounting the audit is relatively
straightforw ard, indeed “m atter of fact”w here you know w hat is m eant by true
and fair. U nder “fair value accounting principles”it gets m uch m ore subjective.
It is clearly creating enorm ous volatility in reported earnings. The product is inferior
and that’s a great sham e’. H e is philosophical. ‘In tim e I believe w e w ill com e full
circle and there w ill be changes’, he said. ‘M eanw hile w e w ill have created a few
years of significant distortion and needless com plexity’.
Cash is king
A s for the H oly G rail of a com m on global set of standards C ubbon agrees that
‘you have to say that it is closer’. ‘A nd that is a good thing as long as people take
the figures as credible. Investors w ill tell you they like the additional disclosures.’
H e sees no problem in additional disclosures, it is having to draw up accounts on
a fair value basis that concerns him . C ubbon takes a practical view . ‘I’d rather
have just cash-based accounts. M ost investors that I m eet say that it is cash
w hich m atters. A nd if not then w hat is w rong w ith historical cost accounts?
There are accounts draw n up from factual data w ith m uch less subjective
assessm ent required. It provides a level playing field’.
A s for the effects of convergence C ubbon says it is ‘too early to say’. ‘I hope one
day it creates a level playing field for capital allocation’, he said, ‘that results in
capital flow ing m ore easily across boundaries. B ut that day is a long w ay off for
m any other reasons’.
A s for the question of w hether financial reports are m ore understandable as a
result of IFRS C ubbon has only the one answ er: ‘N o’, he said. ‘The front section
of our annual report has got bigger as w e have had to explain our strategy and
perform ance in the context of data w hich is com prehensible. I seriously doubt
w hether investors are able to obtain a balanced view of perform ance based on a
review of the financial statem ents and notes thereto.’
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 13
Vi ews on a fi nanci al reporti ng revol uti on 14
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
C ubbon also feels that the IFRS process has had an effect on audit quality and
hence on the integrity of the figures and their use to investors. ‘I think that the
audit process has, at best, rem ained static’, he said. ‘The profession generally has
not invested enough tim e in audit quality and I feel that the audit process is not
as robust. Audit firm s have focused on the developm ent and interpretation of
com plex accounting standards w ithout giving enough thought to the interests of
the ultim ate user of the financial statem ents they audit — the investor’.
Coming full circle
A s for how the financial reporting scene w ill look in the year 2010 he hopes that
‘w e w ill have com e full circle’. ‘There needs to be a critical review of IFRS’, he
said. ‘W e need to report under m ore m eaningful accounting standards w hich w e
can all relate to. W ho w ould have thought that accountants w ould finish up
valuing businesses. That’s w hat stock m arkets do’.
B ut he thinks that ‘w e are 10 years aw ay from that’. ‘B y 2010 w e w ill still be in a
state of flux. M aybe Sir D avid Tw eedie w ill have com m on standards by then so
that at least w e can all be equally confused’.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 14
Vi ews on a fi nanci al reporti ng revol uti on 15
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
Tony G ood is C hair of the Accounting Advocacy C om m ittee of the
U K Society of Investm ent Professionals.
Tony G ood’s view is that the im plem entation of IFRS ‘has all gone relatively
sm oothly’. ‘The large cap com panies have alw ays been w ell on top of it and the
sm all cap com panies are getting there’, he said. For G ood the only surprise about
the im plem entation process w as that ‘there w eren’t m ore surprises’. C om paring
the view s of the sceptics beforehand w ith w hat actually happened is instructive.
‘It is quite rem arkable that w e haven’t had any disasters’, he said. ‘It has show n
the strength of the original U K G A A P as w e have transferred across to IFRS.
W e haven’t had any results w hich w ere significantly different or w hich w e didn’t
expect’. B ut w ith the eye of an analyst G ood does detect one ironic surprise.
‘C om panies w hich used to tell us that they ow ned their subsidiaries now tell us
that they don’t’, he said.
W ith hindsight G ood w ould have liked to have had the standards m ore secure
before im plem entation. ‘It w ould have been helpful if the standards platform could
have been m ore stable’, he said. ‘W e had the farrago of IAS39 running all through
the year’. H e also points to the instability of the EU ’s slow process of approving the
standards. ‘There w ere lots of changes m ade to the standards in 2005, but
because the EU ’s Accounting Regulatory C om m ittee hasn’t approved certain of the
IASB changes, technically EU -adopted IFRS m ay not be the sam e as w hat people
are im plem enting’, he said. ‘It is a tim ing issue. There is this lag in the process. The
IASB announces som ething in O ctober to be im plem ented in N ovem ber but in the
A RC and B russels the w heels grind very slow ly’.
Learning curve
‘It w ould also have helped’, said G ood, ‘if som e of the options available in
financial instrum ents had been m ore lim ited’. There w ould then have been less to
confuse people. H e also feels that the audit firm s w ere slow in their response to
the process. ‘There w as a huge learning curve going on in the B ig Four
them selves’, he said. ‘People w ere asking for advice and then suffering a huge
delay as it all w ent back to the audit firm ’s technical departm ent’.
H e also doubted how the balance betw een having consistent interpretations of
IFRS and not falling into the trap of producing too rigid a rule-book could be
m aintained. H is view is that w holly consistent interpretations w ere alm ost
im possible and w ould also allow the audit firm s too m uch pow er. ‘A re w e saying
w e w ant the B ig Four to have an even bigger stranglehold on the process to get
com m on standards around the w orld?’, he said. ‘W e m ay just have to accept
that, for exam ple, G erm an interpretations w ill be different to those in the U K.
A nd just hope that there is not too w ide a gap’.
TonyGood
Chair, Accounting Advocacy Committee,
UK Society of Investment Professionals
Tony G ood
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 15
Vi ews on a fi nanci al reporti ng revol uti on 16
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
The goal of global standards is also, he thought, som e w ay off. ‘If you sat in on
the roundtables on business com binations, for exam ple’, he said, ‘you found that
a lot of com panies thought that there w as too m uch happening and that FASB
w as having too m uch influence on the IASB. You got a real sense that the IASB
w as leaving its European constituency behind. A nd there is a real danger that w e
could end up w ith a set of standards w hich m ight satisfy neither FASB nor
Europe’. This w ould m ake life m uch harder and w ould fail to achieve the real goal
of the process. ‘If you end up w ith a set of standards w hich people are not
confident in then you w ill raise the cost of capital rather than reducing it.’H e feels
that there is a real danger that the process is becom ing one w here both sides in
any of the argum ents are talking at each other but no one is really listening.
H e felt the real benefits of convergence w ould be seen in countries w here there
had previously been less of a culture of high quality accounting standards. ‘There
is no doubt that in som e parts of continental Europe, for exam ple, people are
gaining m uch m ore confidence in the figures being produced’, he said. ‘A nd it is
helping m any other m arkets com e up to the standards that w e have been
w orking to and that has an undoubted benefit in low ering the cost of capital’.
Shock of the new
O n the other hand ‘the new inform ation can be confusing at first’, he said, and
financial statem ents are not readily m ore understandable. ‘It is the shock of the
new ’, he said. ‘In tim e, for those people w ho do sit dow n w ith accounts and think
about w hat the figures tell them , the concerns w ill drift aw ay’. A nd they are
learning of things w hich they had not realised before. ‘People are finding that there
w as a volatility in the figures w hich they w ere not aw are of previously’, he said.
A nd as for w hether the figures have a greater integrity now and w hether
investors are better served he certainly thinks this is so in both sophisticated and
less-sophisticated m arkets. ‘For com panies w hich had been operating under U K
G A A P, for exam ple, that is certainly the case’, he said. ‘There have been real
im provem ents. B ut there w ill also be real benefits elsew here in Europe.
Investors are undoubtedly better served by having a uniform set of high quality
accounts across the EU ’.
A s for the future, as an analyst he is w orried by som e fundam ental changes in
philosophy. ‘B y 2010 w e w ill have the new C onceptual Fram ew ork w hich the
IASB and FASB are w orking on. A nd that w ill m ean consequences w hich m ay
w ell m anifest them selves in the new standards by that tim e’. This is w here G ood
is m ost w orried. ‘The prim acy of the ow ner of the business is being
underm ined’, he said. ‘There is a hierarchy of users of accounts, from investors,
the ow ners, to em ployees and to a w ider society’, he said. ‘B ut there has to be a
central focus and that has to be the ow ner. If you lose that then you lose the
focus of IFRS. You need a back-stop of the prim ary user. If that is lost then you
“W e m ay just have
to accept that, for
exam ple, G erm an
interpretations w ill be
different to those in
the U K. A nd just hope
that there is not too
w ide a gap.”
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 16
Vi ews on a fi nanci al reporti ng revol uti on 17
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
start getting som e very funny answ ers from the figures’.This w orries him .
‘W e are tip-toeing dow n a path w ithout know ing w here w e are going’, he said.
H e w orries about this direction. ‘W hat is also getting lost is the stew ardship
concept. It needs to be m ade explicit rather than assum ing it is im plicit’, he said.
‘You are ending up w ith a theoretical construct for som ething people w ant to use
in a very practical w ay’.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 17
Vi ews on a fi nanci al reporti ng revol uti on 18
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
C harles G rieve is D irector, C orporate Finance w ith the Securities
and Futures C om m ission, the independent non-governm ental
statutory body responsible for regulating the securities and
futures m arkets in H ong Kong.
‘In H ong Kong the process of im plem enting IFRS w as sm oother than I had
expected’, he said, ‘w hich m akes m e w onder if there are som e surprises to
com e. W e m ay not have seen the end of it yet’. A nd that also w as the thing that
surprised him m ost about the process. ‘I w as expecting m ore problem s’, he said.
A nd then he com m ented on one existing problem w here, as a result of IFRS,
w hat w as seen as a safe and sleepy investm ent has been turned on its head.
‘In H ong Kong the application of the standard relating to investm ent property
com panies has m eant that they are now reporting hugely volatile earnings’. This
com es as a bit of a shock to those w ho saw such com panies as safe havens.
‘In the past property investm ent com panies tended to bring a stable incom e
stream but now they have to report volatile figures. It is not a surprise but it has
a real im pact on investors’.
Like m any he w ishes, w ith hindsight, that m ore tim e could have been found
for the im plem entation process. ‘There w as so m uch else going on, w ith
Sarbanes-O xley for exam ple, that m ore tim e w ould have helped’, he said.
‘N o tim e is ever the right tim e but the fact that IA S39 w as still being played
w ith late in the process didn’t help. A bit m ore thought and a bit m ore of a
stable platform w ould have been good’.
In H ong Kong the regulators have taken less of a position in the process than
elsew here. ‘In H ong Kong’, he said, ‘w e have very m uch left it up to the
accountants. W e don’t have a role in enforcing accounting standards or regulating
accountants. So w e haven’t helped or hindered. W e have been standing on the
sidelines. The H ong Kong Stock Exchange insists that com panies have to com ply
w ith accounting standards but they haven’t yet got a process to call people to
account’. That is now changing. ‘Legislation is now going through, in w hich w e at
the Securities and Futures C om m ission have been instrum ental, w hich should
provide a Financial Reporting Review Panel, w hich w e need’, he said. ‘B ut at the
m om ent H ong Kong is probably still like the U K years ago w hen all this w as left
to the accounting profession’.
Wanting certainty
G rieve feels that the w hole im plem entation process has stirred up the
argum ents over w hether a consistent interpretation is possible w ithout
producing too rigid a rules-based system . H e recalled his early career back in the
audit profession in the U K. ‘C lients used to show er accounts onto the table
saying “your firm allow s other clients to do this”. It w as the oldest of tactics — if
you auditors do not buckle and bend w e w ill take our audit elsew here’.
“People w ill chant the
m antra of principles
w hile asking for ever
changing rules. W e are
betw een the devil and
the deep blue sea.”
Charles Grieve
Director, Securities and
Futures Commission, Hong Kong
C harles G rieve
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 18
Vi ews on a fi nanci al reporti ng revol uti on 19
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
‘The auditing profession has not had enough backbone to stand up to clients’, he
said. ‘The audit profession is not strong enough and looks to rules to give them
backbone’. A nd there are the pressures brought about by the recent history of
corporate scandals, particularly in the U S. ‘Reputational dam age has been so
huge that everyone w ants certainty’, he said. ‘People on both sides of the fence
w ant certainty. B ut at the sam e tim e people have to deal w ith com plex issues
w hich dem and judgem ent’. It is difficult to see a solution. ‘There is a huge
clam our for m ore rules’, he said. ‘The auditors w ant certainty in their application
of the rules, as do com panies.’
‘A nd the regulators w ant certainty so that w hen they have the guys up against
the w all they know they w ill be proved right’. A nd this is the paradox w hich
G rieve has identified. ‘A ll three groups say they w ant principles-based accounting
and financial reporting but all of them prefer the easy life and that m eans precise
rules to get certainty’.
‘C om panies are struggling w ith com plex accounting issues and so they need
certainty. W e need to find a w ay for people to have the benefit of the doubt’. It is
hard to see a w ay out. ‘People w ill chant the m antra of principles w hile asking for
ever m ore rules. W e are betw een the devil and the deep blue sea’.
Big GAAP, Little GAAP?
H e thinks that w e are now closer to the goal of a set of global standards but he has
other doubts. ‘I think that w e w ill have tw o sets of standards. There w ill be B ig
G A A P and Little G A A P’, he said. ‘H ong Kong already has a Little G A A P w hich has
been form ally adopted and is a pragm atic w ay of dealing w ith sm all com panies’.
A s for convergence of U S G A A P and IFR S he is not sure how effective it w ill be
on the technical front. B ut he sees advantages elsew here. ‘It w ill provide cost
savings but the rule book for standards w ill be bigger’, he said. B ut the real
advantage w ill be in the change w hich w ill com e in looking at the figures across
industries and countries, particularly w hen using new technologies w hich
enable you to reform at and re-jig corporate inform ation to fit investor
requirem ents. ‘C om parability w ill get better’, he said. ‘I am a great fan of
eXtensible B usiness R eporting Language (XB R L). The process of com paring
inform ation w ill becom e easier’.
A nd are financial reports m ore understandable as a result of the IFRS process?
‘I think that in the sim plest sense the answ er has to be “N o”’, he said. ‘Accounts
are m oving tow ards telling the truth and w hole truth. A nd the w hole truth is
com plex. A nd things such as earnings per share, w hich w ere the hooks on w hich
people hung their analysis, w ill no longer be of m uch use. There w ill no longer be
easy num bers for people to look at. B ut the figures w ill rew ard study’.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 19
Vi ews on a fi nanci al reporti ng revol uti on 20
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
Integrity
H e feels that the figures under IFRS w ill have greater integrity. ‘The w orld has
becom e m ore com plex. Life is just m ore com plex’, he said. ‘Investors w ho w ork
at the figures, filtered through analysts’opinions, brokers’reports and press
com m ent, w ill be rew arded. The inform ation is there to serve the infrastructure
w hich serves investors, though they m ay feel that it is m uch harder w ork’. A nd
part of the reason it w ill be so m uch harder is not just because things are m ore
com plex. A s he put it: ‘There are too m any frolics in the accounting standards.
They are too academ ic, for exam ple, grossing up goodw ill for m inority interests.
It doesn’t get us anyw here. It is driven by theory rather than som ething w hich
serves the interests of the investor. They have got too tied up w ith the
theoretical basis of standards’.
As for the state of the financial reporting scene in 2010 he feels everything w ill
becom e m ore com plex by then. ‘I w ould hope w e w ould be closer to convergence
w ith the U S by then and that w e w on’t be still seeing reconciliations betw een
U S G A A P and IFRS’, he said. ‘I think that financial statem ents w ill becom e m ore
com plex’, he said, ‘along w ith perform ance reporting and all its com plexities.
So the story w ill be told in m ore shades of grey, w hich w ill be helpful to readers.
B ut I am afraid the rule-book w ill be bigger. It w ill be good hernia-inducing stuff.
A nd I w onder if som e of those issues, like businesses operating joint ventures for
exam ple, w here accountants already have problem s w ill still be a problem . It w ill all
becom e m ore and m ore com plex. A nd even sim ple businesses w ill be draw n into
m ore and m ore com plex financial reporting’.
This is w here he feels action could be taken. ‘W e w ill see a clear dividing line
betw een sim ple and com plex financial reporting. W e need to have a line.
O n one side you have the 3,000 page rule-book. A nd on the other side
som ething m uch sim pler’.
‘B ut in the end, as w e all should know , there is nothing new under the sun.
The sam e issues, like goodw ill, w ill be floating around and being argued about’.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 20
Robert H erz is C hairm an of the Financial Accounting Standards
Board, the U S standard-setting body.
H erz is full of adm iration for the IFRS project. ‘M y vantage point’, he said, ‘is one
w hich is not deeply im m ersed in the day-to-day im plem entation of IFRS. To m e it
is an incredible event in the history of accounting, so m any countries, not just in
Europe, adopting it en m asse. There has been hard w ork and som e apprehension.
It is hard to do som ething w hich involves so m uch change, particularly in certain
parts of the w orld w here, for exam ple, they m ay have been on a tax-based
system . I just tip m y hat to those w ho did it’.
H e thinks it is too early to say w hat surprises there m ay have been in the
process. ‘It seem s to m e w e w ill get a m uch better read on how it has gone
during the upcom ing audit season’, he said. ‘O nce auditors have to sign off then
that’s w hen things w ill com e out. That’s w hat happened w ith Sarbanes-O xley
over here’. H e is also w aiting to see w hat the m ain U S regulator, the Securities
and Exchange C om m ission, does. ‘The SEC staff intend doing a review of the
20F filings w hich com e through in m id-2006. Betw een 400 and 500 com panies
w ill be first-tim e filers under IFRS. The SEC staff w ill do a fairly robust review and
that w ill give us a good indication of how it has gone’.
H erz thinks that the regulators helped in the im plem entation process. ‘A num ber
of the regulators, including C ESR -Fin, (the C om m ittee of European Securities
Regulators group of financial reporting experts), are trying to help out in the sense
of “let’s see how the process goes”w hile not overstepping their m ark’, he said.
‘Its chairm an, John Tiner, has done w ell in trying to find the right balance. In a
m assive exercise like this it is hard to expect it all to be one-w ay traffic. B ut it has
been m ostly that w ay’.
Flavour test
The difficulty ahead w ill be trying to arrive at a consistent interpretation of IFR S
w ithout resorting to too rigid a rule-book system . ‘That is the real difficult
balance. N o doubt’, said H erz. ‘I think that C ESR -Fin is trying to say that, to the
extent that interpretations are needed, the first port of call ought to be IFR IC
and the IASB. A nd auditors can report w here differences are em erging. A nd it is
then up to IFR IC and the IASB to say w hat the principle is supposed to do.
B ut w ith so m any countries adopting IFR S there are bound, for a w hile, to be
different flavours. So there has to be patience first and then bring it to resolution
w ithin the set of principles’.
This is w here the SEC com es in again. ‘O ne of the goals of the SEC staff is to be
able to lift the need for reconciliation betw een IFRS and U S G A A P for IFRS filers
but only after there is consistency’, he said. ‘They need to be able to see w here
there is truth in the labelling. A nd so be sure that w here countries say they are
using IFRS they really are’.
Vi ews on a fi nanci al reporti ng revol uti on 21
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
Robert H erz
Robert Herz
Chairman, Financial Accounting
Standards Board
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 21
Vi ews on a fi nanci al reporti ng revol uti on 22
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
H e feels that the goal of a global set of standards is closer now . ‘It’s got to be
closer’, he said. ‘If you look at the situation five years ago and you look at it now
w ith a hundred countries participating, and see that countries such as C hina and
Japan are com ing in — nobody could have predicted w e w ould be here five
years ago’.
H e sees convergence as having a transform ing effect on the global investm ent
business. ‘I am a big believer in the idea that the processes around any m arket
should be supportive of that m arket’, he said. ‘A key piece of a global capital
m arket is a com m on accounting language. G lobal investing is often done by
sectors, com paring com panies in one part of the w orld w ith another. A global
language for the num bers enables that and reduces the costs greatly’.
A better view
O n the question of w hether financial reports are m ore understandable as a result
of IFRS H erz is pragm atic. ‘U ltim ately they are’, he said, ‘but it depends on w here
you are com ing from . If you com e from a country w ith tax-based accounting and
you introduce IFRS, w hich is investor-based, then it w ill be harder. B ut overall it
provides a m uch better view of the com pany’. D ifferent accounting cultures
produce their ow n contrasts. ‘If you start from the U K vantage point then there
are probably som e things that people w ould prefer to have kept from the past’,
he said. ‘B ut for vast sw athes of the w orld it is just better sets of reports’.
People also need to em brace rather than com plain about com plexity. ‘Som e of
the com plexities just reflect the com plexities of the com pany’s transactions’, he
said. ‘The key is not to dum b dow n the accounting. To keep the transparency you
need to reflect that com plexity in the accounting’.
H erz also suggests patience on the question of w hether the resulting figures w ill
have greater integrity and w hether investors w ill be better served. ‘I think w e w ill
have to see’, he said. ‘H aving a com m on accounting fram ew ork and m ore capital
m arket inform ation should serve investors better. B ut it depends on consistency
around the w orld and the quality of the auditing and how it is overseen. It is not
just a question of the accounting standards. It needs the other elem ents to w ork
as w ell’.
Positive future
‘I’ll take an optim istic view ’, he said in response to the question of w here w e w ill
be in 2010. ‘IFRS w ill be adopted in m any m ore countries. The issues w ill have
been ironed out. The convergence program m e w ill be substantially further along.
A nd that m ay allow the SEC to lift its reconciliation needs’. It w ill all take tim e.
‘N ot everyone w ill be on the sam e standards by 2010. It w ill be three or five years
m ore before that happens’.
“The key is not to
dum b dow n the
accounting. To keep
the transparency
you need to reflect
that com plexity in
the accounting.”
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 22
B ut H erz does feel that w e are in the m idst of a revolution and, as often happens
in such tim es, w e do not see clearly w hat is happening. ‘If you w ere to look back
from the year 2020 to the year 2001 you w ould say “W hat chaos!”and “W hat
inefficient capital m arkets!”’, he said. ‘People w ill look back and say, “H ow did
those people get along then?”It w ill be like w e now say, “H ow did people get
along w ithout cell-phones?”W hen you are in the m iddle of it, it is alw ays
difficult’, he said. ‘It is im portant just to keep on tow ards that end goal’.
Vi ews on a fi nanci al reporti ng revol uti ons 23
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 23
Vi ews on a fi nanci al reporti ng revol uti on 24
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
M ichael H ughes is G lobal H ead of Audit and partner at KPM G .
In his view the w hole IFRS im plem entation process has progressed w ell. B ut he
sees problem s ahead in the process of bringing about convergence of IFRS and
U S G A A P. ‘In the U K the process of im plem entation of IFRS has gone better than
expected’, he said. ‘There has been a huge am ount of effort by com panies’.
A nd he sees advantages ahead. ‘The proof of the pudding w ill be seen in early
sum m er of 2006 w hen people can, for the first tim e, properly com pare the full
IFRS statem ents from com panies. A nd inevitably there w ill be issues arising from
those results’. The picture is the sam e for com panies elsew here. ‘O verseas you
find that com panies have taken the process very seriously and have got to grips
w ith it’.
So far he sees ‘no huge surprises’in the im plem entation process. For him the
real surprise cam e a year ago. ‘It w as only in the last tw elve m onths that the
analysts and user com m unity really becam e involved in the process,’he said.
‘Their lack of interest and know ledge early on w as a surprise. B ut they are now
on top of w hat is going on’. A nd he thinks that the num bers w hich have so far
been revealed by com panies are in line w ith w hat he w as expecting. ‘I don’t see
any surprising num bers’, he said. ‘They have been pretty m uch in line w ith
forecasts’.
W ith the benefit of hindsight there are issues w hich he w ould prefer had been
dealt w ith differently. ‘O n the IASB front it w ould have helped, w ith hindsight,
if they had been m ore focused on a successful im plem entation in Europe rather
than being so focused on convergence w ith U S standards. It w ould have been
m ore helpful to have been pursuing m utual recognition rather than convergence
w ith the U S’. H e also feels that people rem ain concerned about the stability of
standards. ‘The IASB set out a “stable platform ”period during w hich com panies
w ere prom ised no changes in the standards. B ut it w as a very short period.
There is a need for a period of lim ited change and the IASB should have planned
a longer period w ithout change, m ost of w hich w as driven by the convergence
process rather than the process of im plem entation in Europe’.
Need for debate
H e also felt that the IASB needed a different em phasis. ‘The IASB should have
been focused on better guidance’, he said. ‘The IASB needs to be focused on
w here there are problem s w hich need to be sorted. For exam ple pensions need
to be looked at. B ut w hen you look at the issue of business com binations it is not
clear w hat problem s there are w ith the existing rules’. H e w ould like to see m ore
discussion of the rationale behind changes. ‘There ought to be a w ider debate on
the need for change’, he said. ‘If the only reason for changes being proposed is
the convergence program m e then I think it should be looked at again’.
“You need to
have acceptable
interpretations w hich
w ork for both the
principles of IFRS and
the principle of ‘true
and fair’.”
M ichael H ughes
Michael Hughes
Global Head of Audit and partner,
KPMG in the UK
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 24
H is other issue is interpretation. H e sees the insistence by regulators on
consistent interpretation as ham pering the process. ‘There is a difference
betw een judgem ent and principles and a rules-based system ’, he said. ‘Som e
regulators assum e consistency w ill com e from judgem ent w hen inevitably
judgem ents w ill produce an elem ent of inconsistency. They need to acknow ledge
that absolute consistency can only com e from a rules-based system and that such
a system brings w ith it bigger problem s.’
Regulators, he thinks, have both helped the process and been less than helpful.
‘It is a bit of both’, he said. ‘C ESR has been helpful. B ut som e of the com m ents
around interpretation have been less helpful’. This is a central issue at the heart of
the IFRS project as it beds dow n and m atures. ‘Regulators’, he said, ‘have started
to get involved in interpreting standards. The only people w ho set accounting
standards should be the standard-setters’, he said, ‘and not auditors or regulators.
You could end up w ith different interpretations in different countries’. H e thought
there w as a need for m ore dialogue. ‘Regulators need to talk to each other m ore.
This is a key issue over the com ing years.’
Acceptable interpretation
There is also the question of how the balance betw een consistent interpretation
and an over-reliance on rules is m aintained. ‘You have to recognise that there w ill
be genuine differences in interpretation’, he said. ‘You need to have acceptable
interpretations w hich w ork for both the principles of IFRS and the principle of
“true and fair”’, he said. ‘W e need to ensure that there are acceptable
interpretations and w e need to have m ore focus on elim inating unacceptable
ones. IFR IC has not been as effective as it could have been. It needs m ore
resources’. B ut there w ill be help from the evolution of the process. ‘Peer
pressure w ill help’, he said. ‘In 2005, w ithout the full figures com ing through,
w e saw no peer pressure com ing through. B ut in 2006 that w ill begin to happen
as discussions occur w ithin both industry and the analyst com m unity’.
H ughes thinks the goal of global standards ‘is closer’. ‘W e have now m oved to
the position w here there are tw o w idely accepted system s, IFRS and U S G A A P,
instead of dozens of them . W e are clearly closer’. For H ughes this m eans that
further progress should be steady but careful. ‘M oving forw ard the im m ediate
goal should be m utual recognition rather than convergence’, he said. ‘M utual
recognition results in elim ination of the disliked reconciliation. M utual recognition
w ould m ake life easier and achieve m ost of w hat you w ant. A nd then w e could
m ove tow ards convergence at an easier pace’.
For H ughes this is the key. If you ask him w hat the effects of convergence w ill be
he is clear: ‘Probably m ore rules’, he said, ‘and that is the challenge’. It is com plex.
‘There are a lot of reasons w hy international financial reporting standards are the
Vi ews on a fi nanci al reporti ng revol uti ons 25
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 25
Vi ews on a fi nanci al reporti ng revol uti on 26
w ay they are and U S G A A P is as it is. If convergence is the be-all and end-all
then w e w ould m ove tow ards m ore rules’.
So are financial reports m ore understandable as a result of the process w e have
been through? ‘It depends w here you start from ’, he said. ‘Lots of countries are
m oving tow ards IFRS and for m any countries it gives people a lot m ore
inform ation. B ut IFRS are com plex so users need to be pretty good analysts’.
It is the com plexity w hich has raised the level of entry to understanding. ‘For the
w ell-trained analyst there is m ore inform ation’, he said.
A nd the answ er to w hether figures have a greater integrity now and w hether
investors are better served is the sam e. ‘Again, it depends on w here you start
from ’, he said. ‘KPM G International Financial Reporting G roup did a survey of
analysts’view s. That show ed that m ore analysts felt they w ere up to speed but it
also show ed that the positive view s about IFRS producing better inform ation
w hich the corresponding survey of a year before had show n had been diluted.
B ut w here they agreed w as that greater com parability w as an im portant gain’.
This is the im portant result of the IFRS process. ‘IFRS brings m ore discipline and
m ore rigour’, he said. ‘C om panies say that if IFRS continue to base them selves
on econom ic realities then they look at their ow n businesses differently and it
helps them m anage them selves better. C om panies need to feel the figures are
equally relevant for decision-m aking’.
Future views
Looking ahead to w hat financial reporting m ay look like in 2010, H ughes
suggested that there w as a benign view of the future and a less benign view .
The less benign view is that: ‘If w e m ove rapidly to convergence w ith U S G A A P
then by 2010 w e w ould be just about there. B ut it w ould be a m uch m ore
rules-based system w ith a very active interpretations body w hich w ould
effectively be setting m ore rules w ith greater regularity and it w ould be the
SEC w hich people w ould have to listen to’.
The benign view for 2010 w ould be: ‘C onvergence at a m ore sedate pace.
IFRS bedded dow n and m utual recognition’, he said.
A sked to choose betw een his tw o projected scenarios he said: ‘I don’t know
w hich of these w e w ill finish up w ith. There m ay be a w ind of change over
convergence. I m ight tend now tow ards the benign view ’.
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 26
Vi ews on a fi nanci al reporti ng revol uti ons 27
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
Robert Koethner
Vice President for Accounting, Planning
and Reporting and Chief Accounting
Officer, DaimlerChrysler
Robert Koethner is Vice President for Accounting, Planning and
Reporting and C hief Accounting O fficer at D aim lerC hrysler for the
group as a w hole. ‘A t D aim lerC hrysler’, he said, ‘w e don’t have to
file IFRS statem ents until 2007, under the G erm an w aiver. B ut if
w e w ere to file there w ould certainly be som e pressures on us’.
H is view on how the im plem entation of IFRS has gone elsew here is that ‘overall,
from a preparer’s view , it has been a little bit too slow and a bit theoretical’. H is view
is m ore concerned at present w ith U S G A A P and the w hole area of reconciliation
and convergence of rules. ‘As U S filers w e still have to follow U S G A A P currently
and apply it throughout our w orldw ide organisation’, he said. ‘There are only a few
differences w hich have a significant im pact on us. A nd the differences have to be
explained to the financial com m unity’. This is a lengthy and com plicated business.
‘W e are really looking forw ard to the im pact of the actions of FASB and the IASB
as w ell as the SEC and hoping that they w ill be able to converge quickly. There is a
huge im pact on costs if w e have to follow tw o sets of standards. W e closely
m onitor the SEC approach to accepting IFRS’, he said. ‘W e hope the SEC w ill
elim inate the need for reconciliations. O nce w e can abandon U S G A A P throughout
our organisation it w ill take aw ay a huge burden w orldw ide. It is’, he concluded,
‘a cost issue. W e do desperately look to convergence’.
Academic accounting?
Looking back w ith hindsight at the IFRS im plem entation process Koethner w ould
have liked the outcom es from the IASB to have been different. ‘The rules need to
be m ore practicable and m ore acceptable for preparers’, he said. ‘Som etim es w e
feel that they only com e up w ith answ ers for the academ ics. W e need m ore
focus on the preparers. A nd w e need m ore field studies prior to the effectiveness
of IFRS accounting rules in order to prove the practical feasibility’.
H e felt that the regulator com m unity helped the process in tw o areas. ‘W here
they clearly helped w as in the m utual agreem ent on convergence betw een FASB
and the IASB ’, he said. ‘A nd the IASB helped w ith its freeze on new standards’.
B ut perhaps m ore significant than either, he thought, w as ‘the recent
com m itm ent from the C hairm an of the SEC that they w ill elim inate the need for
reconciliation’. B ut he still feels the frustration w hich is com m on in the corporate
w orld and that of the preparers over the speed at w hich such proposals com e.
‘It is rather late’, he said.
The question still rem ains of how w e can arrive at consistent interpretation
w ithout producing too rigid a rule-book. ‘It is a very tricky question’, he said.
‘I think w e have to find a w ell-balanced w ay betw een principles-based accounting
rules and the m ore rigid cookbook-recipe accounting on the other side. C om ing
from a principles-based Europe I feel w e are better off. IFRS are international and
have to apply internationally. B ut every jurisdiction has its peculiarities. A nd there
Robert Koethner
“O nce w e can abandon
U S G A A P throughout
our organisation it
w ill take aw ay a huge
burden w orldw ide…W e
do desperately look to
convergence.”
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 27
Vi ews on a fi nanci al reporti ng revol uti on 28
you need som e rigid interpretations’. For Koethner there is one fundam ental
benefit. ‘The principles-based approach is the right one to com e from ’.
Speaking the same language
A s to w hether the goal of a global set of standards is closer now or further aw ay
Koethner has no doubt. ‘It is clearly closer’, he said. ‘The EU requirem ent to
apply IFRS for 2005 is certainly som ething w hich has helped IFRS into the global
w orld. It helps if everybody speaks the sam e language. A nd as Europe is a m ajor
player in the global econom y it helps other countries and the w orld w ith IFRS’,
he said. ‘Through this m andatory introduction certain dynam ics have started.
A nd that has helped the IASB in gaining m ore ground’.
H e sees the eventual effect of convergence as being very clear. ‘C onvergence
w ill help to spread out IFRS m ore globally’, he said. ‘There w ill be a w ider
acceptance by countries w hich historically have a close affinity w ith U S G A A P.
O ne com m on language is a very positive thing’.
A s to w hether financial reports are m ore understandable as a result Koethner
has a tw ofold answ er. ‘Financial reporting’, he said, ‘is m ore com parable but it
m ight not be m ore understandable. Today w e have m any detailed standards
that try to regulate highly com plex business transactions. The higher degree of
com plexity boost costs of staff, IT system s and related processes and it is also
harm ful to the understandability. This is particularly true for sm aller and
m edium -sized entities’, he said. ‘W e have to m ake sure that in the end w e
balance the com plexity on the one side w ith the understandability and decision
usefulness’, he said. ‘Financial reporting is supposed to be for the norm al
investor and not just for experts’.
Better for investors
Follow ing on from this Koethner w ondered w hether the figures have greater
integrity now and w hether investors are better served as a result. H is answ er
w as that ‘in general the figures have a greater integrity through having one
com m on language and that is better for investors than having different G A A Ps’.
Looking to the future he w as optim istic. ‘M y vision of w here w e w ill be in five
years’tim e is that there w ill be one global standard called IFRS w hich w ill be
accepted w orldw ide’, he said. ‘A nd that m eans in U S G A A P territories and
accepted by regulators, like the SEC , w ithout any reconciliations being
necessary. IFRS should be the accepted high-quality standard’.
H e saw other developm ents ahead. ‘In financial reporting there w ill be m ore
future-oriented reporting involving forw ard-looking statem ents’, he said. ‘The
investors and the analysts w ill ask for m ore online data from financial reporting,
for exam ple filing under the XB R L system . A nd financial reporting w ill be a lot
quicker. The availability and transparency w ill be there’.
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 28
Vi ews on a fi nanci al reporti ng revol uti on 29
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
Jeffrey Lucy is C hairm an of the Australian Securities and
Investm ents C om m ission, the Australian regulator and enforcer of
com pany and financial services law s.
H e firm ly believes that the im plem entation of international financial reporting
standards has gone w ell. ‘O ur focus’, he said, ‘is on the Australian scene and
from that standpoint it’s gone extrem ely w ell’. Responsibility for oversight of
accounting and auditing standards lies w ith the Financial Reporting C ouncil (FRC ),
an arm of the Australian G overnm ent. ‘The FRC in Australia’, said Lucy, ‘m oved to
adopt IFRS and there w as w ide support for that decision though there w as som e
anxiety about the readiness of the standards’. B ut Australia, perhaps feeling the
distance from other investm ent m arkets, had better reasons than m ost to
support the m ove to IFRS. ‘W e w ere m otivated by the need for a com m on
accounting language’, said Lucy. ‘W e needed to ensure that our m ajor com panies
w ere not going to be disadvantaged’. H e also praised the participants.
‘C om panies and auditors have had to do a lot of w ork so that they w ere ready’,
he said.
The process has gone w ell. There w ere, he said, no surprises. A nd that, in a w ay,
w as alm ost a surprise. ‘I w ouldn’t rate it as a surprise’, he said. ‘B ut as a
regulator w e expected som e com panies to have m ore difficulties at, for exam ple,
the audit com m ittee level, finance director level or at the audit level. B ut
everyone has responded to the challenge and I am very pleased at the w ay
Australian corporates have m et those challenges’.
No regrets
A nd w ith the benefit of hindsight Lucy reckons that there is little he w ould have
changed. ‘I don’t think Australia has any regrets’, he said. ‘O ur tim ing has proved
to be appropriate. If I had our tim e over again I don’t think w e w ould have done
anything differently. Australia has a proud tradition of having our ow n accounting
standards. W e continue to have our ow n Australian Accounting Standards Board
and it is im portant that they continue in their w ork and in liaising w ith D avid
Tw eedie and his w ork at the IASB ’.
Part of the reason for the successful initial im plem entation has been the w ork of
the regulators. ‘W e have helped the process’, said Lucy. ‘Both m yself and the
C hairm an of the FRC w rote to corporate Australia to rem ind them of their
responsibilities. In Australia accounting standards carry the force of law .
O ur com m unications rem inding the corporates of the im portance of early and
accurate adoption have been the catalyst w hile the profession and the m ajor
audit firm s have played a big part. They are highly trained and highly skilled and
instrum ental in the sm ooth adoption of IFRS’.
J effrey Lucy
Chairman, Australian Securities and
Investments Commission
Jeffrey Lucy
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 29
Vi ews on a fi nanci al reporti ng revol uti on 30
H e sees the conundrum of producing consistent interpretation of IFRS w ithout
also producing too rigid a rule-book as being ‘the big question’. ‘W e can’t look at
that in isolation’, he said. ‘W e have to take account of Europe and its tim etables
and the grow ing convergence betw een U S G A A P and IFRS. C om m issioner
M cC reevy of the European C om m ission has said forcibly that he doesn’t w ant
restatem ents. A nd I have taken that m essage back to Australia. W e are only just
getting into this’. The problem is that the easy route for regulators w ould be to
pull in a large num ber of accounts and ask for them to be restated in an effort to
show publicly that the regulators w ere on top of their job. B ut it w ould not m ake
life any easier and investors could be harm ed.
Global consideration
‘I do not anticipate any regulatory response’, said Lucy. ‘B ut the question of
restatem ent or not is a difficult question. You could fall into a default position of
restatem ent but that is not going to assist investors. It needs to be considered
around the w orld’. O ne route is to have a separate financial reporting review
panel, as exists in the U K, and Australia is follow ing that exam ple. ‘W e have
legislated in Australia to introduce an FR R P very m uch along the lines of the
U K one’, said Lucy. ‘W e have been very im pressed w ith how the U K FR R P has
w orked and w e are optim istic that it w ill be of positive assistance’.
H e thinks that the overall goal of a global set of standards is ‘w ithout question
m uch closer’. ‘It is alm ost in the category of “beyond our w ildest dream s”’, he
said. ‘IFRS has gone sm oothly. M any countries in A sia are now focusing on
adoption. The necessity for reconciliation of accounts w ith the U S w ill be gone
by som etim e betw een 2007 and 2009’. H e is happy.
A s for the effects of IFR S in Australia so far they have been benign and caused
no stock m arket alarm . ‘R esearch suggests that corporate profits w ill increase
by six percent across our top 100 com panies’, he said. ‘C hanges in the
treatm ent of goodw ill and intangibles have had a profound effect on balance
sheets. B ut there have been no panics. O ne com pany announced a significant
w rite-dow n to the stock m arket and its price w ent up. A ll of this doesn’t affect
the value of a com pany and once the initial year of adjustm ents is over w e
expect sm ooth sailing’.
A s for the understandability of accounts: ‘You w ould have to say at this point in
tim e there isn’t the sam e level of fam iliarity as there has been w ith Australian
G A A P’, he said. ‘IFRS w ill be m ore com parable around the w orld. B ut it w ill take
a little tim e for the investing public to adjust to IFRS results’.
This is a far m ore im portant point in Australia than it is in the U K, for exam ple,
w here direct investing by m em bers of the public is com paratively low .
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
“You could fall into a
default position of
restatem ent but that is
not going to assist
investors. It needs to
be considered around
the w orld.”
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 30
‘O ver 50 percent of Australians have a direct interest in shares’, Lucy pointed out.
‘In that w e are very sim ilar to the position in the U S’, he said. ‘It is very healthy’.
For Lucy the point about the effect of IFRS on the investing public, w hich his
regulatory body is there to protect, is com parability. ‘C om parability is now the
key’, he said. ‘So our investors are better served. A nd anything w hich low ers the
cost of capital is to the advantage of the Australian com m unity’.
Room for optimism
A s for how the financial reporting scene w ill look by the year 2010 he is
optim istic. ‘W e m ight w ell be looking back at this period w ith a level of pride’, he
said. ‘The accountancy profession has show n itself to be adaptable. B y 2010 the
w hole process w ill have bedded dow n. W e should have a com m on accounting
language and hopefully the new standards w e need w ill be there on the shelf to
be used’.
The key to achieving these goals lies w ith the auditing profession and the big
firm s. ‘W e need a consistent approach to auditing’, he said. ‘W e need the highest
standards consistently applied around the w orld’. This requires the resolution of
the biggest issue w ithin the B ig Four. ‘They are global in branding but local in
ow nership and that puts a strain on the efforts to provide consistent auditing in
all locations around the w orld’.
‘W hile w e have truly international com panies, the Shells and B Ps of this w orld,
w e don’t have international accounting firm s’, he said. ‘They are separate
partnerships and separate country-by-country firm s. For B P, for exam ple, w hoever
the auditors are, they are in a different firm w herever they operate. The auditing
profession needs to reflect on this’. In part these differences are forced upon the
auditing firm s by, for exam ple, the threat of liability, but Lucy feels that despite
this the corporate clients of the firm s increasingly are let dow n by the lack of truly
global consistency. ‘In the absence of a consistent global approach to liability the
idea of truly global partnership is a w ay aw ay. B ut corporates do require it’.
Vi ews on a fi nanci al reporti ng revol uti on 31
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 31
32 Vi ews on a fi nanci al reporti ng revol uti on
Jon Sym onds is C hief Financial O fficer w ith A straZeneca. A s far as
he is concerned the im plem entation of IFRS has ‘gone pretty
w ell’. Though he then qualified the rem ark. ‘For us the education,
the planning and the im plem entation w ork w ent very sm oothly.
B ut w e didn’t have any exposure to the standards on financial
instrum ents, like IAS39’.
‘The point to em phasise’, he said, ‘is that if you are w ell prepared and have
planned w ell it shouldn’t be a difficult project’. B ut he understands w hy people in
other industries are com plaining. ‘There are com plicated parts to the standards.
People in financial services com panies are im plem enting alm ost incom prehensible
standards. A nd because there is no body of G A A P and so no body of support they
are finding it difficult to interpret them ’. H e felt that the audit profession had not
been as m uch help as it could have been. ‘The audit profession has been slow in
interpreting the standards and has pushed everything up to IFR IC ’, he said.
H e encountered no surprises in the course of A straZeneca’s im plem entation
program m e. ‘Som e things w ere m ore difficult than I had expected’, he said, ‘but
w e haven’t had any surprises. W e decided that our hedging w as not
econom ically necessary and w e stopped it before im plem entation. W e didn’t
w ant to get involved w ith IAS39’.
W here there w ere difficulties they w ere in sim ple understanding of the
reasoning behind the standards. ‘Som e things w ere m ore m echanical than you
w ould hope. There w as less scope for com m on sense’, he said. A nd being in the
pharm aceutical business w ith a m ass of patents and intellectual property issues
there w ere som e particular concerns. ‘W e spent a lot of tim e getting to grips
w ith the treatm ent of intangibles’, he said. ‘It can lead to som e very odd results.
You scratch your head over som e very different answ ers. W e are publishing
num bers w hich appear m ore com plex than they really are and w hich do not
com m unicate the real underlying business’.
Theoretical nonsense?
Sym onds feels that there are also m ore serious issues w hich have still not been
properly debated and, w ith hindsight, should have been. ‘The debate w e are
m oving tow ards is one w hich should have happened before’, he said. W hile, on
the surface, convergence of the standards should have been relatively easy they
have becom e blurred by the introduction of other, extraneous, com plications.
‘There should be relatively straightforw ard convergence betw een U S and U K
G A A P’, he said, ‘but w e have now got into conceptual issues like perform ance
reporting and fair values, for exam ple. A nd there are big conceptual issues
betw een w here the U S is and w here the IASB is trying to travel to’. For
Sym onds such unresolved issues are not leading to sensible solutions.
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
J on Symonds
Chief Financial Officer, AstraZeneca
“W e need to have
accountability pushed
back to the C FO s to
apply judgem ent.”
Jon Sym onds
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 32
‘I do w ant to know w here the boundaries of fair value are’, he said. ‘It’s just
theoretical nonsense at tim es’.
H e is also biding his tim e on how far regulators have helped or hindered the
w hole process. ‘I don’t know yet’, he said. ‘The SEC review s w hich take place in
the first half of 2006 w ill set the tone. If they say: “H ow have you applied the
principle?”then w e w ill know that things have changed. If it is: “W hat about line
y in paragraph x?”then w e w ill be on the road to rules again. The critical step is
in the attitude of the SEC . They have alw ays taken a legalistic view , form rather
than substance’. For Sym onds this w ill be the biggest test of w hether the change
to IFRS w ill have w orked.
Philosophical debate
The other test w ill be the balance betw een gaining consistent interpretation
w ithout producing too rigid a rule-book. ‘It is alm ost a philosophical point’, he
said. ‘The m ore people w ant interpretation the m ore rules w ill appear. The IASB
needs to resist the m any things being pushed up to IFR IC , the interpretations
com m ittee’. For Sym onds there is a need for judgem ent at a corporate level.
‘W e need to have accountability pushed back to the C FO s to apply judgem ent.
O therw ise w e push judgem ent out of the system . That w ould be a disaster,
particularly for us because our entire accounting careers have been based on:
“You m ake the judgem ent”’.
O n the assessm ent of w hether the goal of a global set of standards is closer
now or further aw ay he is undecided. ‘I hesitate to say “further aw ay”’, he said,
‘because I don’t w ant to be in that cam p. B ut I am genuinely concerned, for
exam ple, about the direction of the issue of business com binations. There are now
principles in there w hich have not been debated. A nd I am very uncom fortable
about the continuous stream of papers about fair values. I am not sure I w ant
convergence if it has all that stuff in it’.
In particular he is disturbed by the m ove tow ards the theory w hich he feels fair
value represents. ‘W ith fair values you have to enter a theoretical w orld’, he said.
‘I don’t know how you can m anage it. O nce you are beyond an observable m arket
you are in a land of fantasy. I don’t know w ho can sign off over relevant but
unreliable num bers’.
B ut he still hopes that convergence could have benign effects. ‘The prize of a
single global language is an im portant one and one that’s w orth investing tim e to
effect’, he said. ‘It is a m ajor step in im proving financial reporting’.
OFR tragedy
B ut understandability m ay be the casualty. Ask Sym onds if financial reports are
m ore understandable as a result and the answ er is a resounding ‘N o’.
Vi ews on a fi nanci al reporti ng revol uti on 33
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 33
Vi ews on a fi nanci al reporti ng revol uti on 34
B ut he thinks this is not too surprising. ‘I’ve alw ays taken a pragm atic view ’, he
said. ‘For large global com panies you can’t encapsulate everything w ith the figures.
You need the accounts. B ut you also need the notes to the accounts, and the
narrative, like the operating and financial review or the m anagem ent discussion and
analysis. You need all three. You cannot understand it w ithout all three’.
H e is angry about the U K G overnm ent’s decision to fire a shot across the bow
of the O FR by backing dow n on its becom ing a m andatory part of every listed
com pany’s disclosures. ‘That is the tragedy of the decision over the O FR’, he
said. ‘There w ere som e issues around safe harbour provisions and it confused
financial reporting w ith social reporting. Both of those are relevant, but not in the
sam e docum ent. B ut the spirit of the O FR w as clear’. N ot that the G overnm ent
decision w ill affect his plans for A straZeneca’s O FR . ‘I w ill follow the spirit of the
O FR’, he said.
A s for w hether the figures have greater integrity now and w hether investors are
better served Sym onds’response is: ‘I think so’. H e feels that they have greater
strength now . ‘They are m ore robust’, he said, ‘though I suppose that the
Sarbanes-O xley legislation has played a part in that. B ut just reporting under IFRS
has got to im prove quality’.
A s for w hat the financial reporting scene w ill look like in five years’tim e he feels
that there is a crossroads ahead. ‘I’m an optim ist’, he said. ‘I believe the next
tw o to three years w ill see us sorting through som e of the issues. W e w ill have
clarity in the direction in w hich w e are going. B ut the dow nside is that w e could
have both European IFRS and U S IFRS and it is on a knife edge as to w hich w ay
that w ill go’.
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:33 Page 34
Sir D avid Tw eedie is C hairm an of the International Accounting
Standards Board, w hich has created the system of International
Financial Reporting Standards w ith w hich com panies across Europe
and m any countries across the rest of the w orld are grappling.
H e feels that the process of im plem entation of IFRS has ‘gone surprisingly w ell’.
B ut he agrees that there have been difficulties. ‘People have found it m ore of a
hassle than they expected’, he said. ‘There w ere all sorts of tiny differences
w hich people hadn’t thought about. A lso international financial reporting
standards tend to be longer than the U K standards used to be. So there w as
m ore guidance than people w ere accustom ed to having’. Tw eedie w ould like this
to change in future standards. ‘H opefully w e can w rite them in plain English and
keep them as short principles-based standards. It w as the detail w hich upset
people. They w ere m ore detailed than they thought and expected’. B ut,
particularly elsew here around the w orld, Tw eedie finds people getting to grips
w ith the standards. ‘In Australia, for exam ple, the approach is one of “decision
m ade, stop bitching, get on w ith it”’, he said.
There is also the difficulty during year one of im plem entation w here everyone
com es up w ith sm all changes in the standards that they w ould like to see.
‘The changes that people now w ant are sm all’, he said. ‘B ut everyone w ants
different sm all changes. A nd w e can’t have endless changes. People w ould
becom e dem ented’.
Not all fair value
W hat surprised him during the im plem entation stage w as the changed attitude in
the U K. ‘W hat surprised m e w as the U K getting grum py w ith people thinking that
it w as all m ore involved than they had expected’. A nd the tim ing didn’t help. ‘It
w as the w orst year to do it w ith the Sarbanes-O xley legislation suddenly com ing
in at the sam e tim e’. H e also felt that w hat he sees as m isunderstandings didn’t
help. ‘There w as a feeling that it w as all fair value’, he said. ‘B ut in truth w e didn’t
introduce m uch fair value except for IAS32 and IAS39 w hich w e inherited from the
form er International Accounting Standards C om m ittee (IASC ). There w ere
m isgivings about am endm ents to IFRS3 w hich certainly had fair value elem ents.
B ut it w as only an exposure draft so w e still have to look at that. B ut as a result
these all becam e tied up w ith the fair value criticism s. W e intend to have a general
public debate on the issue of w hen fair value or cost w ould be appropriate as part
of our consultations connected w ith the IASB /FASB project on the C onceptual
Fram ew ork revisions.’
A s you m ight expect Tw eedie w ishes, w ith hindsight, that the issue of IAS39
could have been different. ‘W hen w e opened up IAS39 for discussion w e did it to
try and m ake im plem entation easier’, he said. ‘A nd that led people to believe that
IAS39 w as our standard. A nd so w e w ere attacked over a standard w hich dated
Vi ews on a fi nanci al reporti ng revol uti on 35
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
David Tweedie
Chairman, International Accounting
Standards Board
“W e can’t have endless
changes. People w ill
becom e dem ented.”
Sir D avid Tw eedie
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page 35
Vi ews on a fi nanci al reporti ng revol uti on 36
back to 1999. W ith hindsight’, he said, ‘w e w ould have saved ourselves a lot of
trouble by not going back to revisit it. B ut w e did help a lot of com panies handle
the issues by doing so’.
A s for the role of the regulators he is happy, for now . ‘The regulators have
pushed very hard to get the w hole im plem entation process underw ay and
w orking’, he said, ‘and it is so m uch easier for the regulators if this all does com e
off. For exam ple, the SEC w ouldn’t have to spend tim e looking at U K standards,
or G erm an standards, or w hatever. It can just look at IFRS’. A nd he also
applauded regulators for giving the process tim e. Regulators have not been
issuing their ow n take via pronouncem ents by regulatory body chairm en. ‘They
have stepped back and not issued any interpretations, w hereas the SEC in the
old days w ould have done so. It w as w hat w e used to call “standard-setting by
speech”’, he said. ‘A nd there w as absolutely no due process in that’.
B ut it is the question of how you can arrive at a consistent interpretation w ithout
producing too rigid a rule-book that gets Tw eedie really anim ated. ‘This is the big
issue from now on’, he said. ‘W e haven’t done any standard-setting for four
years. W e have just been using sticking plaster or tinkering. O ur prim e w ork now
is to get rid of reconciliations betw een IFRS and U S G A A P. W e have identified six
standards w here w e need to m ake changes. B ut w e w ill be only dealing w ith the
principles. W e w ill be avoiding m aking detailed changes. That’s the first stage’.
Road to reconciliation
The second stage builds further on that. ‘W e have to deal w ith standards w hich
are not ideal but w hich are also not too far apart. The SEC has agreed 11 areas
w here instead of converging w e should just w rite new standards jointly w ith the
FASB. That w ill take years but the SEC has said that as long as they know and
understand w hat w e are doing and m oving tow ards then that w ill be enough for
them ’. This could transform the process. ‘It w ill m ean that the reconciliation w ill
be gone by the end of 2007 or early 2008’, he said. ‘It w ill ease the burden on
com panies also’, he said. ‘People are fed up w ith constant change. It w ill bring
everything closer.’
So the equation is six standards for w hich convergence w ould be the answ er
and 11 new standards to outline. B ut the im portant point w ill be that the IASB
doesn’t have to conclude the 11 new standards to achieve acceptance by the
SEC and hence reconciliation. Indeed the last of the 11 standards w ould not be
com pleted until about 2010–2011.
A nd Tw eedie hopes the process w ill be m uch m ore dow n-to-earth. ‘W e should
start off w ith the core principle, w hich is really the “true and fair”core of the
standard’, he said. H e applies this to one of his old bugbears, leasing. ‘So, for
exam ple, leases w ould becom e a liability. It w ould be a case of “show the
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page 36
liability you have incurred by signing the lease contract and the rights to the asset
obtained thereby”and that’s the standard. That’s it. If you haven’t show n the
liability you’ve failed’.
This approach also clears up other potential disagreem ents. ‘It also m eans that
there are no exceptions’, he said. ‘It puts the onus right back on the auditors and
the C FO s’. A nd it also needs restraint from regulators m arching in and issuing
their ow n interpretations on how to com ply w ith the principle. ‘The regulators
need to understand’, said Tw eedie, ‘that they can w reck this by dem anding
restatem ents if a com pany m eets the principle by using one m ethod w hile the
regulator prefers another. People need certainty’.
U nder this approach participants should also be safe from the threat of litigation.
‘People should be safe from litigation if they can show that they have genuinely
tried’, he said. ‘C ertainly the courts in the U K w ould agree that there w ould not
be negligence if evidence existed of a m ajor effort to com ply w ith the standard
involving, for difficult issues, appropriate research and consultation’.
This is w here Tw eedie sees the big challenge in the principles versus rules
debate. ‘It is the big test’, he said. ‘C an people use judgem ent and can the
regulators hold off ? The next few years are crucial’.
Global standards
Tw eedie certainly sees the goal of a global set of standards as m ore attainable
now . ‘It is m uch, m uch closer’, he said. ‘N ext year there w ill be over a hundred
countries using IFRS. C hina is sw itching. C anada, Israel and C hile are sw itching.
It is all going the sam e w ay. India says that it is 95 percent there. O ther countries
in Latin A m erica w ill start to com e in. There are roughly tw o hundred countries in
the w orld. W e are already halfw ay there’.
H e is also enthusiastic about the effects of convergence. ‘It rem oves an
investm ent risk’, he said. ‘International investors are terrified that they have
m isread the accounting in em erging econom ies, for exam ple. B ut providing the
auditing and regulation is good and you can understand the accounting then you
can invest easier — a m ajor risk has been rem oved. The effect is greater cross-
border investm ent’. It is all dow n to being able to understand the accounting.
A nd understandability has been a bit of a casualty in this first year. ‘W e all m ake
accounting m uch m ore com plicated than it needs to be’, he said. ‘Som e of the
standards w e inherited are too com plicated. There is now a cottage industry of
technical people understanding and interpreting them . W e have som ehow got to
return IFRS to the profession. W e have got to do better than this’. Partly this
should gradually com e about as new truly principles-based standards com e
through. ‘W e w ant to m ake them clearer. It is very frustrating’, he said.
Vi ews on a fi nanci al reporti ng revol uti on 37
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
“C an people use
judgem ent and can the
regulators hold off?
The next few years
are crucial.”
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page 37
Vi ews on a fi nanci al reporti ng revol uti on 38
‘W e have to get back to the principles and have them reflecting how things really
are. Accounting is not that difficult after all’.
B ut Tw eedie does feel that the figures have greater integrity now and that
investors are better served. ‘For exam ple, take IAS39’, he said. ‘It isn’t m y
favourite standard. B ut as a result of it people now know m ore about the nature
of derivatives than they did before. It show s the big risks being taken. It has
greater integrity and investors do understand it all better’.
A s for how the w orld of financial reporting w ill look in 2010 Tw eedie is optim istic.
‘I w ould like to see standards shorter, m ore principles-based, w ith few er
exceptions and seeing m ore, for exam ple, like leases and pension surpluses or
deficits, on the balance sheet. I’d like to see IAS39 replaced. W e m ust be able to
sim plify it’, he said.
Need for narrative
In particular he sees the place of m anagem ent com m entary, like its U K version,
the O perating and Financial Review , playing m ore of a part. ‘The O FR w ill
becom e m ore and m ore im portant’, he said. ‘M anagem ent com m entary w ill
becom e very critical for com panies w hen they say that, for exam ple, “w e have a
pensions deficit”and investors ask “w hat are you going to do about it?”
A detailed narrative explanation of actions to be taken is the answ er. The O FR
w ill becom e m ore and m ore im portant’.
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page 38
Zhang W ei G uo is C hief Accountant w ith the C hina Securities and
Regulatory C om m ission.
‘It is 20 years since C hina introduced its policy of reform and opening up’, said
M r Zhang, ‘and especially after capital m arkets w ere established in C hina in 1990.
C hina has com e a very long w ay in the developm ent, adoption and enforcem ent
of high quality accounting and finance inform ation. Accounting standards are
increasingly converged w ith IFRS’, he said. ‘From now on C hina w ill continue to
accelerate the convergence of its accounting standards. There are several key
reasons for IFRS convergence. First, since 1992, C hina has decided to take the
m arket econom y as its basic developm ent orientation. In 2002 joining the W orld
Trade O rganisation (W TO ) sped up m arketing the econom y even further than
internal reform s. This orientation w ill not change’, he said. ‘Therefore C hina w ill
inevitably accept IFRS, w hich is im portant to developing the nation’s m arket
econom y environm ent’.
‘Secondly, the C hinese econom y is rapidly joining the econom ic globalisation tide
and has achieved m uch in that progress. From 1978 to 2004 C hinese im ports and
exports grew from U S$20.6 billion to U S$1,154.8 billion. The yearly average
grow th is 16 percent. The country has risen one rank in the global platoon
position every year and last year becam e the third biggest trade country.
A lthough C hinese capital m arket developm ents have occurred only over 15 years,
and experience the com m on problem s of em erging and transitional econom ies,
the rate of change has been phenom enal and m om entum gained. The m arket
system s are oriented tow ards international rules’.
Booming foreign interest
‘In 2002’, he said, ‘C hina surpassed the U S to becom e the leading nation in
attracting foreign direct investm ent (FD I). In 2004 FD I in C hina am ounted to
U S$60.6 billion,10 percent of global FD I. To 2004 C hina had been the recipient of
FD I am ounting to U S$562.1 billion. To 2004 C hina has authorised m ore than
500,000 foreign invested enterprises w hich have provided m ore than tw enty
m illion em ploym ent opportunities. Their contribution to the C hinese econom y
also includes: 55 percent of exports, 38 percent of industry productivity, 21
percent of tax revenue and 57 percent of technical im ports. A nd from 1978 to
2004 C hina’s foreign exchange reserve grew from U S$167 m illion to U S$609.9
billion. The total am ount of the foreign exchange reserve has continuously
ranked second in the w orld in recent years, increasing progressively at 30
percent to 40 percent per annum ’.
These are quite extraordinary figures. A nd they have an accounting im pact.
‘G lobalisation of the C hinese econom y naturally requires accounting standards to
hasten to international standards’, he said.
Vi ews on a fi nanci al reporti ng revol uti ons 39
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
Zhang Wei Guo
Chief Accountant, China Securities and
Regulatory Commission
“G lobalisation of
the C hinese econom y
naturally requires
accounting standards to
hasten to international
standards.”
Zhang W ei G uo
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page 39
Vi ews on a fi nanci al reporti ng revol uti on 40
‘Thirdly, C hina is still a developing country according to the C hinese average G D P
per person, and C hina’s political system and its econom ic and cultural traditions
are also quite different from com parable developed countries. N evertheless
C hina is diligently behaving consistently w ith its w orld im age of a responsible
and significant nation by joining the W TO , signing the Kyoto protocol, and
com plying w ith the tide of accounting standards internationalisation’, he said.
Rapid accounting changes
‘A lthough C hina has chosen a step-by-step path of reform and opening-up policy,
in little m ore than 20 years C hina has achieved m ore than m any countries could
achieve in relation to m any aspects, including the internationalisation of
accounting standards’, he said. ‘C hina has already absorbed, and w ill continue to
absorb, the essence of IFRS rapidly and efficiently. It is expected that w ith
further developm ent of the breadth and depth of the C hinese econom y, C hina
w ill continue to im pel the internationalisation of accounting standards, and
differences betw een C AS and IAS w ill dim inish even further’.
‘A t the sam e tim e C hina has determ ined that it w ill continue to set its ow n
accounting standards rather than totally copying IFRS. This approach is
determ ined by C hina’s special national condition. For instance, accounting
standards are still part of C hina’s w ritten law environm ent. Thus, their style and
force in im plem entation differ from IFRS applied in unw ritten law . Furtherm ore,
as C hina’s capital m arket is still not fully developed, the proportion of listed
com panies is not high, and the contribution of listed com panies and the capital
m arket to the national econom y still cannot reach the level of developed m arkets.
A s a result, the need for high quality accounting standards to inform external
stakeholders is also lim ited’, he said. ‘Furtherm ore C hina’s econom ic
developm ent is still in a prelim inary stage, thus m any transactions still lack the
reliable m arket values required under IFRS. Accounting standards are not
developed solely from conceptual underpinnings. Instead they are the result of
political com prom ise am ongst various lobbying interest groups. C ontroversy in
the U S over stock options, and reluctance from som e EU countries to accept
IAS39, are good exam ples.’Sim ilarly C hina has to consider the econom ic
consequences from convergence of accounting standards for som e transactions.
Local differences
‘W hile assim ilating IFRS, C hina has to face som e cases w ith obvious C hinese
character. Sim ilarly, the IASB also has to deal w ith special circum stances of
som e countries and areas, w hile com pelling the establishm ent of a high quality
accounting standard’, he said. ‘The IASB possibly faces an em barrassing situation
if its broad scope causes individual country characteristics to not fit the IFRS
developed. The IASB has the possibility to incorporate country-specific situations
and to contain som e exceptional principles. A lternatively, if the IASB hands over
country-specific issues to national standard-setters, the national standard-setters
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page 40
m ay act to enlarge their ow n standard-setting program m es. C onsidering that
various countries all possibly have som e unique issues, it m ight be reasonable for
the w hole w orld to allow G A A P differences in a few areas and require disclosure
of reconciliation w hile approaching full convergence’.
‘N o m atter how high the quality of an accounting standard, there w ill not be high
quality and com parable accounting inform ation w ithout reasonable and consistent
interpretations, and strict enforcem ent’, he said. ‘From now on, w ith the greater
assim ilation of C hinese accounting standards and IFRS, C hina needs even further
endeavour to guarantee the effective im plem entation of standards. In particular,
the IFRS principles basis and fair value orientation w ill provide challenges to the
preparers, users, auditors, as w ell as regulators of financial inform ation in C hina
because these tw o orientations rely m ore on judgem ent than the traditional
C hinese approach. If C hina does not strengthen training, raise judgem ent skills,
and enhance consciousness of the true and fair view , its rapid convergence
program m e m ight cause serious earnings m anagem ent problem s. Such a result
counteracts the ultim ate objective of the w hole convergence endeavour’, he said.
The view s expressed in this interview are the personal view s of M r Zhang W ei G uo, and do
not necessarily represent the view s of the C hina Securities and Regulatory C om m ission.
Vi ews on a fi nanci al reporti ng revol uti on 41
© 2006 KPM G International. KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of
independent firm s operating under the KPM G nam e. KPM G International provides no services to clients. Each m em ber firm
of KPM G International is a legally distinct and separate entity and each describes itself as such. A ll rights reserved.
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page 41
kpm g.com
KPM G International is a Sw iss cooperative that serves as a coordinating entity for a netw ork of independent firm s
operating under the KPM G nam e. KPM G International provides no audit or other client services. Such services are
provided solely by m em ber firm s of KPM G International (including sublicensees and subsidiaries) in their respective
geographic areas. KPM G International and its m em ber firm s are legally distinct and separate entities. They are not and
nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents,
partners, or joint venturers. N o m em ber firm has any authority (actual, apparent, im plied or otherw ise) to obligate or bind
KPM G International or any other m em ber firm , nor does KPM G International have any such authority to obligate or bind
any m em ber firm , in any m anner w hatsoever.
The inform ation contained herein [or insert the nam e of the publication, new sletter, or other m ailing] is of a general
nature and is not intended to address the circum stances of any particular individual or entity. A lthough w e endeavour
to provide accurate and tim ely inform ation, there can be no guarantee that such inform ation is accurate as of the date
it is received or that it w ill continue to be accurate in the future. N o one should act on such inform ation w ithout
appropriate professional advice after a thorough exam ination of the particular situation.
The view s and opinions expressed herein are those of the interview ees and do not necessarily represent the view s
and opinions of KPM G International or KPM G m em ber firm s.
© 2006 KPM G International. KPM G International is a
Sw iss cooperative that serves as a coordinating entity
for a netw ork of independent firm s operating under the
KPM G nam e. KPM G International provides no services
to clients. Each m em ber firm of KPM G International is a
legally distinct and separate entity and each describes
itself as such. A ll rights reserved.
KPM G and the KPM G logo are registered tradem arks
of KPM G International, a Sw iss cooperative.
D esigned and produced by KPM G LLP (U K)’s
D esign Services
Publication nam e: IFRS:View s on a Financial
Reporting Revolution
Publication num ber: 300-778
Publication date: A pril 2006
Michael Hughes
Global Head of Audit
KPMG LLP (U.K.)
Tel: +44 (0)20 7311 4792
michael.hughes@kpmg.co.uk
Henry R. Keizer
Vice Chairman, Audit
KPMG LLP (U.S.)
Tel: +1 212 909 5321
hkeizer@kpmg.com
Carlson Tong
Partner in Charge, Audit
KPMG in Hong Kong
Tel: +852 2826 7216
carlson.tong@kpmg.com.hk
Mark Hamilton
Corporate Communications
Manager
KPMG LLP (U.K.)
Tel: +44 (0)20 7694 2687
mark.hamilton@kpmg.co.uk
For further information please contact:
300 778 IFRS Report for PDF.qxd 25/4/06 10:34 Page BC1