He noted that adoption of IFRS standards – vs. convergence to a similar set of standards – was required by the IFRS Foundation to be considered part of their single set of global accounting standards, whether a local country mandates adoption of IFRS or permits adoption of IFRS on a voluntary basis.
The IASB Vice Chairman’s positive speech may appear to be in stark contrast to the tone of IASB Chairman Hans Hoogervorst’s widely reported remarks in Singapore last week, as reported in AccountingToday, that “Accounting Convergence is Unachievable.” In his remarks, Hoogervorst pointed out the failure of the FASB and IASB to reach convergence on certain major projects that could have led to full convergence and ‘the ultimate jump to IFRS.’
In my opinion, Mackintosh’s speech can help to counter concern that the failure of the U.S. to converge with IFRS, or adopt it on a mandatory basis, is any threat to IFRS becoming the “global accounting standard.”
One of the most significant parts of his speech was the distinction he drew between ‘convergence’ and ‘adoption’ of IFRS, and how that relates to the IFRS Foundation’s definition of IFRS adoption.
According to Mackintosh:
- Adoption entails the application by a jurisdiction of IFRS in full. It implies a continuing commitment by all adopters to contribute to the development of IFRS into the future.
- Convergence, on the other hand, has been a perfectly valid strategy for bringing different sets of accounting standards into close alignment. But as the 2011 Trustees’ Strategy Review made clear, convergence cannot be a substitute for adoption.
Further bolstering his arguments as to the ‘inevitability’ of IFRS becoming the single set of global accounting standards, Mackintosh cited statistics on the use of IFRS around the world, including:
- Over 100 countries currently mandate all or most of their public companies to use IFRS
- India and Japan permit voluntary use of IFRS
- China’s largest companies use full IFRS for dual listings in Hong Kong, and
- The U.S. permits foreign filers to use IFRS for U.S. filings
Lastly, Mackintosh claimed the march to IFRS as a global standard was ‘inevitable’ due to global economic forces. In my view, some may question the absolute “inevitability” of the economic argument, tying to the inevitability of global accounting standards to support related global transaction flows. But the latter would seem to encourage, if not make ‘inevitable’ the former. For instance, Mackintosh cited a recent
report by law firm Baker & McKenzie showing an uptick in Cross-Border M&A, and a recent report by
McKinsey and Co. on global investments and transaction flow.
“These reports, and many others like them,” said Mackintosh, “paint a picture of ever-increasing global transactions, undertaken by companies operating in a global marketplace, backed by investors seeking global opportunities and diversification.
“Against this backdrop, it is increasingly difficult to see different and often incompatible national accounting standards as anything other than a legacy of a bygone era. They add cost, complexity and translation risk to companies and investors operating in today’s global marketplace.”
As the U.S., and I would venture to guess, the world, waits to see the next steps to be taken on the use of IFRS in the U.S. by the SEC, I would note (again in my opinion) that the ‘economic inevitability’ argument is not completely persuasive, particularly when there are counterarguments, including:
- Existing regulations that may rely on home country GAAP
- Contracts, debt covenants or other agreements that include GAAP reporting provisions
- Tax regimes
- Differences between the standards or standard-setters themselves.
However, there may be strong incentives for certain globally operating and/or globally listed companies to pursue IFRS implementation.
Further on this topic, see also former IFRS Advisory Council Member, and former SEC Deputy Chief Accountant Scott Taub’s recent column which originally appeared in Compliance Week, Busting Some Myths about IFRS and GAAP.