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KPMG News

So far, so good...
IFRS implementation surprisingly smooth so far - but critical issues remain to be resolved

06 June 2006

A new report from KPMG International reveals that senior accounting, regulatory and industry figures from around the world believe that a number of key issues remain to be resolved in order to confirm the success of the International Financial Reporting Standards (IFRS) project - though they have been surprised at how smoothly the implementation of IFRS has gone to date.

KPMG International's report - International Financial Reporting Standards: Views on a financial reporting revolution - consists of interviews with standard-setters, regulators, CFOs, analysts and auditors from around the world, including several well-known figures in the region.

The report highlights some critical issues ahead, including:

- US convergence - how will the Securities and Exchange Commission (SEC) react to the first full IFRS results as they are issued? A series of requested restatements could be a major blow to progress towards mutual recognition between IFRS and US GAAP, and the ultimate quest for one global accounting language
- Consistency of interpretation - how can the financial community ensure that IFRS is adopted and interpreted in a consistent manner across borders and between different industry sectors?
- Rules versus principles - IFRS is a principles-based system but will the need for consistency result in a movement towards a more rigid rules-based (US-style) approach?
- Fair value - some preparers are still uncomfortable with the direction that fair value accounting is taking, and question the relevance of some of the numbers it produces.
- Complexity of accounts - accounts are meant to serve investors and yet they are becoming more difficult to read. Some of those interviewed believe that the greater complexity more accurately reflects reality, and that the numbers bring greater rewards once they are understood, while others are more sceptical.

Despite these issues, many interviewees comment on how smooth the process has been so far. According to Sir David Tweedie, Chairman of the International Accounting Standards Board, implementation of IFRS to date has gone "surprisingly well", and Robert Herz, Chairman of the Financial Accounting Standards Board (FASB), the US standard-setting body, describes it as "an incredible event in the history of accounting."

Local respondents Charles Grieve, Director, Corporate Finance with the Hong Kong Securities and Futures Commission and Martin Cubbon, Group Finance Director of Swire Pacific in Hong Kong, agree that the alignment of local accounting standards with IFRS has gone smoothly despite the complexity of the new standards. However, while Charles Grieve feels that the figures under IFRS have greater integrity, Martin Cubbon is concerned that they are being asked to produce information which he feels is increasingly irrelevant to management, investors and other stakeholders.

Looking forward, many have a positive view of the future. In five years' time, according to Michael Hughes, Global Head of Audit at KPMG and partner in KPMG's UK firm, there is a good chance that we will see "convergence at a more sedate pace. IFRS bedded down and mutual recognition [between IFRS and US GAAP]". Narrowing of differences is also expected closer to home. Zhang Wei Guo, Chief Accountant with the China Securities and Regulatory Commission, confirms that "with the further developments of the breadth and depth of the Chinese economy, China will continue to impel the internationalisation of accounting standards, and differences between CAS [Chinese Accounting Standards] and IAS will diminish even further".

But for Jon Symonds, CFO at AstraZeneca, the future is in the balance right now. In five years' time, he says, "we will have clarity in the direction in which we are going. But the downside is that we could have both European IFRS and US IFRS and it is on a knife edge as to which way that will go." Locally, Martin Cubbon believes that by 2010 we will still be in a state of flux, a view echoed by Charles Grieve: "there is nothing new under the sun. The same issues, like goodwill, will be floating around and being argued about".

Commenting locally on the report, Carlson Tong, head of KPMG's audit practice in Hong Kong and China, said "The frank and diverse views expressed in this report give us all pause for thought. I feel proud that Hong Kong can claim that its financial statements are now the same as in London, Frankfurt, Sydney and over 90 other countries around the world and I am very encouraged by China's moves towards adopting international standards. But in the race to converge and conform, have we lost sight of the basic objective of financial reporting, being to produce information that is useful to users? I see addressing this fundamental concern as the challenge for the future for all parties involved." As Mike Rake, Chairman of KPMG International, says in the report: "It is essential that constituents, particularly users and preparers, play a full and active part in the future development of IFRS. We must all now work to ensure that IFRS delivers the intended benefits to companies and investors."

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