The Hindu Business Line : Global accounting standards?

The signs are certainly encouraging for a global set of accounting standards since the US has decided to cooperate in the convergence project of the IFRS.

Mohan R. Lavi

Would a single set of global accounting standards be feasible and realistic? The International Accounting Standards Board (IASB) by issuing International Financial Reporting Standards (IFRS) has belled the cat and the Financial Accounting Standards Board (FASB) in the US has followed up by amending a few of its standards to match an IFRS on the same subject.

The FASB, in coordination with the Securities and Exchange Commission (SEC), plans to permit use of IFRS reporting by foreign companies from 2009 as an option instead of the popular US GAAP. Even the now popular reconciliation with US GAAP that dots many an annual report would not be needed.

However, given the sheer diversity of accounting practices followed globally, one-size-fit-all accounting standards appear difficult but possible. The fact that US GAAP — extremely rule-based and situation-specific — has decided to join hands with the IFRS — generalistic and disclosure-based — only confirms this view. A recent piece by Bloomberg on a company summarises the issues involved.

A gold-mining company incorporated in 1990 was registered in Canada. It was literally global as its headquarters was at Connecticut, US, mining operations in Tanzania, the CFO was based in Toronto and its external auditor was in Vancouver. The SEC has a rule for foreign private issuer, for which this company qualified and hence required it to report its accounts under US GAAP too.

Since inception, this company had neither revenues nor mineral reserves as it had been exploring for the last 17 years but had not found the pot of gold, yet.

Under Canadian GAAP, the company treated the $22.6 million for exploration as assets. If converted to US GAAP, only $11.2 million would qualify and the rest would have to be written off; the US GAAP has a specific standard for the mining industry, whereby it must treat all its exploration costs as expenses until it finds deposits worth mining.

The US GAAP seems to dictate that spent cash is not an asset until you have anything to show for it. There is yet no IFRS on mining, which means that companies adopting IFRS would still continue to expense exploration costs, thereby throwing up a reconciling difference with US GAAP. Another industry-specific standard in US is on the insurance industry for which there is no equivalent from the IFRS.

Back to the Future

The question that could arise is: If there are so many areas of differences between two Goliaths, how would other smaller countries comply with a single set of global accounting standards? The Institute of Chartered Accountants of India (ICAI) has toed the line of the IFRS ever since it decided to make accounting standards mandatory, making its task a wee bit easier.

A team to converge Indian accounting standards to the IFRS has been formed, and it should come out with its report sooner or later. China is also all set to adopt IFRS and has repealed/amended quite a few of its accounting standards to make them IFRS-compliant. The signs are certainly encouraging for a global set of accounting standards since the US has decided to cooperate in the convergence project of the IFRS.

The above example could be wished away as a rare example. The fact that the days of reconciling differences in the areas of stock options, foreign exchange differences and amortisation appear to be passé cannot be ignored. However, the very nature of accounting — a post-mortem recording of a transaction — could give rise to situations wherein there could be more than one way of accounting for a rare hedging transaction, a complicated acquisition or a systematic infusion in the capital of a company by a private equity player with differing conditions for each infusion. These situations would have to be tackled on the fly.

Local tax laws could encourage companies to adopt a different method of accounting than the one prescribed by the regulator. To answer the question asked at the beginning, one may not have global accounting standards that are non-negotiable and set in stone — the reconciling statement would still remain.

(The author is a Hyderabad-based chartered accountant.)

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