Formed in 2000/2001, and appealing to the private sector, IASB has no capital and its budget depends on its contributions. It is the responsibility of the Board of Trustees to ensure that these contributions keep coming, enabling the organi- zation to perform its duties and face its accounting responsibilities in an able manner. IASB’s contribution is underlined by the fact that a globalized market needs to have:
● Generally applicable accounting and financial standards, and
● Most particularly, standards established by an independent body.
A globalized market can work effectively ifit has available standards which are universally accepted, correctly applied, and properly enforced. Universality of accounting standards helps in creating a level playing field. It also permits cross- comparisons and this sets the stage for more sophisticated economic and finan- cial analysis, with greater coverage and market impact.
Precisely for this reason, IASB cooperates with many national and international organizations in developing its accounting standards. It works closely with the Financial Accounting Standards Board (FASB) in the United States; the International Organization of Securities Commissions (IOSCO), which repre- sents securities regulators; the International Association of Insurance Supervisors (IAIS), and other national and international accounting standards bodies as well as regulatory authorities.
At the same time, readers should appreciate that updating, upgrading, and changing accounting standards is no kid’s game. Goals have to be set, designs have to be created, some compromises have to be made, intensive training of managers and accountants should take place, and a project with responsibility for the new standards implementation must be set up (see Chapter 6). It should also be appreciated that, like a critical review by rating agencies, a change in accounting standards could bring:
● A company’s assumed risks, and
● Potential losses into the open.
The fact that hidden risks and losses may become transparentis a positivenot a negative contribution of a new accounting standard. The losses were there but hidden, maybe because with the old standard management knew how to cook
the books. Or, alternatively, because the old accounting standard was not fine grained enough to capture all types of risks.
Good governance (see section 7) is always characterized by the need to know, because by knowing management can change its way of doing business when this is wrong. Sam Walton, one of the most successful businessmen of the post-World War II years, described in the following manner the way his mind worked: ‘When I decide that I am wrong, I am ready to move to something else’; he also described Wal-Mart’s greatest strength as its management’s ability to turn on a dime.
A project, process, department, business unit, or executive in charge of it, may prove unable to deliver what was planned and promised, and as Walton aptly remarked on another occasion: ‘One should never underwrite somebody else’s inefficiencies.’ This dictum fits neatly with the ineffectiveness of an accounting system which, after more than 500 years of steady service, is starting to show its age (see section 3).
For this reason, we should all feel indebted to the International Accounting Standards Board, whose objective is promoting more efficient accounting stan- dards, thereby benefiting all industry sectors and the handling of financial issues at large. Notice, however, that IASB develops these standards but cannot impose them. In the European Union, it is the European Commission which must see to it that IFRS is applied in the 25 member states. Other countries which have decided to implement IFRS are Australia, New Zealand, South Africa, and more.
Corporate implementation of IFRS aside, one of the main challenges that lie ahead is to assure compatibility with American accounting and financial reporting standards. To this end, IASB is working closely with the US Financial Accounting Standards Board. Experts from the two entities work together in London, and IASB also collaborates with the Securities and Exchange Commission, to which FASB reports – without this meaning that IFRS and US GAAP are presently compatible.
How long will it take until IAS and GAAP are in full synchronism? Today, nobody can answer this question. The most likely reply is ‘rather a long time’.
But ifthis query is rephrased to something less ambitious, for instance: ‘How long will it take until international companies have a fairly similar accounting and financial reporting structure?’, thenthe answer might be by 2010.
Global companies participating in this research expressed the opinion that a process of accounting reconciliation between different standards makes sense.
There is an absolute need for common standards, not only in connection to dif- ferences prevailing between IFRS and US GAAP, but also in regard to the broader issue of incompatibilities and gaps characterizing national accounting standards that remain in effect in those countries which have not adopted IFRS.
This is the global companies’ viewpoint. Among other reasons, compatibility of standards simplifies their accounting and it provides a fair basis for better gov- ernance (see section 7). Both regulators and standards setters are aware of these facts. In our meeting in late January 2005, Kevin Stevenson, Technical Director of IASB, suggested that current differences between US GAAP and IFRS may be classified into three groups:
● Small ones that prevail in the short term and are likely to be resolved in the not too distant future
● Major standards projects, where one of the standards bodies has made headway, or has already developed sound rules.
● Major issues requiring a new project, where no standards body currently has an answer. An example is accounting standards for leasing.
The third bullet point here brings into perspective the very significant role research, development, and implementation (R, D&I) plays in modern enterprise, including in the accounting functions. The R, D&I budget is a measure of a com- pany’s, an industry’s, and an economy’s commitment to staying in business.
Therefore, it is a prime indicator of survivability – and it is often valued in this manner.
There are many other challenges associated to standards setting, particularly in the case of a global accounting standard intended to replace national accounting standards of those jurisdictions subscribing to it. Not the least is the need for a forward-looking standards design which can effectively help vital daily gover- nance operations such as risk control:
● In uncovering hidden or latent risks which are there, and
● In providing effective documentation of results obtained through corporate- wide risk management functions.
This second bullet point is in effect materializing because statements of risk dis- closure, for instance, in connection to credit risk, are within the perspective of financial reporting standards within IFRS. This is a positive development. The relationship which exists between IFRS, hedge accounting, and risk management is discussed in Chapter 5.