International Accounting

When you have completed this chapter you will be understand:

that accounting practice differs significantly between countries;

some of the principal features of the German and French accounting and governance systems;

why globalization has brought with it calls for greater harmonization of accounting practice;

the role being played by IASB and FASB in this process.

Accounting Standards: Tower of Babel, by LEX

The Tower of Babel, with its one-tongue culture, was a good idea that ended badly. The notion of a single accounting language – which should have similar appeal for investors – has not yet incurred divine wrath. But it is not progressing smoothly, either. International Financial Reporting Standards (or their predecessor rules) arrived in the early 1970s. Their usage took a big step forward when they became mandatory for EU-listed companies eight years ago. Today, they are deployed in more than 100 countries.

That is the good news; weigh it against the bad. Some convergence projects with big outlier countries are making slow or erratic progress. Japan, for example, has not yet made a full commitment to IFRS, although some companies there do use it. US regulators look unlikely to permit domestic-listed companies to report under these standards any time soon. Meantime, the uneven interpretation of IFRS in corporate statements, especially in the banking and financial services sectors, has hampered comparisons during and after the financial crisis. Last month, the pan-European securities market regulator pointed to a slew of areas where shortcomings were evident – from the information on the use of derivatives to diverse criteria used to assess impaired assets. Investors could only despair.

But perhaps most worrying is the threat of slippage among even the faithful. EU interaction with the IFRS’s standard-setting board has often been fractious and muddied by political objectives. Now Europe’s status as the main IFRS user has prompted a push for more EU influence over this body. And that, in turn, risks opening the door to greater flexibility on how standards (in whole or part) are adopted in the bloc – unwinding some of the “single language” purpose of IFRS. So far, such threats have been kept at bay. But investors should stay alert: Babel was a cautionary tale.

(Financial Times, 30 December 2013)