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October 6, 2014

Editor’s letter: Double standards

For the last ten years the accountancy profession has been discussing the convenience of adopting global standards to be able to compare the financial results of companies regardless of where they operate.

The European Union formally adopted IFRS in 2002, perhaps the only solution available to achieve such a herculean task of comparability across sovereign countries. By 2005 all EU listed companies were already preparing their financial statements following the international standards issued by the IASB.

Despite not being perfect, the spread of IFRS has been unstoppable and only a handful of countries haven’t adopted the standards yet.

Emerging economies have no doubt about it and are eagerly jumping on the IFRS bandwagon. Take the example of Colombia, where even the national GAAP will be replaced by IFRS for SMEs by 2015.

Of course, the most prominent exception is the US, whose love-hate relationship with the international standards reached a low point in the summer of 2012 when the SEC swept its long-awaited decision on IFRS adoption under the carpet. It has remained silent ever since.

Given the global relevance of the US economy, the second best option to get the Americans on board has been convergence between the standards issued by the Financial Accounting Standards Board and IFRS. The success of this convergence process is another matter altogether.

All these years, nonetheless, there has been an elephant in the room the profession seemed to have disregarded. Would we like to compare consistently how governments are managing their finances?

Accrual accountingThe duality IFRS versus US GAAP applies also to the public sector accounting. The IFRS equivalent in the governmental accounting sector would be IPSAS, the rules issued by the International Public Sector Accounting Standards Board (IPSASB).

In the case of the US, the standard setter for this matter is the Federal Accounting Standards Advisory Board (FASAB). Another dichotomy, therefore, in the standard-setting arena: IPSASB versus FASAB.

The adoption of accrual-based IPSAS (or at least convergence) is at its nascent stage and will presumably continue at a slow pace -it’s hard to imagine governments relinquishing control over their public sector accounting.

But doing so, they are turning a deaf ear to IFAC’s constant calls to adopt accrual-based accounting to promote transparency and accountability in the public sector.

It seems reasonable to demand from government the same accounting system it requires from companies in the private sector. Citizens are their main investors and deserve as much information as the shareholders of a company.

Governments, however, are not in the business of making profit and their accounting should reflect this fact. Quite often they provide services that no one else would, depending on how advanced their social welfare systems are.

Building on the case study offered by the US, in this month’s issue The Accountant takes a non-partisan look at what governments worldwide are including (or hiding) in their balance sheets.

Carlos Martin Tornerocarlos.tornero@uk.timetric.com

 

Related stories

IFRS versus company law: long-term investors concerned over regulator’s passivity

Colombia: Chronicle of a success foretold

Accrual accounting in the US: A seventy-two-trillion-dollar question?

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