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November 14, 2008

Research: Financial leaders question IFRS value

Academics from Oxford University in the UK and Duke University in the US have teamed up for what they say is the first major survey about corporate financial reporting and IFRS. The findings include a majority of respondents saying the costs of switching to IFRS at the moment outweigh the benefits. Carolyn Canham reports.

There is clear support for the International Accounting Standards Board’s (IASB) mission of creating international accounting standards among the preparer community, while at the same time feelings are mixed about the board’s operating and due process, according to a report published this month.

Assessing the IASB: Results of a Business Survey about International Financial Reporting Standards and IASB’s Operations, Accountability, and Responsiveness to Stakeholders reports findings from a survey of 749 financial executives of companies listed on the major stock exchanges of the US, Germany, France and the UK. Standard setting

The report is authored by Walter Mattli, a professor of international political economy and a fellow of St. John’s College at Oxford University, and Tim Büthe, assistant professor of political science and associate director of the Center for European Studies at Duke University in North Carolina. It forms part of a larger study, the International Standards Project, which the academics jointly direct.

The survey respondents overwhelmingly expected financial reporting standards to be increasingly set at the international level, and a clear majority approved of this trend. More than one third, however, questioned whether truly global accounting rules and practices are achievable given the differences in legal environments and business cultures across countries.

There were some concerns from both sides of the Atlantic over the IASB’s standard-setting process, however, US respondents were more favourable than their European counterparts (see table). A clear majority of respondents said the quality and effectiveness of IFRS is high. However, a majority also said the complexity and cost of implementation of IFRS was high and almost 60 percent said the cost of switching to IFRS at the moment outweighs the benefits.

Notably, considerably more US respondents said US GAAP was very complex (97 percent) compared with IFRS (64 percent).

Despite a large proportion of respondents being affected by IFRS, they were unlikely to participate in IASB consultations. The percentage of respondents who never gave input into a new or revised international standard was 28 percent in the US and 40 percent in Europe. In both locations only 4 percent always gave input. The perception that comments would have no effect on the final standards was the most common cause for inaction according to 77 percent of US respondents and 89 percent of European respondents.

Another popular argument was that international standards have no material impact on the firm’s ability to raise capital.

Overwhelming majorities said early involvement in the standard-setting process is key, and more than half the respondents said that by the time they hear a new standard is being developed, it is too late to influence the process effectively. Fifty-six percent of US firms and 67 percent of European firms said they know about draft international standards by the time the exposure draft is open for comment and 78 percent of US and 84 percent of European firms typically learn of a new standard before it is adopted in its final form.

Virtually all European respondents reported being familiar or very familiar with IFRS. More than 60 percent of US respondents reported comparable levels of familiarity, even though only 18 percent presently use the standards for any part of their financial reporting.

There was no consensus on the comparability of US and international standards. Both US and European firms were almost evenly split on whether or not the two sets of standards are largely identical; about a third agreed, a third disagreed and a third had no opinion.

A slight majority of US respondents welcomed the introduction of IFRS; 53 percent of US respondents said the Securities and Exchange Commission should allow both foreign and domestic registrants to file IFRS-based financial statements without reconciliation to US GAAP.

Fair value accounting

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