CFOs have long been used to what many regard as the real task of investor presentations: taking the annual report and accounts and explaining the gap between figures arrived at under accounting standards and results arrived at in a way they feel better reflect the business, its model and performance. This approach falls some way short of meeting the aim of International Financial Reporting Standards (IFRS), the endeavour to create a single set of globally applied accounting standards.
While such adjustments were by no means unheard of under UK GAAP, they seem to have become more prevalent since the introduction of IFRS for European listed companies in 2005. Part of the reason for this, says KPMG Partner Andrew Vials, is the balance sheet-focus of IFRS and its greater use of fair value when reporting assets and liabilities. “This has created expenses (and gains) that previously didn’t exist. For example, share-based payments, amortisation of intangibles and re-measurement of items such as derivatives. This tends to create greater volatility in the profit and loss account to which many preparers object, perhaps because they are not seen as indicative of the cash-generating potential of the business.”
For Boards, there is probably nothing worse than a set of results that renders company performance unrecognisable to its directors and officers. But the danger inherent within the trend for translating figures into non-GAAP disclosures, Vials points out, is that preparation of financial statements in line with IFRS will become merely a compliance exercise, and a costly one at that. “That would be a shame,” he says. “Companies’ own unofficial measures of performance would increasingly be the focus for analysts and investors and the original purpose of moving to one set of global accounting standards – to improve comparability between companies – would fall by the wayside.”
Ian Mackintosh, Vice Chairman of the International Accounting Standards Board (IASB), says the international standard-setter has listened to companies and made changes in line with their comments. “We do have preparers suggesting that particular standards don’t reflect their business model,” he says. “We’ve had that, for example, in hedging and in classification and measurement of financial instruments. We’ve made some changes so that we can get financial reporting to reflect what’s really going on in the business models.”
However, Mackintosh disagrees that non-GAAP adjustments to results are becoming more prevalent. “If you’re talking about the UK, I don’t know that it’s very different to pre-2005. Where we see different sorts of non-GAAP disclosures, we do engage with people on the difficulties they perceive. We don’t really like non-GAAP measures. We’d like to see reporting under IFRS. But we do engage with stakeholders when they tell us that IFRS does not enable them to reflect their businesses.”
Since harmonising accounting standards globally is such a mammoth undertaking, it should come as no surprise that the financial crisis and its aftermath continues to make progress difficult. However, the IASB is now engaged on some truly fundamental issues – such as leasing and revenue recognition – issues that will affect the vast majority of companies. Mackintosh says ongoing economic uncertainty presents challenges in key areas for international standard-setters, who are only too aware of current sensitivities.
He stresses that investors are IFRS’ primary stakeholders, but says the consultation process around IFRS is extremely wide-ranging. “We have international pressure to converge standards in the financial instruments area. We are working very hard on issues relating to the insurance industry, on [loan] impairment and on revenue recognition,” he says. “The users of our standards are investors. That said, we engage actively with account preparers and with auditors and strive to involve them and take account of their views. There are the views of other stakeholders like regulators and governments to involve also. It is always in our interest to hear those views and work towards standards that meet the needs of all. We have a consultation process that is, I would say, second to none. Throughout the whole process – exposure draft to finished standard to implementation – we engage with a wide range of views.”
Ten years in, the IASB has started a consultation process for its future agenda and both the IASB and the IFRS Foundation are on a near-constant cycle of consultation throughout the process of debating, creating and testing international standards, says Mackintosh. ”We do that through general outreach; we talk to preparers; talk to users.”
While the process of moving individual standards on is undoubtedly long and complex, as is consulting on new standards, Mackintosh remains optimistic about the future. “We are in the process of really assessing where our constituents want us to go next,” he says. “We are in the process of analysing 300 responses to the current round of consultation. These are not short responses and we will be giving them proper consideration, which means getting out and talking to people, re-confirming what it is they want and then coming to a conclusion.”
What’s more, each country has its pet project. “Asian economies really want us to have another look at agriculture,” explains Mackintosh. “Brazil and Korea want us to look at currency exchange. But on the other hand, people don’t want too much activity. The IFRS community will be active for some time to come and for all of the years up to 2015 as new standards come on board.”
The imperative to help countries with IFRS implementation is very much front and centre for the Foundation. “There are 100 countries in the process of adopting international standards,” says Mackintosh. “You realise how big the world is when you work on these things; how big and how diverse.”