IFRS ComparabilityPosted: September 20, 2011
Anyone who has been following the SEC’s decision process on allowing/requiring U.S. public companies to use IFRS has heard time and again how adopting IFRS is critical to enhance the comparability of financial statements across the world. It seems likes comparability is a given – one set of global accounting standards means everyone will be accounting for the same transaction the same way – all over the world. Who can argue against the benefits of that to the investor community?
The problem is that the dream – everyone accounting for the same transaction the same way – is just that, a dream. I put forth as exhibit A, the nightmare of accounting in Europe over the value of Greek Bonds. As you know, Greece is in a little trouble and there is serious doubt about their ability to pay-off all of their debt. As a result, the level of trading in the bonds has diminished since the crisis began, but there still is trading in the bonds. That trading however indicates a price that is at a substantial discount, even lower than what some “experts” say Greece will eventually be able to pay off.
So, what should companies (mostly banks) value the Greek bonds at in their interim financial statements? Should they be valued at what they are trading for today or should they be valued at what the (experts and the) bank thinks they will eventually get back? I will be the first to tell you that there are a lot of variables in that decision, but the part that concerns me the most is that the value of the bonds seems to be determined by the country the bank is located in, not the accounting standard followed by the bank.
Yes, different banks, both using IFRS, have reported substantially different values for the bonds – and it’s not because one bank lists the bonds as held to maturity and another bank lists them as available for sale. It’s also not because the banks have different auditors – at least by name. Several of the banks with starkly different values appear to be clients of the same auditing firm. As a CPA with an understanding of how firms work, I know that a “firm” using the same name in different countries is really not the same firm. It is two (or more) firms – one from each country – that are bound together at some level internationally, but ultimately, each country (even office) of those firms has some, potentially significant, level of autonomy. Unfortunately, most investors don’t understand the intricacies of audit firm structures. If they see two opinions signed by the firm Jones & Smith, they assume that at least those financial statements should have things accounted for consistently.
So this Greek (Bond) tragedy, besides showing cracks in various aspects of the European Union, may also be showing us that moving to IFRS is not the comparability nirvana for investors that it is touted to be. There have been a lot of good debates about U.S.GAAP vs. IFRS, but until now, those on the U.S. GAAP side did not have a good response to the comparability argument. The soft underbelly of IFRS comparability has been shown for the tough old gut it is I for one am glad we didn’t rush into adopting IFRS before we had a chance to see how the supposed wonderful comparability of a single set of accounting standards really works.