Published in the Financial Times: May 19 2006 
 

Surprisingly, the Financial Times and a draft report from the UK arm of PwC recently called for efforts aimed at further international convergence of accounting standards to be abandoned. In the light of progress already made by the International Accounting Standards Board and the US Financial Accounting Standards Board, these calls are unfounded and should be firmly resisted

The simple fact is that markets are integrating worldwide. Differences in accounting methodologies and reporting systems impose an increasing burden on economic efficiency. They make cross-border comparisons difficult and costly. They may mislead markets and capital allocation. They also encourage a competition in laxity, because countries may reduce the quality of their standards in a short-sighted attempt to attract listings or to appeal to special interests. None of these consequences serves the interests of the global economy or investors.

Convergence between IASB and US standards is just one step, albeit a big one, on the road towards high quality, understandable and enforceable global accounting standards.

The most recent argument against further convergence claims that there is an inevitable trade-off between the needs of companies and investors in the nearly 100 countries using International Financial Reporting Standards and progress on convergence with US GAAP. This is a gratuitous statement, inconsistent with what the IASB has achieved so far. First, convergence is not a zero-sum game where the gain of one standard-setter is a loss for the other. Second, convergence is not bound to lead to the predominance of traditionally rule-based US approaches over a principle-based system to which IASB is committed. The greatest obstacle to a principle-based approach is not the US standard-setting body but companies, auditors and regulators who seek comfort in narrowly defined rules.

The convergence process is laid out in the memorandum of understanding signed in February 2006 by the IASB and the FASB and blessed by the US Securities and Exchange Commission and the European Commission. According to the memorandum, the boards will begin work on substantial improvements in areas where IFRS and US GAAP are judged deficient, so as to permit removal of the requirement for companies to reconcile their accounts to US GAAP by 2009.

Meanwhile, the boards will provide general stability of accounting standards over the next few years. Indeed, the IASB recognises that companies using IFRS do not want a series of changes, merely for the sake of convergence. To address that concern and meet conditions of the SEC staff road map, the boards plan to complete only a few short-term projects before 2008 - and those would focus on broad principles and not on detailed guidance.

The memorandum calls for the boards to address areas where both see deficiencies in existing IFRS and GAAP. Those include pensions and leasing, as well as questions regarding the use of fair value accounting. These changes will not come overnight and the boards will reach conclusions only after intensive public consultation. The convergence programme envisages completion not before 2011 or 2012.

Why should it be better for the IASB and the FASB to reach different conclusions on these areas when they are addressing the same topics? Would it not make more sense for both to benefit from the expertise of a broader range of market participants, ensure a level playing field and fully integrate the US in an international process?

It is also crucial to recognise that the impact of the convergence programme extends beyond the US and the European Union. It is the promise of improving access to US and European markets, which convergence work makes possible, that has encouraged other developed and emerging economies, including Brazil, China, India and Japan, to opt for convergence with IFRS. Abandoning convergence with the US would not lead to a second-best conclusion in which the world had two main sets of standards, IFRS and US GAAP. Rather, it would probably lead to a world where big economies each had their own variation.

The coming months are not a time for abandoning a successful strategy. For the world to benefit fully from the globalising economy, capital markets require rules that ensure fair competition and transparency. The IASB must now be allowed to work towards that end with appropriate concern for issues of stability and without distraction.

The author, Italy's new finance minister, writes as chairman of the trustees of the IASC Foundation, which oversees the IASB.

The article can be accessed via the following link to the Financial Times website: