A Closer Look At Convergence of Accounting Standards: The Reality of Our World

Implications: 1.    The need for convergence of accounting standards is real.
2.    The ability to converge accounting standards is challenging due to cultural and legal issues.
3.    Although convergence will ultimately occur, it will occur with a broad based framework that may be adjusted by countries.  The adjustment will be a function of cultural and legal issues.

Analysis: Very few people debate the need to have a consistent set of accounting principles for our global world of business.  Yet the reality of achieving convergence is another matter.

Expectations should not be raised beyond a reasonable point.  Cultural and legal issues must be considered.  Let me give two examples.

Example one - China

China is one of the fastest growing, most significant players in the global investment and financing market.  Yet they have not adopted IFRS or US GAAP.  The only Chinese companies using IFRS or US GAAP are companies traded on exchanges requiring IRFS/US GAAP.  Many of China's standards are based on IFRS and US GAAP, however China's cultural and legal system does not permit it to fully embrace all such standards.  Intercompany ownership and transactions cannot and will not be reported under global standards in the near future.  Liabilities and costs of defined benefit pension plans likewise create problems for Chinese policy makers.

Example two - US

US GAAP is based on conservatism due to the legal structure of the US.  Accountants worry about being sued.  To compensate, US GAAP is a blend of current cost and historical costs.  An example is lower-of-cost-or-market.  Current value is only recorded if it is lower than historical costs.  IFRS is trying to move to current values, whether such values are below or above historical costs.  However IFRS is based in Europe, which has a different legal system.  Suing accountants is more challenging in Europe.


To conclude, I believe we will see accounting standards converge in the future.  This is a positive.  However exact and total convergence in the near future is not realistic.  I believe we will see a broad framework.  I also believe that countries will be able to create their own principles, within the broad framework, based on that country's culture and legal system.  (An example is Britain's pension standard and how it fits into IFRS.)  Financial analysis will remain complex.  Reconciling accounting standards used around the world will still remain a reality.  Financial analysts will be challenged for the foreseeable future.