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Convergence of accounting standards entails significant costs
January, 03rd 2008

There are significant costs of convergence. Each countrys accountants, auditors and regulators have to learn IFRS. There will be costs to dismantling the standard-setting infrastructure in each country. All this must be done in a short period of time if the deadlines are to be met.


A survey of accounting industry leaders from around the world has found overwhelming support for convergence of accounting standards, as a recent story in informs.

According to a survey of 143 leaders from 91 countries, conducted by the International Federation of Accountants, 89 per cent indicated that convergence to International Financial Reporting Standards (IFRS) was very important or important for economic growth in their countries. Nine per cent said it was somewhat important, while only 1 per cent said it was not important, states the December 4-dated article.

Convergence moves are evident. For example, closer home, the ICAI (Institute of Chartered Accountants of India) has decided to shift to IFRS by 2011. And, in the US, the SEC (Securities and Exchange Commission) approved on November 15, rule amendments under which financial statements from foreign private issuers in the US will be accepted without reconciliation to the US GAAP (generally accepted accounting principles), if the statements are prepared using IFRS as issued by the International Accounting Standards Board (IASB).

What is convergence? Do we have similar convergence in other fields? Convergence is when the laws and regulations in various fields are converging to one common set all over the world. Right now we are moving towards one set of standards, the IFRS, in the accounting area, explains Mr Siva Nathan, Associate Professor, School of Accountancy, Robinson College of Business, Georgia State University, US.

Similar convergence is taking place in other areas such as environmental regulations, safety regulations (with regard to aviation, shipping, and automobiles), labour laws, commercial law, etc., he adds, during the course of an interaction with Business Line, over a quick lunch. Convergence is happening because business has become global, he reasons. It is impossible to conduct trans-border business without a common set of regulations throughout the world.

Later, squeezing in time between his teaching and speaking assignments in Chennai and Hyderabad, and logging in from his hotel room and the airport lounge, Mr Nathan manages to answer over the e-mail a few questions.

Excerpts from the interview:

We hear much about convergence these days. Have there been earlier efforts at convergence? What are the major hitches that convergence has had to face?

Yes, there were earlier efforts but they failed because at that time business had not become global to the extent it is now. Also, people were very parochial and each country thought it had the best regulations.

What are the advantages of convergence?

I will talk about this in the accounting context. With convergence, companies that are traded in various global markets will have to prepare only one set of financial statements, using one set of standards. Analysts will then have to know only one set of accounting standards to analyse any company in the world.

While it will become easier for a company to conduct business and raise capital from anywhere in the world, investors too will think of investing in any company in the world because they would now understand the financial statements across the globe.

Are there any disadvantages of convergence?

Every country has its unique culture, especially business culture. Also economic conditions are unique to some countries. Having a common set of international accounting standards may hinder the conveying of information of certain company specific information unique to a country.

For example, in India, even large publicly-traded companies have a large number of related party transactions. So there is an extensive requirement in India to disclose related party transactions. The IFRS regulations are not as extensive.

Can you outline the stages/phases of convergence? Is there any timeline?

In India the ICAI has decided to converge in about four years. In the US, the SEC has already passed a regulation allowing foreign companies traded in US stock exchanges to file under IFRS.

The SEC currently has a proposal under consideration allowing US companies the option of filing under IFRS. This proposal is expected to pass in January 2010. Experts in the US feel that by January 2015, the SEC will mandate that all US companies file under IFRS. In other words, US GAAP (generally accepted accounting principles) will cease to exist at that point. All the EU (European Union) countries are currently following IFRS.

If convergence has to happen in accounting standards, what are the prerequisites?

In order for the convergence in accounting standards to work effectively, two other related convergences have to take place.

First, there has to be a convergence of auditing standards throughout the world. If the accounting standards converge, but the auditing standards do not, companies would effectively have to prepare multiple financial statements, which defeats the purpose of a common set of accounting standards.

Second, the regulatory authorities throughout the world (such as the SEC, the SEBI, etc.) need to get together and come to an agreement as to how the IFRS is going to be enforced. This is especially important because IFRS standards are principles-based standards so there is a lot of judgment involved in applying the standards.

The regulatory authorities need to have a common set of enforcement standards. Otherwise, the convergence of accounting standards will not work. For example, if Infosys files under IFRS with SEBI in India and SEBI approves the filing, but the SEC in the US does not agree with Infosyss interpretation of IFRS then it will be a big problem for Infosys. Effectively, they would have to end up preparing two sets of financial statements.

Will convergence be a costly exercise?

There are significant costs of convergence. Each countrys accountants have to learn IFRS. The auditors have to learn IFRS. The regulators have to learn IFRS. The university faculty in each country has to learn IFRS and teach it to students, and the textbooks in each country have to be rewritten. There will be costs to dismantling the standard setting infrastructure in each country. All this has to be done in a short period of time if the announced deadlines are to be met.


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