How IFRS provides benefits to emerging jurisdictions

From time to time (or perhaps more often than that) I cite various doubts or reservations about the utility of IFRS financial statements. Let’s forget about that today and focus on areas where the benefits of IFRS-compliant reporting seem to be a bit clearer. This is from an article on Intheblack.com, carrying the rather muted title The Journey to International Accounting Standards:

• The world’s economy has changed shape dramatically in the past 25 years. In 2010–2016, the seven largest so-called emerging economies – Brazil, China, India, Indonesia, Mexico, Russia and Turkey – contributed 24 per cent of global economic output, up from 14 per cent in the 1990s. In the same period, the Group of 7 (G7) industrialised economies shrank from 60 per cent of world economic output to 48 per cent, World Bank data reveals.
• Maintaining those significant increases in trade and capital from emerging economies, and alleviating poverty in those nations as a result, is a major aim of the World Bank, and it sees the accounting framework developed by (the IFRS Foundation) as playing an important role in its program.
• More than a third of all financial transactions occur across national borders, according to the IFRS Foundation. Having a single set of high-quality, global accounting standards makes the flow of trade and capital stronger and more transparent. Indeed, the World Bank holds that adopting IFRS can attract investment and boost development in emerging economies.

Wiseman Nkuhlu, chancellor of the University of Pretoria and chairman of Rothschild (SA), says: “(In Africa) dependency on aid has moved to market participation and growth in the private sector, and it’s very important that accounting standards are in line with international standards,” he says. Although one must obviously exercise caution in responding to such anecdotal evaluations (no matter how apparently qualified the speaker), one can see the logic whereby (say) a balance sheet prepared in stated compliance with IFRS would carry greater weight than one for which the basis of preparation is unclear.

That depends though, no doubt, on providing confidence that the compliance with IFRS is deep and substantive. I’ve certainly come across instances of purportedly IFRS-compliant statements from emerging jurisdictions that all-too-obviously asserted themselves as not being that – for example, by reporting deferred-cost-type balance sheet assets. Language barriers present two interrelated issues. On the one hand, deficiencies in articulation and spelling inevitably carry the potential to undermine a user’s confidence in the information presented (the same goes for design and other elements – even for something as simple as a typeface). But language also poses a challenge in accurately interpreting the nuances of IFRS across borders: the article cites “the use of terms involving judgement such as ‘highly certain’ and ‘highly probable.” This isn’t too hard to believe, given my recent example of how the understood meaning of a term like “probable” might vary even between English-speaking jurisdictions.

The article points out some specific implementation challenges (and it seems, for the intrepid reader, various overseas employment opportunities):

• Emerging economies usually have a relatively small number of professional valuers and accountants, the Emerging Economies Group found in 2011. “Even the valuation teams of many large financial institutions are composed of only a few individuals. In addition, many market participants do not set up their own system to capture a fair values database for fair value measurement,” the Group wrote in its Guidelines on the Application of the Fair Value Measurement Standard in Emerging Economies.
• This lack of accountants has a flow-on effect. “The costs involved in determining fair values and preparing financial statements could be more than that in developed countries, particularly if countries do not have many qualified personnel to carry out the required valuations,” the Group’s report explained. “For example, the population of Africa is about 10 times that of the United Kingdom, but it has fewer accountants.”

Given the frequent difficulties of grappling with fair value concepts and practices even in more developed jurisdictions, it’s not hard to be sympathetic toward these problems. It’s interesting too how the article cites the importance in Malaysia of the “bearer plant” amendments to IAS 41, given the significance there of the palm oil industry (palm oil, we’re informed, is made from the pulp of the fruit of the oil palm). Again, this resonates somewhat against the current debate in Canada about the application of IAS 41 to marijuana crops, if only as a generalized reminder that we’re all in this together.

Anyway, as the article emphasizes in various places, this is all about identifying steps in the right direction. It was always naïve to imagine that adopting IFRS could instantly provide an absolute guarantee of comparability from one jurisdiction to another: it’s more realistic to think of it (at least in the earlier years of adoption) as a common reference point, providing agreed parameters for productive conversation and exchange. If it’s helping to facilitate those exchanges in some of the countries that most need it, then perhaps we can all feel (if only for a fleeting moment) like partners in a worthy cause.

The opinions expressed are solely those of the author