The ‘Achilles’ heel’ of IFRS
It's one of the hottest topics in the world of finance these days. But for all of the hype, there are some concerns about the implementation of international financial reporting standards, or IFRS.
Near the top of the list is the danger that some countries will adopt IFRS but add a few local twists of their own. That's not adopting IFRS; that's adapting IFRS, and it would kill the concept of standardization. "It would be unfortunate if we were to lose ground by countries adapting IFRSs," Ian Ball, CEO of the International Federation of Accountants, said in an article entitled IFRS Going Global: Implications for the Accounting Profession. "And it is unfortunate where it occurs. Countries that adapt get the worst of both worlds. They have the costs of adopting and the costs of adapting."
CFO magazine's Alan Rappeport takes that issue one step further. In an article entitled One Standard, Many Laws, Rappeport says it all boils down to the difference between code-law and common-law accounting systems. In common-law systems (like the one in use in the United States), "rules are created independently, function as best practices, and are enforced through litigation," writes Rappeport. "They can be copyrighted and sold." In code-law systems, the rules are generally regarded as free and can be adapted to suit each country's needs.
"IFRS are rooted in common law, but many of the countries adopting them traditionally use code law, with their governments creating and enforcing accounting rules," writes Rappeport. "Will IFRS survive intact as they are adopted by code-law countries, or will they morph into a number of different, even contradictory, country-specific versions?"
Some believe the economic advantages of adopting a universal set of standards will be enough to convince countries not to modify IFRS. What do you think? Will that particular form of common sense rule the day?