The Many Interpreters of IFRS

After the International Accounting Standards Board hands off its rules to companies, who ensures the consistency of their application?

Six years ago, the International Accounting Standards Board took over as an international standard-setter, using its U.S. counterpart as a model — except for one key difference. Unlike the Financial Accounting Standards Board, which has the Securities and Exchange Commission on its back, the IASB acts autonomously.

Critics repeatedly have called the lack of IASB oversight into question, but particularly in recent months after the SEC made two proposals that would raise IASB’s stature in the United States by allowing companies listed there to use International Financial Reporting Standards.

To address concerns about the IASB’s governance, the board’s trustees are creating a monitoring body whose members would include securities regulators who would approve trustee appointments and review the group’s budget. Currently, many view the IASB as freely issuing the equivalent of European law without formal scrutiny.

At the same time, the oversight the IASB’s standards receive once approved by the board and put into practical use varies by the many regulatory bodies that review companies’ financial statements. They vary from country to country, even though more than 100 countries are either using the standards or are in the process of converting to them.

An official call for the creation of an IASB monitoring body came from several regulatory sources earlier this month. In their joint statement, the SEC, the European Commission, the Financial Services Agency of Japan, and the International Organization of Securities Commissions (IOSCO) said an overseer would give the board and its trustees more accountability while also “enhancing public confidence in IFRS.”

To be sure, public confidence is shaky. The application of IFRS has been inconsistent thus far, as some countries have refused to adopt the IASB-blessed version of the standards in favor of the version mandated by the European Union. This have put into the question the fate of the FASB/IASB convergence project and IASB’s future as the official global standard-setter.

Once IASB issues a new standard, it’s up to individual countries whether to adopt it. In the European Union, which mandated that its countries use IFRS starting in 2005, each standard goes through additional rounds of scrutiny by the European Commission and the European Parliament. Within IASB’s umbrella, the standards also go through an implementation review by its International Financial Reporting Interpretations Committee, which rarely issues guidance.

The variant opinions on IFRS and other securities matters has raised the possibility of a consolidated, supranational securities regulator. However, observers tell CFO.com that notion could be a pipe dream.

The Committee of European Securities Regulators (CESR) was created six years ago to coordinate the enforcement efforts of the regulators and advise the European Commission on securities issues. One of CESR’s tasks is to promote a uniform interpretation of accounting rules, which it does through enforcement-coordination sessions to make sure the European regulators don’t start sharing disparate understandings of standards.

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