Can we achieve consistency in IFRS application?
It would be great to have consistent application of a global set of accounting standards. A common reporting language helps users understand financial statements, whatever the industry or jurisdiction. But with a principles-based framework, we will still inevitably see some degree of diversity.
How does inconsistency or diversity arise?
There are several obstacles to achieving worldwide consistency. IFRS sometimes allows an accounting policy choice. Differences also arise in interpreting IFRS and in exercising judgement where an estimate is required. Although distinct, these are quite often confused by commentators. Disclosure can help here − for example, by explaining the extent of any significant estimation uncertainty and the accounting policy choice. But the value of a common reporting language would be lost if disclosure became a justification for inconsistency.
National or regional endorsement mechanisms (for example, the EU carve-out of part of IAS 39) can impose differences. Interestingly, a 2011 study by the SEC identified one of the most common causes of inconsistency as the tendency at a national level to roll interpretations from a country's prior GAAP into IFRS.
How can consistency be achieved?
Achieving consistency has to be a collaborative exercise of preparers, users, auditors, regulators and the IASB itself.
Preparers − Peer pressure helps to support consistency. Many preparers belong to industry or national groupings that discuss accounting issues to arrive at a common answer. Preparers might give additional disclosure or present non-GAAP measures in the front half of the annual report where they are uncomfortable with the IFRS answer. There is much debate about non-GAAP measures, but I believe that, provided they are reconciled back to IFRS to anchor the consistency with other companies, they can provide valuable information on how management sees the business.
Users − Users should communicate with preparers where there have concerns about inconsistency in the application of IFRS.
Auditors − Auditors have an important role in enforcing consistency of interpretation, but they cannot enforce a single answer for an estimate; their role is to judge whether the estimate is reasonable in the overall context of the accounts. There will be a range of tolerance for this.
Regulators – Regulators have the greatest armoury for enforcement: most can apply sanctions to preparers that they believe have not interpreted IFRS appropriately. Regulation, though, is typically applied nationally, and national regulators arrive at different answers. Some regulators meet on a regional basis to discuss interpretations; but in the absence of a global forum, there is potentially a role for the IFRS Interpretations Committee in resolving differences. Where regulators create inconsistency by an endorsement process, the problem is different – the inconsistency is more visible, clearly not IFRS issued by the IASB. Endorsement processes are inevitable where countries are reluctant to give up sovereignty over standard setting. We can regret they exist but we have to live with them. It is crucial to keep the number of differences as low as possible, and all stakeholders have a role in working to achieve this.
IASB – High-quality standards are essential. The IASB's consultation in the standard-setting process is vital in identifying and resolving difficult areas. The IFRS Foundation Trustees say that the IASB can do more to promote consistency, by identifying issues through post-implementation reviews and consulting with regulators and national standard setters. I also welcome the Trustees review conclusions on the operations of the IFRS Interpretations Committee, which propose a broader range of ‘tools’ for IFRIC to be more responsive.
We can’t expect every preparer to arrive at exactly the same assumptions and judgements when faced with uncertainty, but estimates present real concern for users. Of course, this problem relates to all GAAP frameworks, not just IFRS. To the extent there is a solution, I believe it lies with improving disclosure around significant uncertainties. IFRS already requires disclosure but allows the preparer to judge the degree of detail. Practice has not always been consistent. Therefore the challenge for all stakeholders is to work on developing more consistent good practice.
In a principles-based system, consistency will always remain an area of debate. Let me know what you think.