Another year has begun without any commitment from the Securities and Exchange Commission (SEC) on the adoption of International Financial Reporting Standards (IFRS) in the United States. As the world's largest capital market, the direction that the US takes is bound to have an effect on other nations' decisions.
Singapore, for example, last year delayed full convergence with international standards, partly because of the uncertainty over whether or when the US might become one of the more than 100-strong IFRS family. For other regional and international financial hubs such as the UAE, where some businesses report under IFRS, the continued delay of developing a single global financial reporting language is very relevant and perhaps frustrating. However, it is important to look at what has been achieved so far.
Increasingly, globalised markets and cross-border trade and capital flows have demonstrated the need for a widely accepted set of high-quality international accounting standards. Research suggests the benefits of IFRS adoption can vary between countries depending on a number of factors, but most notably what standards they are moving from. However, the advantages include lower accounting costs, greater comparability for investors, and cheaper capital.
Over the last decade, we have seen efforts by the International Accounting Standards Board, and its counterpart in the US, the Financial Accounting Standards Board, to harmonise their respective accounting standards, encouraged by the G20 leaders. This has brought the two sets of standards much closer together. However, recently the two bodies have struggled to agree on how to deal with standards in some key areas, such as financial instruments. Momentum has slowed.
However, given the scale of the wider project - a global financial reporting language - some setbacks were inevitable. This does not mean the project has failed; far from it. Over two thirds of the G20 nations either allow or require listed companies to use IFRS or national standards based closely upon IFRS, a level of adoption nearly unthinkable a decade ago. It is worth reflecting on how far we have travelled, where the project should be heading and what this means for the Middle East.
While convergence was a laudable aim, for the International Accounting Standards Board to devote more attention to it at the expense of the needs of its own "constituents" would be a mistake. Any further harmonisation should only happen if it would demonstrably improve IFRS reporting. The time is right for the IASB to go its own way where necessary to finalise some key accounting requirements that are in need of real improvement. Moreover, The Institute of Chartered Accountants in England and Wales (ICAEW), of which I am the Middle East director, believes that all listed companies, anywhere in the world, should be allowed to opt to use IFRS. They should have the freedom to decide for themselves whether the benefits of transition are worth the costs, and choose accordingly. This would also bring benefits to the UAE, where IFRS is a requirement for companies within the Dubai International Financial Centre.
It is true that many countries in the Middle East already use IFRS - such as Bahrain, Kuwait, Oman and Qatar - or are planning to convert to it soon. Saudi Arabia plans to move to it in 2015. However, increased comparability and transparency would make cross-border trade and investment easier - an especially important consideration for finance hubs which are looking to attract global business and investment.
The G20 leaders - who have called in the past for convergence of US and international standards - should now focus on encouraging IFRS adoption instead.
Peter Beynon is the regional director of ICAEW Middle East