There’s no turning back now. This month, some 7,000 listed European companies are scheduled to start using a single set of international financial-reporting standards—whether they are ready or not. The new IFRS rules must be adopted by year-end, including those related to hedge accounting and fair value that met fierce opposition.
Sir David Tweedie, chairman of the International Accounting Standards Board, believes the time is right for the European Union to have one accounting language. As he told CFO last year, a single language will mean much more than financial transparency. “What we are really talking about is inward investment, growth, employment, and world trade,” he said. “It is not about arcane bookkeeping matters.”
Those bookkeeping matters, however, have not been easy to decipher. It is estimated that at least 500 companies in the United Kingdom, for example, are not ready for the rules introduction. Even more worrisome is that investors and analysts are not prepared. A November KPMG survey revealed that 40 percent of the 100 analysts surveyed said that their knowledge of the new standards was “poor.”
How the standards will affect financials won’t be known until the first interim reports are issued later in the year. But there will be a mixed bag. German chemical giant BASF AG has already revealed that the new rules on goodwill could add about E200 million to its net profit, while L’Oreal SA’s net worth could be reduced by E1.8 billion.
What the European experience will mean for the convergence of U.S. and international standards—slated to be in place between 2007 and 2008—is also unclear. It may be the “handwriting on the wall” for what the future holds for U.S. companies, says Paul Bahnson, a professor of accountancy at Boise State University. But one main difference, says April Mackenzie, director of international financial reporting at Grant Thornton LLP, is that Europe is experiencing “a big bang,” whereas U.S. convergence will be “more like a creep.”
Still, observers strongly recommend that U.S. companies pay close attention to the European transition—a task that might prove difficult, says Dennis Beresford, former chairman of the Financial Accounting Standards Board. With all that U.S. CFOs have to do—Section 404 of Sarbanes-Oxley, accelerated reporting, expensing stock options—addressing future convergence is too overwhelming. “It may be intellectually interesting,” says Beresford, now an accounting professor at the University of Georgia, “but [finance executives] don’t have time right now to think about something so long term.”