Now I know what I am, a boring old banker, and this post will make you think that I am even more boring. But spare a thought of the challenge I am going to face on this post. I am going to try to make accountancy simpler and sexier (ok, so I am exaggerating a bit on the sexy side!). It is now two years that Europe rolled out the International Financial Reporting Standard or IFRS for short. I can already see your eyes glazing rapidly and you are heading towards the back button. But if you are courageous enough, there is a reason why I am talking about this anniversary and this is because this standard is going to impact every person on the globe. I am also dangerously simplifying this very complex matter and for those accountants out there, please do not mind me making huge jumps and missing bits and possibly even making large mistakes.
Before IFRS, each country out there had their own standards for accountancy. So the national and company accounts were extremely national, very very difficult to compare across countries and finally were rarely having the same objective. To take an example, the accountancy standards of Germany were oriented towards the tax authorities, that of France towards the national economics and statistics authorities, the USA for the local state and multiple federal agencies and UK for the investor. So how does it matter? Well, the idea of why it matters comes from the fact that the cost of capital for British and American firms has been up to 10% lower compared to an equivalent German or French firm. So if you were a firm who wanted to incorporate a business and start making widgets, guess where you would do it? There is a large industry in Germany which helps local German firms to incorporate in the UK for the better tax and corporate laws.
But the EU being the EU, it pushed and prodded for a single tax law. Two years after it was mandated, we can say that the implementation and rollout has been a cautious good. Now one can understand accounts across EU (by and large), provided you appreciate the fact that the IFRS meant that the annual account reports are much longer and there are still country level differences. There are also quite a lot of challenges, exclusions (why are you surprised? this is the EU we are talking about, one of their motto's is: never let anything good pass by without missing a chance to bugger around with it) with the standard but by and large, it is good. Also ameasure of success is that almost 100 countries have now signed up to apply this IFRS standard, and most importantly, even the USA is now talking about getting the US GAAP lined up to the IFRS standard.
But why is this important for you and I? Well, at end of the day, every person on this planet works on the basis of assets, directly or indirectly. Whether you are a child or an adult or a pensioner, you will be working with assets. If you are a child, you are working with pencils and footballs, if you are an adult, you are talking about machines and salary and houses, if you are a pensioner, you are talking about pensions, savings on haircuts and health care. In other words, assets. Intangible and tangible "stuff" which helps life along. Now these assets need to be measured and managed. Given the increased mobility of labour and capital across the world, the impact of global aspects on global assets, the valuation of these assets is vital.
So the fact that Chile is adopting IFRS will mean that an electric motor repairman in Assam India will be impacted (no cracks about the butterfly chaos theory effect please!). Chile is one of the biggest exporters of copper, the pricing of copper and the accountancy of Chilean copper firms has a direct impact on copper traded on the world markets which has an impact on the price of copper in India which has an impact on the cost of copper wires which has an impact on the cost of re-wiring a burnt out electric motor in Assam, India. His earnings are therefore, very indirectly, linked to the accountancy standard in Chile. So the fact that these national accountancy standards are going to be internationally standardised means that the cost of assets will come down a wee bit, the cost of raising capital will come down a wee bit (as the global complexity reduces, the risk reduces and thus the price reduces) and generally it is a good thing. Did that make it simple? or would you prefer if I talked about the wiring in the under-wired bra of your partner? (I know, I am pushing it to make accountancy simpler!)
Happy Birthday IFRS! (terrible two's?)
All this to be taken with a grain of piquant salt!!!
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