The Advent of the International Financial Reporting Standards: A Catalyst for Changing Global Finance

Article excerpt

We are now living through a transformational period marked by a fading American empire and an emerging global landscape. Recent years have seen globalization gain breadth and depth as the internet has leveled the playing field, more countries are producing and selling goods, and capital moves more freely. Despite twenty years of a very expensive dollar, U.S. exports have held their ground, and the World Economic Forum currently ranks the United States' $14 trillion economy as the world's most competitive. (1) Yet three years ago, the United States received a loud wake-up call in terms of its position as the nucleus of global finance. In 2005, twenty-four of the world's twenty-five largest initial public offerings (IPOs) were floated on exchanges outside the United States. (2) In a parallel development, the twelve non-U.S, sovereign wealth funds (SWFs) established then have grown to control roughly US$2.5 trillion. (3) These upheavals coincided with the introduction of a new principles-based uniform system of accounting standards in the European Union (EU), known as International Financial Reporting Standards (IFRS). These guidelines have since been adopted by more than 100 countries. (4) In response to these changes and to the recent market turmoil, the United States moved in August 2008 to adopt IFRS, conceding that it could no longer function in the global economy by prescribing American rules for other countries to follow. (5) The adoption of IFRS not only makes the United States more competitive in the world economy, it also provides a catalyst for change in the world's regulatory and legal frameworks utilized by all global market participants.

On 27 August 2008, the Securities and Exchange Commission (SEC), America's financial markets watchdog, made the landmark decision to adopt IFRS in an effort to promote the sharing of financial information across geographical boundaries by standardizing terminology. The Commission allowed large American-based multinationals to begin using IFRS for their annual reports as early as 2009 and expects that most firms will voluntary switch to the standards by 2010. (6) A road map for their mandatory adoption by 2016 has also been proposed. (7) This last measure was the latest in a string of proposals under the leadership of SEC Chairman Christopher Cox designed to bring American and foreign markets closer together. Announcing the decision, he hailed the new standards as a move to an "international language of disclosure, transparency and comparability," saying that the proposed road map marks a cautious step forward from the previously dominant U.S. standards. (8)

Despite the success of the new standards in integrating regional and global markets, reducing compliance costs by eliminating the need for reconciliation and lowering the cost of capital, IFRS only established their first real foothold in the United States in late 2007. On 15 November, the SEC announced it would allow foreign companies access to U.S. capital markets while reporting under IFRS. (9) That unanimous vote instantly affected roughly 1,100 companies with U.S. listings, along with any companies planning U.S. IPOs. (10) At the same time, the SEC started contemplating changes that would grant domestic firms the choice between reporting under IFRS or the previous set of accounting rules--known as the Generally Accepted Accounting Principles (GAAP). There were a number of considerations in favor of embracing IFRS. If the new accounting regime forced firms to be more forthcoming in what and how they report, investors would be better off. The lower costs and universality of IFRS also promised greater market access for foreign businesses. Until the November move by the SEC, if a European company wanted to list on the New York Stock Exchange (NYSE) or any other U.S. exchange, it had to engage in a costly reconciliation between its IFRS-compliant financial records and the results under GAAP. (11)

THE BUILDUP TO IFRS

The adoption of IFRS was the United States' answer to a leveling of the playing field it had once defined and an attempt to counterbalance the negative externalities of competition with emerging countries. …