The world of global accounting is girding up for a trans-Atlantic battle. Last month L'Oreal, Royal Dutch Shell, and Unilever, all gigantic companies, asked the U.S. Securities and Exchange Commission (SEC) to allow them to choose which accounting standards they want to use. (The companies belong to the European Association of Listed Companies, who delivered the letter.)
The reason is that U.S. Generally Accepted Accounting Principles (GAAP) is 25,000 pages long (which are based on very specific rules) and they don't like it. By comparison, the International Financial Reporting Standards (IFRS), is just one tenth the length (which are based on principles which can be more open to interpretation).
There are other good arguments for using the global rules - there are now more than 100 countries either using or adopting international financial reporting standards, or IFRS, including the members of the European Union, China, India and Canada.
But L'Oreal, Royal Dutch Shell, and Unilever, don't just want the easier rules, they want to choose which version of IFRS they can use - a European Commission version that allows them to choose how they value certain assets.
Financial Week, an industry magazine, in New York is up in arms.
" Imagine signing a contract and not having to hold up your end of the bargain. Or being able to say "I do" at the altar when you might sometimes mean "I don't." Having it both ways in such matters sure provides flexibility, to put it charitably. Yet that's exactly what a group of European companies want when it comes to accounting standards for global companies tapping the U.S. capital markets," editors of Financial Week, wrote earlier this month. (see "Converging on Chaos")
Another industry magazine, Accountancy Age in London, has also been critical of companies that use the more flexible European Commission rules. A couple of years ago, Taking Stock, the magazine's blog, asked Rudy Markham, the finance director of Unilver, why he was using flexible IFRS rules in reporting for the company, but he refused to comment, leading them to poke fun at him:
" TS understands that the biggest accounting change for a generation can be a complete turn off. We assume the numbers involved didn't mean that much to Markham anyway - a billion off the top line there, a billion on the bottom line there. He did, after all, personally take home just over ú1.1 million last year. Money, money, money, as Abba used to sing... "
The good news is that the U.S. which has long insisted on using its own complex rules, may be open to using the global standard. SEC chairman Christopher Cox has agreed to allow U.S. companies to use the IFRS but has cautioned against local versions of the rules, like the European Union version. Financial Accounting Standards Board chairman Robert Herz has also said that this is a bad idea.
Today the International Accounting Standard Board, which drew up the IFRS, appointed a new chairman, Gerrit Zalm, a former Dutch finance minister, who has already announced that he would try to prevent local variations of the global rules: "One of my first priorities will be no new carve-outs in Europe and trying to get rid of the existing carve-out, because if Europe is doing this, other countries could get the same inspiration and then all the advantages of the one programme fade away," Zalm told the Financial Times. "The fragmentation of standards is costly for the enterprise sector and it doesn't help in creating clarity for investors."
We look forward to his efforts to create a single global standard. Stronger global rules are always welcome, especially if they are easier to follow, but weaker ones that cater to nationalistic interests are not.