Speaking In Tongues

Forget esperanto. Too straightforward. The lingua L'franca that is increasingly spanning the globe is a tongue-twisting accounting-speak that is forcing even Americans to rethink some precious notions of financial sovereignty.

International Financial Reporring Standards (IFRS), rr-hich aim to harmonise financial reporting in a world of cross-border trade and investment, have made great strides since they were adopted by 7,000 or so listed companies in the European Union in 2005. To date, over 100 countries, from Canada to China, have adopted the rules, or said that they plan to adopt them. The Londonbased International Accounting Standards Board (IASB) expects that to swell to 150 in the next four years.

Even America, no ardent internationalist, is working rr.ith the IASB to narrow the gap between its own accounting standards and IFRS, which foreign companies listed in America could choose by 2009, or possibly sooner. Today such companies must "reconcile" their accounts with American rules - a costly exercise that some believe is driving foreign listings away from the United States.

But even the EU's embrace of IFRS has been less than effusive. It chose a version of the rules endorsed by the European Parliament, rather than one issued by the IASB. There is only one difference, but it is a big one - the rule on how to account for financial instruments (derivatives and the like).

Kuwait and other countries in the Middle East, too, are said to be adopting IFRS with certain peculiarities. The worry is that if enough countries seek to tailor standards to their liking, there couid be "hundreds ofdifferent versions of IFRS instead of one set of international rules, which is the whole point," says Sir David Tweedie, the head of the IASB. "We have to nip this in the bud." So far, nipping means working with international standard setters to compel companies to disclose exactly what set of rules they are using. The hope is that investors would press companies not to use countryspecific, bespoke versions of IFRS, or charge them higher risk premiums if they do. Today, an investor in Europe could not tell from reading a company)s financial report whether it is using full-blown IFRS or the EU version.

Arhether pure IFRS or not, all countries are prone to interpret the rules in ways that reflect their old nationai accounting standards, according to KPMG, an accountancy firm. Regulators are working through IOSCO, an international body ofsecurities regulators, to attempt to whittle down these differences. The task is further complicated by the fact that international accounting rules tend to be "principies based," which means there are no hard-and-fast codes to follow. This is different from America, where accounting principles are accompanied by thousands of pages of prescriptive regulatory guidance and interpretations from auditors and accounting groups, some ofit gleaned from SEC speeches. IFRS have no such baggage, leaving more room for judgment.