One of two Staff Papers releases by the United States Securities and Exchange Commission this week, “An analysis of IFRS in Practice” found limitations in disclosures and comparability of financial statements across countries and industries. The paper was developed as part of the SEC's work plan for the consideration of incorporating IFRSs into the Financial Reporting System for U.S. Issuers.
The analysis covered the most recent annual consolidated financial statements of 183 companies across 36 industries which prepare financial statements in accordance with IFRSs. The companies were selected from the Fortune Global 500 (the top 500 companies by revenue) and represented all those which prepared financial statements in accordance with IFRS in English. The 183 companies were domiciled in 22 countries, with the majority (approx 80%) being domiciled in the European Union, but with China and Australia also being represented with more than five companies.
The Staff found that company financial statements generally appeared to comply with IFRS requirements. However, the SEC said this week that this observation should be considered in light of the following two themes that emerged from the Staff’s analysis:
First, across topical areas, the transparency and clarity of the financial statements in the sample could be enhanced. For example, some companies did not provide accounting policy disclosures in certain areas that appeared to be relevant to them. Also, many companies did not appear to provide sufficient detail or clarity in their accounting policy disclosures to support an investor’s understanding of the financial statements, including in areas they determined as having the most significant impact on the amounts recognized in the financial statements. Some companies also used terms that were inconsistent with the terminology in the applicable IFRS. Further, some companies referred to local guidance, the specific requirements of which were often unclear. Consequently, certain disclosures presented challenges to understanding the nature of a company’s transactions and how those transactions were reflected in the financial statements.
Second, diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries. This diversity can be attributed to a variety of factors. In some cases, diversity appeared to be driven by the standards themselves, either due to explicit options permitted by IFRS or the absence of IFRS guidance in certain areas. In other cases, diversity resulted from what appeared to be noncompliance with IFRS.
The diversity arising from the standards themselves was, at times, mitigated by guidance from local standard setters or regulatory bodies that narrowed the range of acceptable alternatives already permitted by IFRS or provided additional guidance or interpretations. This diversity also was mitigated by a tendency by some companies to carry over their previous home country practices in their IFRS financial statements. While country guidance and carryover tendencies may promote comparability within a country, they may diminish comparability on a global level.
