IFRS and local GAAP
One of the main reasons for the technical difficulties arising from the consolidation process has always been the discontinuous nature of the process. Contrary to the accounting process, which is based on the transfer of balances brought forward, changes in currency rates, percentages, consolidation methods and entries/exits of companies from the perimeter are all discontinuities that have always made the consolidator’s task difficult.
IFRS standards added another discontinuity to the process in 2005 in that the accounts included are, in principle, established based on local standards whereas consolidated accounts must be created using IFRS standards. Legislators will have to take some difficult decisions sooner or later, which in my opinion are inevitable, to deal with contradictory situations. Let’s take a closer look at this.
First, we don’t think it’s normal that a parent company establish its statutory accounts in local standards and that, in the same annual report, its consolidated accounts are published according to IFRS standards. Next, maintaining local standards for group companies implies adjustments in the consolidation to ensure that they conform to IFRS standards. This is a twofold difficulty.
Either IFRS adjustments remain centralised with the parent company without necessarily having sufficient information to manage them correctly, or IFRS adjustments are decentralised in the group’s companies with the ensuing risks for misunderstandings and difficulties due to the fact that their management isn’t integrated. There is a deterioration of the quality of information in either case.
Stepping back, it becomes clear that over time the worldwide accounting rules underpinning consolidations will erase both national practices and the disparities between listed and non-listed groups. Excel has been a global success because it was adopted by everyone everywhere, by both professionals and non-professionals. This same degree of success is shared by the PC, the Internet, GPS, Facebook and more. Accounting standards will evolve the same way.
Articles in the “Future of Consolidation” series:
- The structure of the data to consolidate and processing in consolidation
- The reconciliation of intercompany balances: is there hope?
- IFRS and local GAAP
- Statutory consolidation and reporting: unified consolidation
- Group structure
- Financial communication
- Impact of future technological changes on consolidation