International Financial Reporting Standards (IFRS): pros and cons for investors Ray Ball*
Abstract—Accounting in shaped by economic and political forces. It follows that increased worldwide integration of both markets and politics (driven by reductions in communications and information processing costs) makes increased integration of financial reporting standards and practice almost inevitable. But most market and political forces will remain local for the foreseeable future, so it is unclear how much convergence in actual financial reporting practice will (or should) occur. Furthermore, there is little settled theory or evidence on which to build an assessment of the advantages and disadvantages of uniform accounting rules within a country, let alone internationally. The pros and cons of IFRS therefore are somewhat conjectural, the unbridled enthusiasm of allegedly altruistic proponents notwithstanding. On the ‘pro’ side of the ledger, I conclude that extraordinary success has been achieved in developing a comprehensive set of ‘high quality’ IFRS standards, in persuading almost 100 countries to adopt them, and in obtaining convergence in standards with important non-adopters (notably, the US). On the ‘con’ side, I envisage problems with the current fascination of the IASB (and the FASB) with ‘fair value accounting’. A deeper concern is that there inevitably will be substantial differences among countries in implementation of IFRS, which now risk being concealed by a veneer of uniformity. The notion that uniform standards alone will produce uniform financial reporting seems naive. In addition, I express several longer run concerns. Time will tell.
1. Introduction and outline
It is a distinct pleasure to deliver the 2005 PD Leake Lecture, and I sincerely thank the Institute of Chartered Accountants in England and Wales (ICAEW) for inviting me to do so. PD Leake was an early contributor to a then fledgling but now mature accounting literature. His work on goodwill (Leake, 1921a,b) stands apart from its contemporaries, so it is an honour to celebrate the contributions of such a pioneer. My introduction to Leake’s work came from a review article (Carsberg, 1966) that I read almost 40 years ago. Ironically, the review was published in a journal I now co-edit (Journal of Accounting Research), and was written by a man who later became a pioneer in what now are known as International Financial Reporting Standards (the subject of this lecture), and with whom I once co-taught a course on International Accounting (here in London, at London Business School). It truly is a small world in many ways – which goes a long way to explaining the current interest in international standards. *The author is Sidney Davidson Professor of Accounting at the University of Chicago. His paper is based on the PD Leake Lecture delivered on 8 September 2005 at the Institute of Chartered Accountants in England and Wales, which can be accessed at http://www.icaew.co.uk/index.cfm?route=112609. It draws extensively on the framework in Ball (1995) and benefited from comments by Steve Zeff. Financial support from the PD Leake Trust and the Graduate School of Business at the University of Chicago is gratefully acknowledged. Correspondence should be addressed to Professor Ball at the Graduate School of Business, University of Chicago, 5807 S. Woodlawn Avenue, Chicago, IL 60637. Tel. +00 1 (773) 834 5941; E-mail: email@example.com
International Financial Reporting Standards (IFRS) are forefront on the immediate agenda because, starting in 2005, listed companies in European Union countries are required to report consolidated financial statements prepared according to IFRS. At the time of speaking, companies are preparing for the release of their first full-year IFRS-compliant financial statements. Investors have seen interim reports based on IFRS, but have...