Integrity of brand is a concept mainly associated with consumer products. However, investors having to cope with the collateralised debt obligation/sub-prime turmoil, are also being faced with another fundamental challenge, to measure how well different countries have been implementing international financial reporting standards (IFRS) in their national rulebooks.
The emerging problem here is that this common set of rules may be not so common after all. Temptation for governments to tweak the standards is becoming greater as more of the 100-150 existing and potential national jurisdictions take up the code set by the International Acc-ounting Standards Board (IASB).
The issue was well summarised by David Devlin, then president of the European Federation of Accountants (FEE), in October 2005: "Unless properly explained, differences between IFRS as adopted for use in the EU and IFRS as adopted by the IASB, risk causing uncertainty in the market and could potentially undermine confidence in financial reporting."
Devlin made the point that, even in the EU, the IFRS fudge factor had raised its ugly head. That was prior to the kick off of implementation at the start of 2005, when listed companies saw a tangle of variegated national regulations replaced with one standard. But it was a "hollowed-out" IFRS.
The European Commission had felt forced to drop 17 paragraphs from the IAS39 standard. This section covers financial instruments (contracts giving rise to an asset of one entity and a liability of another). This was under pressure during 2004 from the banks which, notably, were then favouring hedging operations not permissible under full IFRS.
Since then, that problem has solved itself, but not as anticipated. Ken Wild, global leader, international accounting standards at Deloitte & Touche, explains that all but 30 of the EU's 8,000 listed companies do go the full IFRS route.
The Commission itself agrees that, across the EU, IFRS is generally performing well. An official added: "However, we are still progressing in the application of the rules, relying on the International Financial Reporting Interpretation Committee (associated with the IASB) and the Commission, to help in the exchange of any problems. Discussions are channelled via the EU Round Table on Consistent Interpretation."
Not all would defer entirely to this optimism. For instance, Wild points out that: "If you carve out 39, it is no longer IFRS. That should be clear. It is like being pregnant or dead. One either is or one is not."
Stepping from Europe to the global scene, Wild continues that there could be country X that argues that "our capital markets are not that sophisticated so we are dropping all of IAS39". In that case it should be labelled "Country X GAAP, which includes some IFRS principles". Anything stronger would be misleading.
Whether the EU is as white as snow, or not, is relevant to the eventual acceptance of IFRS by the US, says Sharon Bowles, member of the important economic and monetary affairs committee in the European Parliament. She points out that this issue, which is related to branding, is playing a role in discussions with the US over acceptance of the code.
Whatever, "brand dilution" is certainly the concern among trustees at the IASB. Tom Jones, vice-chairman, emphasises that the need is to ensure confidence in consistent application of IFRS across multiple jurisdictions, while not slowing the momentum of IFRS's advance in bringing economic benefits around the world.
Richard Martin, head of financial reporting, at the Association of Certified and Chartered Accountants takes a parallel line, criticising divergence from the brand causing a negative effect on investors. He adds that it is still too soon to gauge the phenomenon, but he expects that investors would tend to favour those countries that comply in full.
One solution to brand dilution comes from FEE. In a position paper it suggests that EU companies should sign off with "in accordance with IFRS as adopted by the EU".
If in full compliance, they should say so. FEE adds that, if not, they should say how far their accounting policies depart from full IFRS. Such practice in all IFRS jurisdictions would seem to make a strong incentive against any straying from the straight and narrow.