International Taxation: Is IFRS The Solution?

As businesses expand into other jurisdictions with different fiscal regulatory requirements, so the problems multiply. No matter that you’ve retained the services of a specialist firm of tax accountants to keep you on the right side of the law, your financial management information systems still need to cope with presenting income, expenditure and asset values in a range of accountancy "languages."

The Background

Accounting for taxation can be a problematic issue for companies trading in a single marketplace. As businesses expand into other jurisdictions with different fiscal regulatory requirements, so the problems multiply. No matter that you’ve retained the services of a specialist firm of tax accountants to keep you on the right side of the law, your financial management information systems still need to cope with presenting income, expenditure and asset values in a range of accountancy “languages,” which are potentially as diverse as the financial jurisdictions in which you operate.

Enter International Financial Reporting Standards (IFRS) – a kind of Esperanto for accountants. Developed by the International Accounting Standards Board (IASB), IFRS is intended to become the global financial standard for the preparation of public company financial statements. On the face of it, this sounds like really good news for companies and their shareholders.

From a corporate accounting point of view, anything which allows standardisation of financial management and accounting, both in terms of the systems inputs and outputs, must surely be welcome. For shareholders and investors, the ability to compare financial data across companies and jurisdictions has to be a good thing. From a regulatory standpoint, a seamless presentation of data means more straightforward compliance procedures and less opportunity for items to slip between jurisdictions.

Even the G20 has called for “global adoption of a single set of high quality financial reporting standards.” So, everyone’s happy and IFRS becomes the universal gold standard in international accountancy? Well, life just isn’t that simple.

The pros and cons

The devil is, as usual, in the detail. Almost of necessity, IFRS adopts a fairly broad-brush approach. In many ways it couldn’t be otherwise – the standards are intended to operate across a wide range of jurisdictions, each with specific issues and requirements. This means that the standards contained within IFRS are largely principle based rather than prescriptive. The way in which accounts and financial data is presented is therefore, to some extent, at the discretion of individual companies and their auditors, potentially negating the benefits of “read-across” which IFRS was intended to deliver in the first place.

Some jurisdictions have also expressed more specific concerns. The valuation of fixed capital assets, for instance, is referenced under IFRS to the concept of “Fair Value” – usually defined in relation to net present value of the future income stream. As has been demonstrated all too graphically during the economic turbulence of the past five years, actual market prices have a habit of diverging from theoretical values, leaving the door open for assets without fixed market values to be manipulated by the unscrupulous.

Other IFRS-sceptic jurisdictions have argued that the very lack of competition which such a process of standardisation represents would destroy competition and innovation in jurisdictional regulation which would be to the detriment of general standards and good practice.

Clearly, what can be heralded as flexibility and inclusivity, on the one hand, can be presented as an opportunity for manipulation on the other. In a sense, IASB is “damned if it does and damned if it doesn’t” — too prescriptive and the standards are likely to be inapplicable to some jurisdictions and industrial sectors. Too generalised and they fail to achieve the aims of standardisation and the benefits of straightforward comparison of financial data between industries and jurisdictions.

Who’s in and who’s out

One of the major issues with IFRS is that not all the major jurisdictions have fully adopted its principles – at least not yet. Of the 66 jurisdictions identified by IASB and surveyed as to their intentions regarding IFRS, only three have not made a public commitment to adopting IFRS standards with Switzerland as the most notable of these.

Of the remaining jurisdictions, 11 have yet to fully move to IFRS as the default standard. India, Japan and the U.S., for example, permit IFRS accounts on a limited voluntary basis but maintain the focus on local Generally Accepted Account Principles (GAAP).

Other jurisdictions, Russia and the CIS, for example, have indicated a timetable for full progression to IFRS. IFRS has been mandatory for all public interest entities in Russia, including banking and insurance, since 2012 and will become mandatory across the board by 2018 according to a recent statement by Andrei Belousov, Russia’s Minister for Economic Development.

What does this mean for business?

One of the major imperatives for the switch to IFRS (or some other globally recognised standard) is the benefits to business of a standardised form of financial management information system data inputs and a common presentation of data outputs. In the absence of a fully implemented standard, firms are faced with complying with local GAAP, IFRS or, in some jurisdictions, U.S. GAAP. Even in jurisdictions such as Russia, which has indicated a timetable for change, some parallel running is inevitable. For a firm conducting business in Russia, and therefore accounting for tax in Russia, for example, it would be sensible when choosing a financial management platform to look for one which is capable of presenting data in either GAAP or IFRS format.

Cost is clearly an issue. In the U.S., the Securities Exchange Commission (SEC) estimated that the costs for the largest US firms of migration from GAAP to IFRS may be as high as $32 million with an average cost of around 0.125 to 0.3 percent of revenue.

Where a firm is trading as a multinational, across jurisdictional boundaries, the problem is multiplied. As many of the elements of the cost of standardising on IFRS financial management systems for those firms affected are, to some extent, fixed, one criticism is that the burden of compliance falls disproportionately on smaller companies. In some instances, this can be addressed through derogation, although this is an area of uncertainty in itself.

There are, however, a number of financial management and enterprise resource planning (ERP) platforms, many of which can be tailored to meet firm’s specific requirements, which have been developed to accept financial data in multiple forms and provide data for fiscal, financial management, shareholder presentation and other requirements in either common or jurisdictionally specific formats.

As ever, the best advice is to plan ahead. The IFRS/IASB website contains data on major jurisdictions’ stated plans for the adoption of IFRS. To the extent that your company accounts for tax in the jurisdictions affected, it’s sensible to look at the transitional impact on your systems and how best to affect a smooth changeover for your financial management and ERP data systems. As with any IT requirement, failure to properly manage the change can have a severe impact on the cost of the project.


http://www.1bit.com/ is a company dedicated to smoothing the path of large international organisations who wish to do business with Russia. To this end we have developed an IFRS compatible software package which will help you integrate your business systems with accounting in Russia.

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