NOT so long ago, almost every country had its own financial reporting language. Hence why it was difficult to make sense of the financial statements of companies beyond national borders. In fact, it was nearly impossible for the typical investor to make meaningful cross-country comparisons. But in today's interconnected world, it is increasingly important that businesses in different parts of the world speak the same accounting language. Of course, the vision of a single set of high-quality global accounting standards is not a new one — the idea was first mooted as long ago as the 1970s. It took time, however, for the fledging international standards to gain credibility, with very few countries adopting them in the early years. But gradually the standards began to gain credence as improvements were made and options removed. By the mid-1990s a small number of countries — including some Gulf States — had embraced the brave new world of international accounting standards. But it was not until early in the new millennium that lawmakers in the European Union lit the touch paper that would hasten the spread of what have become known as International Financial Reporting Standards (IFRS). The EU's bold decision to require all listed companies across the then-25 member states to switch from a multitude of national standards to IFRS from Jan. 1 2005 proved to be a major catalyst for change. The use of the standards spread rapidly around the world until today over 100 countries — including many of the G20 nations and GCC members such as the UAE, Bahrain and Oman — require some or all companies to use them, or standards based closely upon them. Now also the Kingdom of Saudi Arabia is preparing to join the IFRS community. Plans are in place that would require all listed companies in the Kingdom to report under IFRS with effect from 2017, joining Saudi banks and insurance companies who are already required by the Saudi Arabian Monetary Authority to apply the standards. Moving to IFRS will present many Saudi businesses with a formidable logistical challenge. Some will no doubt feel that the standards are overly complex and will have concerns about the time and effort that will inevitably be involved in making the transition from one set of standards to another. Others will highlight the costs involved in upgrading systems, processes and internal controls to capture all the information needed to comply with the standards. There any certainly many challenges that will need to be overcome, but if the European experience is anything to go by, business as a whole in the Kingdom will ultimately benefit from switching to a widely-applied, high quality set of international standards. There is a wealth of academic research on the economic effects of mandatory IFRS adoption in the EU. This indicates that the degree to which EU countries and companies benefited from switching to IFRS varied, and that much depended on the quality of a jurisdiction's overall institutional architecture. It also shows on balance the move to IFRS brought a number of significant benefits, including improved comparability, increased market liquidity, better international capital flows and reduced cost of raising capital. There is no reason to suspect that the experience in the Kingdom will be very different. Some have suggested that Saudi Arabia is different from other countries and that if the Kingdom must adopt IFRS, then local lawmakers should amend the international standards or provide supplementary guidance and interpretations to reflect existing practices and unique local circumstances. However, experience from other countries and regions, such as the EU, shows that the full benefits of IFRS adoption can only be reaped if the standards are adopted in full. Put simply, most international investors do not have the time or the resources to study the intricacies of local variations or to easily understand the implications of carve-outs or amendments. They want to be confident that the IFRS brand has been adopted in full. If it isn't, they will expect a higher return to compensate them for what they perceive to be a higher risk. In other words, the cost of capital for Saudi businesses may begin to creep up again. The Saudi Organization for Certified Public Accountants (SOCPA) is currently in the process of reviewing each of the international standards to ensure that they are compatible with the Saudi environment. While doing so is time consuming, the European experience shows that it is important, as it helps to underpin the legitimacy of the standards. While SOCPA has reserved the right to amend any IFRS requirement that contradicts Shariah or local law, it is reassuring to note that it has yet to make any such amendments. So there is still work to be done before Saudi companies can adopt IFRS. But that doesn't mean that companies can sit back and relax. It should be remembered that the transition would be much more than just a technical accounting issue. There are likely to be wide-ranging effects across the business as a whole. Companies would therefore be wise to start planning for the changes that lie ahead sooner rather than later. A smooth transition should be possible with the support of top management and a suitably resourced project team. — Eddy James is a technical manager in ICAEW's Financial Reporting Faculty. He is the co-author of ICAEW's report on Moving to IFRS Reporting: Seven Lessons Learned from the European Experience.
