One of the drawbacks of having International Financial Reporting Standards could be that they might mean different things in different languages.
That’s one of the findings of a new paper by Peter Walton, IFRS director of the ESSEC KPMG Financial Reporting Center.
“In all of the debates about the advantages and disadvantages of international comparability of financial statements, and arguments for and against the use of IFRS, there is a conundrum that is not addressed by regulators and is rarely mentioned in the literature,” he said. “This is that while national regulations address the financial statements in the national language, the international capital markets, to whom IFRS statements are addressed, typically use the English translation."
For the study, Walton drew on a report by staff members at the Securities and Exchange Commission’s Office of the Chief Accountant evaluating the financial statements issued by companies using IFRS in their 2009 statements. “This report looked at the English language version of the financial statements and complained about ‘differences in form, content and presentation’ across industries and countries,” he said. “At the same time, the SEC staff noted that IFRS leave a large degree of choice in terms of presentation.This raises the question: if one reviewed the statements of the French companies in the SEC sample, would there be differences in form, content and presentation? If there were, would these relate to the translation or would they reflect the French original?”
Walton acknowledged that the SEC report is careful not to name individual companies or countries in its analysis. The SEC staff’s sample consists of companies in the 2009 Fortune Global 500 that published statements in English based on IFRS. His paper in turn examined 28 French non-financial companies that met these criteria, and analyzed the form, content and presentation of their figures. Walton noted that most of the companies attach a disclaimer to the English statements to the effect that they are for information purposes, and only the French original is legally binding.
In his study, Walton found some degree of diversity in labeling in the financial statements, but the diversity was mostly present in the French originals, and was thereby reproduced by the translator.
IFRS allows a choice of titles, he noted, although in the case of the Statement of Comprehensive Income, some of the labels used are not recognized at all in the IFRS literature. IFRS also does not prevent companies from adding sub-totals in the financial statements, and here there is even more significant diversity.
“From the point of view of the international market, there is indeed a degree of non-comparability arising from the use of different terminology,” said Walton. “Since IFRS do not so far specify a required format, nor required language, this is not surprising. We can add to that the problem more thoroughly reviewed by the literature that there are competing French translations of IFRS terminology.
“The situation has been complicated by the international standard-setter introducing terms like ‘Statement of Financial Position’ that were not previously used in Europe, and expanding the profit or loss account into a ‘Statement of Comprehensive Income,’” he added. “Nonetheless, it does seem that French companies focus on the French financial statements, and do not reflect on how comparable to other companies are the English language versions used by investors from the international capital markets.”