1 A significant exception of theoretical consequence

The paper by Ramanna (this issue) titled “The international politics of IFRS harmonization” is helpful to understand what has been going on with the International Financial Reporting Standards (IFRS) harmonization decisions by major countries. The author’s detailed descriptions of political and cultural aspects of global convergence are quite informative, and it is particularly interesting (if not controversial as the author acknowledges) to take the International Accounting Standards Board (IASB’s) European identity as a baseline against which other jurisdictions’ responses can be assessed.

According to the author’s model introduced in Section 6, those classified in Quadrant II (at the upper right) are expected to be IFRS-adopting countries, depending on his theoretical perspective. However, a most probable candidate for this Quadrant, the United States, seems unlikely to commit to full adoption, on the basis of recent Securities and Exchange Commission (SEC)’s announcements which have been made public. Particularly, the final staff report of July 2012 clearly stated that the designation of IFRS as authoritative was not supported by the majority of participants in the US capital markets (USSEC, 2012, p. 2).

Being classified in Quadrant II, therefore, may be a necessary but not a sufficient condition for IFRS adoption. Although the paper gets around this issue by characterizing the United States as a special case (i.e. as an exception), the explanatory power of the author’s model may be open to question as long as the United States are a credible candidate for this Quadrant among non-EU countries. The extent of Quadrant II may then be even narrower, as IFRS adoption among EU member states was introduced as part of a broader set of reforms aimed at pan-European standardization led by EU inter-state institutions.

2 A theoretical advance by considering institutional cross-complementarity

The theoretical difficulty may depend on the x-axis of author’s 2 × 2 matrix representing the country’s proximity to existing political powers at the IASB. While the term “proximity” is explained in terms of “culture,” with the latter being defined as “beliefs and preferences” that vary across countries, this sort of cultural proximity may still remain insufficient as a basis for assessing the IFRS harmonization decisions. In my opinion, we may take a step further to replace it with the affinity of related social regimes, including legal and regulatory systems, to regimes in place in the EU. This approach may focus more directly on the cost-benefit trade-offs concerning IFRS adoption/incorporation in local regimes and systems as a matter of economic analysis.¹

Cross-complementarities among institutional systems and regimes (Aoki, 2001) seem to be of vital importance for accounting matters.² Various social systems, including accounting standards, influence each other to build up a market infrastructure. Let us suppose that there is a set of interrelated systems (A, B, C, …, K) that has developed over time into two different types of combination (A₁, B₁, C₁, …, K₁) and (A₂, B₂, C₂, …, K₂) in two different countries. Even if A₁ is a more desirable form of A than A₂, this preference does not always hold true when A₁ is combined with (B₂, C₂, …, K₂). Cost of conflict between A₁ and (B₂, C₂, …, K₂) may exceed the incremental benefit of replacing A₂ with A₁ in that particular institutional combination, because of institutional complementarities between interrelated systems.

Free-riding full adoption of IFRS enables individual countries not only to avoid the cost of developing and maintaining their own accounting standards but also to enjoy the benefit of positive network externalities among adopting countries. However, this strategy also incurs the cost of conflicts with related legislations (such as corporate laws and tax codes), regulatory frameworks (such as financial, industrial, and price regulations), and contracts (such as bond covenants, management compensation plans, etc.), all of which are closely related to one another to play complementary roles in control, governance, and regulation. The international political dynamics of IFRS harmonization, which is the author’s major concern, may be viewed as a result of trade-offs between such complementarity of domestic systems and the potential political power of individual countries the author subsumed on the y-axis of his original model.

The cost of those institutional conflicts depends largely on the affinity and cross-complementarity of adopting countries’ legislations, regulations, and contracts to the regimes in place in Europe, where the IFRS have been developed and adopted (taking here for granted the controversial assumption that aligns IFRS with Europe). The net benefit (i.e. benefit over cost) of IFRS adoption and institutional incorporation may be based on the affinity of countries’ social regimes, instead of the cultural proximity to political powers at the IASB. Accordingly, if this net benefit is placed on the x-axis with “Low” on the left of the original author’s scheme, the United States and China (and Japan) may fall into Quadrant III. This result, I think, gives a more convincing and less abstract picture of what has been going on with the IFRS harmonization decisions in those countries so far, and does predict better what is being to be.³

In case of Canada (a former member of Quadrant I), many legislative systems are more familiar with the European than the US institutional frameworks. Taking the nation as a whole, therefore, this may be a better reason (at least better than the author’s claim on “inferiority complex”) why Canada preferred the IFRSs to the US GAAPs, contrary to the interests of big corporations raising funds in the US capital markets.

3 The case of Japan

The paper gives a full account of the present circumstances of Canada, China, India, and the United States. It seems important to add some considerations on Japan. Having launched a joint convergence project with the IASB in 2004, the Accounting Standards Board of Japan (ASBJ), established as a private standard setter in 2001, has worked intensively to develop and/or revise Japanese accounting standards to foster convergence with international accounting standards (IFRS). The process was accelerated by a new agreement (called “Tokyo agreement”) signed on 8 August 2007 between both boards, settling deadlines for the ongoing convergence project.⁴

It seemed a hard task to reconcile the urgent needs related to the equivalence assessment of Japanese standards required by the EU in 2005⁵ with a difference in relationship between accounting standards and complementary legal or regulatory systems in Japan.⁶ In December 2008, the European Commission adopted a Decision and a Regulation, which identified the U.S. GAAPs and Japanese GAAPs as equivalent to IFRS. Since 1 January 2009, companies from these countries listed in the EU can report using their national accounting standards. This EU decision ensured conditions of reciprocity between the EU and Japan for financial reporting matters.⁷ Thereafter in Japan, voluntary application of the IFRS has become admitted even for domestic issuers that satisfy strict conditions, while no conclusion has been reached yet in regard to further convergence strategies including mandatory application within certain limits. Trade-offs are still unsettled between the institutional complementarity and the political power of the country.

4 Legal and regulatory sources

• European Commission Decision No. 2008/961/EC: Commission Decision of 12 December 2008 on the use by third countries’ issuers of securities of certain third country’s national accounting standards and International Financial Reporting Standards to prepare their consolidated financial statements (notified under document number C(2008) 8218) OJ L 340, 19.12.2008. URL: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32008D0961:EN:NOT

• European Commission Regulation No. 1289/2008 of 12 December 2008 amending Commission Regulation (EC) No. 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards elements related to prospectuses and advertisements (Text with EEA relevance) OJ L 340, 19.12.2008. URL: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32008R1289:EN:NOT

• USSEC, Office of the Chief Accountant. 2012. “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers,” Final Staff Report. 13 July. URL: http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf