Attestation Update – A&A for CPAs

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IFRS adoption is not quite as widespread as you think

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Image courtesy of Adobe Stock.

A presenter at the CalCPA’s Accounting and Auditing Conference on April 25, 2017 said IFRS has been adopted by over 120 countries, essentially every country on the planet with the holdout exceptions of:

  • U.S.
  • China
  • Japan
  • India

The inference is the overwhelming majority of the stocks in the world are reported on a consistent basis.

The US is the main stubborn hold out. He suggests China is holding back to see what the US does. Ripple effect is that if the US continues to hold out, China will too. If we adopt, China will too.

There is still the uncomfortable reality that each country chooses which aspects of IFRS to adopt or reject.

Apart from that precisely-consistent-across-the-planet idea, the comment that only a few countries have not adopted and eeeeevryone else is doing it makes it sound like most stocks are reported on IFRS.

I checked.

That isn’t the case.

Here is some info on stock market capitalization. Data for October 2016 is from Business Insider. Amounts in trillions of US dollars:

 

 Country  $trillion  % adopt  % non-adopt
 U.S.        23.8 36%
 China          6.6 10%
 Japan          5.2 8%
 India          1.7 3%
 Hong Kong          4.1 6%
 U.K.          3.0 5%
 Canada          1.9 3%
 France          1.9 3%
 Germany          1.8 3%
 Switzerland          1.4 2%
 rest of world        14.2 22%
 —-  —-  —-
 total        65.6 43% 57%

 

That is bit different picture than “over 120 countries” have adopted and only a mere 4 are holding out.

The US has over one-third of the market cap in the world, with China a distant second.

Of the countries that have adopted IFRS, the top of the list in terms of market share is Hong Kong with 6% of world-wide market cap.

That overwhelming majority of countries that have adopted IFRS have only 43% of the market cap.

The four hold-outs have 57% of world cap.

That means that over half of the world’s stock by market cap is not yet reported in the more subjective, judgment laden, each-country-chooses-what-to-apply, one-size-fits-every-economy accounting rules.

Another view: market cap of stock in US is almost as much as the market cap of all stock in all countries that have adopted IFRS. If we backed out Hong Kong stocks and go from 120 to 119, the market cap of the “over 119 countries” is essentially equal to market cap of US stocks. Here’s a formula for you:  sum(MV of >119) = (MV of 1)

So I’m thinking the ‘everybody is doing it’ argument for adopting IFRS doesn’t really work. Didn’t work well when we were kids, and has same level of validity of an argument in favor of IFRS now.

Written by Jim Ulvog

April 28, 2017, 7:29 am at 7:29 am

Posted in Accounting

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