The International Financial Reporting Standards (IFRS) have generally been praised as a positive initiative for the development of governance and markets. In this article, however, we have decided to row against the current and make a more objective analysis of the subject.

To start with, we must remember the main reason for the creation of the IFRS. From its name, one can perceive that the objective was to standardize the accounting rules and facilitate comparison of financial statements from several different countries. It was initially applied to publicly traded companies in Europe and has gradually been adopted in other regions, including Brazil, through the conversion of local accounting standards into IFRS.

The IFRS can be characterized as a list of accounting rulings based on principles, rather than rules, as is already the case of several accounting standards (US Gaap, for example). This characteristic makes standardization somewhat difficult, as each country can apply it according to its own interests, whether political, fiscal or due to alleged macroeconomic impacts. The rules are not even applied in an even-handed manner within the European Economic Community. There is no entity with broad enough authority to enforce uniform application of the IFRS in the different countries. This issue also goes for companies, albeit on a smaller scale: as the provisions are subject to interpretation, similar situations can be dealt with differently by different companies.

The characteristics of financial statements prepared under the IFRS include application of fair value to a series of assets and liabilities. This mechanism was chosen because the IFRS formulators wanted financial statements to report net equity values as close as possible to the assets' real economic value. As we know, economic value is derived from the present value of future cash flow. Accordingly, financial statements stop focusing essentially on the result of completed (or past) transactions and start to incorporate company expectations with regards to future performance. One need not study the issue for very long to realize that this alteration causes an increase in the discretionary content of financial statements.

This phenomenon can be observed in the investment evaluations of several of the bonds linked to subprime mortgages during the downturn in 2008. As the bonds had no liquidity, their fair value estimates were created from assumptions disconnected from market reality. The consequence was overvaluation. Further evidence of discretionary content can be found in recorded goodwill resulting from the acquisition of companies. In this case, the last individual responsible for adjusting market value (impairment) ¬– the company CEO – is usually also the one who contributed to the formation of that goodwill. There is a clear conflict of interest in this case, which may eventually have a substantial impact on the company's results. Accordingly, it is easy to ascertain that impairment normally occurs when the current CEO was not responsible for the acquisition. In such cases, an economic event (impairment) is recognized in the affected accounting ledgers due to the interest of the directors.

In answer to the question posed by this article, the IFRS will probably be implemented in accordance with expectations, however the result will probably not be the one envisaged by its formulators. After all, how can they make the 100 countries that have signed up thus far apply the same approach, in such diverse environments as Germany and Haiti, or Kenya and the Netherlands? How can they prevent sensitive issues in certain markets (compensation in Brazil, stock option programs in the USA, etc.) from being dealt with by the regulators in accordance with the principles created for the IFRS?

We believe that, even after the implementation of the IFRS, there will still be relevant differences among accounting criteria adopted by companies. When comparing the performance records of two or more companies, we will still need to investigate any accounting distortions before carrying out a reliable analysis.