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Mideast could see greater FDI by embracing financial convergence

Robert Garnett, a member of the International Accounting Standards Board (IASB), said: "Many countries using IFRS are finding that they are now more attractive to international investors, which is helping economic growth and creating jobs. There was a big barrier before, because investors didn't understand the rules."

He said: "The Middle East could follow the example of India, which is experiencing major investment growth. India is moving towards IFRS because its major trading partners like Russia and China are doing so as well."

Garnett, who is also Chairman of the International Financial Reporting Interpretations Committee (IFRIC), will deliver the keynote international address at the second World Accounting Summit in Dubai, which runs from May 27-31.

The five-day summit will bring together more than 300 international, regional and local accounting experts, regulators and standards setters — and the successful regional implementation of the global benchmark for accounting and reporting, IFRS, will be a key topic.

Garnett will present a progress report on convergence, and the implications of the required changes in financial reporting over the next three years.

Commenting on the gap between the Middle East and much of the rest of the world on IFRS, Garnett said: "Perhaps the Middle East has been neglected in the past as an investment area, and seen only as a source of energy. But with oil revenues being directed into large investments, the region is increasingly being seen as a potential partner."

He said: "The incentive wasn't as great five to 10 years ago, but the world is becoming smaller. The Gulf is now part of the international community. Local businesses are starting to reach out, and other companies are looking to reach in."

While the rate of convergence may vary, there is a global trend towards adoption of IFRS. More than 100 countries, including the EU, are now using the standards, and major economic powers like China, Japan, and South Korea are committed to conform.

The banking system and the majority of listed companies in Russia are following IFRS, and the United States is also committed to resolving the differences between IFRS and its homegrown GAAP.

While demands for built-in flexibility with the unique conditions of emerging markets like the Middle East are understandable, international standards need to be the same in order to be meaningful, according to Garnett.

"Kenya was one of the first countries to adopt IFRS in 1999, and many of the compliance issues faced by emerging economies are also shared by Russia and China, which are moving towards IFRS. We are sensitive to the needs of emerging markets because we spend time addressing them, but you can't have the label without paying the price. If we want international standards they need to be the same for everybody."

A board member of the IASB and Chairman of the IFRIC, Garnett added: "Countries that want to retain local standards are free to do so, but the market may exact a price. The reaction of the investment community to localised accounting standards can be less reliable, because they require investors to understand them. This was the experience of Australia, which adopted IFRS in 2005 but made changes because it felt it had a better framework."

Calls for representation on the IASB for emerging markets are also counterproductive, Garnett said. "The most effective committee is two people; as it grows its efficiency is reduced. The IASB's predecessor, the International Accounting Standards Committee, had 60 people from 15 countries. It reached a point where it couldn't operate. The IASB has trustees and an advisory committee to try to understand different concerns and address issues."

Legal changes may be required to enforce IFRS, but cultural factors will decide. "In Europe it needed the law to make it happen. In South Africa it was a requirement of the market; companies that didn't follow IFRS were de-listed from the exchange. The Middle East is facing a choice like other markets, but there is certainly positive movement, and we can work towards a common goal."

Garnett added: "The Gulf states are in a great position. There are many trained accountants, and there is a wealth of expertise around the world. There is no shortage of available knowledge, it's a question of transferring the knowledge from the people who have it to those who need it."

Agata Pawlik, Conference Director at IIR, organisers of the World Accounting Summit, said: "This month's World Accounting Summit in Dubai is a valuable opportunity to address the regional challenges of IFRS implementation."