This is a small item, no big headlines. It's a bit of legislation about accounting practices, quite boring. But the repercussions, I believe, are important.
US companies are set to switch to international accounting rules in a move that will, for the first time, see all the world's most important listed groups reporting according to the same set of standards.
The US Securities and Exchange Commission yesterday proposed a "roadmap" to manage the migration of US companies from its rules to the international ones. The plans are open to comment for 60 days.
More than 100 countries use, or are adopting, International Financial Reporting Standards, including all 27 European Union members as well as China, Japan, Canada and India. US GAAP, the accounting lingua franca until the sudden rise of IFRS, is the last significant standard to be switched.
Under the SEC's plans, US groups are likely to adopt IFRS in 2014 providing certain conditions are met, a decision that will be taken in 2011. Some companies may be allowed to adopt IFRS sooner.
What does this mean? Financial statements are a labyrinth where accountants, tax attorneys and the like can hide their bosses' pecadilloes and misdemeanors. The situation is even worse when you're comparing companies accross countries, since everyone has their own accounting standards.
Case in point: the WSJ recently called out Cemex for it's debt management. According to the Journal, Cemex might be in trouble not because of the Venezuelan expropriation, but because they are heavily leveraged and demand is declining.
==>Cemex's Cement Shoes
But investors should be more worried by the Mexican company's large, complex and, some fear, overly engineered debt. This exposes shareholders to risks associated with things like movements in the Japanese yen and changes in Cemex's own share price.
The article also points out that the company's 17.6 billion dollar debt- mostly acquired when they purchased Rinker- doesn't include about 4 billion that are considered capital assets in México, but instead are liabilities under US GAAP (Generally Accepted Accounting Principles).
This is all very boring to most of you, I know. Only very geeky people get excited about accounting rules. The bottom line is, having everyone (or more companies at least) follow the same rules when counting their chickens means less room for interpretation and subterfuge. Less room for bubbles and meltdowns, less Enrons. And while this may not be stop all presses kind of item, in the long run, I think it's an important move in the right direction.
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