IFRS vs Reality: When Standards Meet Practice (Ep. 22)

IFRS has been with us for more than 20 years, but has it really changed financial reporting in practice?

In this episode of Financial Reporting Conversations, Wayne Basford and Judith Leung are joined by James Scott from JD Scott & Co. to unpack the IFRS Practice Gap: the difference between what the standards say and what companies actually produce.

🎧 In this episode, you’ll learn:

Why IFRS can still become a compliance exercise

• How revenue, consolidation, leases, and business combinations go wrong in practice
• Why technical accounting knowledge is often missing when it matters most
• How preparers, auditors, and regulators all shape the IFRS Practice Gap

Financial Reporting Conversations is brought to you by Basford Consulting helping professionals go beyond compliance and get financial reporting right.

For technical insights, training, and resources that make the unknowns in financial reporting known, visit basfordconsulting.com

🔗 Connect with us:
LinkedIn: Wayne Basford & Judith Leung
YouTube: @BasfordConsulting
Website: basfordconsulting.com

Transcript

SPEAKER_01 0:00

Welcome to Financial Reporting Conversations brought to you by Baster Consulting.

SPEAKER_00 0:04

We're here to make the unknown anonymous of accounting, auditing and climate standards known so you can avoid the blindfredding mistakes and do financial reporting better.

SPEAKER_01 0:13

Each episode will unpack what the standards really say, what they mean in practice.

SPEAKER_00 0:18

Whether you're a preparer, auditor, director, or litigator, our aim is to help you get it right. If it's now in its 20s, and over the last two decades, there have been refinements and improvements. Yet there is still a gap, not the convergence gap between IFRS's US gap that a lot of people talk about, but the real gap between what the standard says and what companies actually produce. So the question is when IFRES meets the real world, what actually happens? Welcome to Financial Reporting Conversations. This series is about one thing: the chasm between theory and practice. Financial reporting isn't just about understanding IFRS or interpreting it correctly. It's also applying in the real world, where the rubber hits the road. Embedding it or sometimes not embedding it within organizations and their accounting systems. And perhaps a more provocative question we'll be exploring this series is does IFRIS even matter? Or is my career in the last 20 years as a technical accountant and time spent at the IAS being meaningless? As always, I'm joined by Wayne Bassford. And today we're very excited to welcome our first guest, James Scott from JD Scott Co. James is the founder and managing director of JD Scott Co. And James has a career spanning from mid-tier accounting firms to EY and QBE insurance. Wayne James and I used to work together a long time ago. So very well welcome, James. Now, having left the world of technical accountants, what are you doing now? What does JD Scott and Co. do?

SPEAKER_02 1:53

Yes, you did mention, you forgot to mention that Wayne and I uh was 20 years ago, I think we started working together, wasn't it? So it's been a few years. Um right at the start of IFRIS in Australia, I think it was. Um but no the last couple of years I left um uh it was a big four firm for a number of years there in clinical accounting, and then worked in accounting advisory there. Um after doing that for seven or eight years, moved to a very large Australian insurance company uh with operations around the world. And I ran the group financial reporting team there, and we reported quarterly and then um yeah, obviously stack reporting as well. And I did that for quite a few years, kind of pumping out half-year sensor financials and full-year sense of financials, that sort of stuff. So I that gave me the experience of both sides of the corner, if you will be the actual real experience of actually how to actually pull a set of financials together with a CFO and CEO and chairman, and Ed's breaking down your neck, and orders card that's breaking down your neck on the one side, and you know, the number you've got on the other. And the actual theory that, you know, here's what the accounting scanner should say, and here's what you know, I forest interpretations say, putting those two things together. So that was my little journey left there and started journey's got about six years. The firm has a uh private business practice, which is uh accounting attacks for uh large family groups and um pilot with family individuals, finite with individuals. We also have a uh a corporate accounting practice, which is pretty much applied accounting. That is financial recording. I don't call it CFO advisory because we don't do a lot of the CFO stuff, but we do you know those things that matter to financial recording, reconciliations through the preparing financials, right on the roads, uh making the numbers work, uh, and dealing with auditors and as well. And so that's the that's it together over half of the business.

SPEAKER_00 3:38

Thanks, James. And are your clients interested in accounting standards?

SPEAKER_02 3:42

Uh depends what you mean by interested. Sometimes they are. Um but usually when someone's pointed out to them that that that uh a transaction they're about to undertake after you count the applications, because it's never any it's never it's never a positive implications a lot of the outside a lot of the time they're interested in wild transactions. Most clients get it on a day one from year to year, but where clients run themselves and where the auditors go to the clients and does one object um or where you know a a team has had a wonderful idea. Let's put this in place but nobody actually thinks about the financial accounting on the outside, or the on the side of the transaction, of course. Um yeah, they they they do care. Um at the care level is a really it depends at the end of the day.

SPEAKER_00 4:35

As we have three of us here bring very different uh perspectives, uh we're gonna sort of explore and I guess this series of podcasts, not just this one. Hopefully, this is a start, the beginning of many ones that we're gonna look at what ifris, the gap between what iFres says and what actually happens in practice. I mean, IFRS has been around for years. We first had the Big Bang adoption in 2005, and then we had the Big Three, IFRS 9, 15, and 16. And along the way, we also had IFRS 3 business combinations, iFres 8 segment reporting, and many other smaller ISB cause and improvements.

SPEAKER_01 5:16

Judith, you have missed the exciting thing in between Big Bang and the Big Three. You did miss the excitement of 10, 11, 12, and 13.

unknown 5:26

Yes.

SPEAKER_00 5:29

Well, blur into 20 years of trying to fast track this so we can, you know, get into the real thing, you know, between, you know, really looking at this gap that in practice, right? So um, James, let's start with you. Why is there a gap, such a gap between what the standard says and what we see in practice?

SPEAKER_02 5:59

Um I think the issue isn't so much um not wanting to do the right thing. I think the issue is more you can get to be esoteric, it's all the discussions, you know. I think clients like to do the right thing. The audit teams, you know, want to do the right thing, but ultimately you know it comes down to you know material, right? Almost the does anybody care. It doesn't matter so um you're taking up compliance exercises. Um I think for a lot of you know, particularly the bottom half of all the bottom parts of of other identities, it really just becomes a bit of a compliance exercise because they've got to do it. That's the only reason they do do it.

SPEAKER_00 6:41

Interesting perspective. What about what you, Ain? What's your perspective?

SPEAKER_01 6:46

I hate being the negative one on these calls. James is supposed to be the negative one. Uh from my perspective in Australia, it's appalling. It is diabolically appalling that they're brilliant standards, but from an Australian perspective, the the big three or or the previous big three have just not been adopted properly. You know, my history and this sad history of it's over 20 years, you know, I came into IFRS from US Gap. And US preparers, they did revenue seriously. They took revenue seriously, the SEC and the regulators took revenue very seriously. One of my great career moves back in the early turn of the century was it wasn't nobody was actually going to do a US GAAP listing in Australia because US GAAP was just too hard and it was too hard, and we can't possibly do it US GAAP. IFS15 comes out, it's the same as Topic 606. IFS 15 is US GAAP, and the Australians they continue doing what they've always done. That was a bit hard. Wayne and Judith presented that. I went at these technical accountants, they keep on telling me something about five-step approach. This is difficult. I can't remember what this five-step approach is. The simplest thing is I recognise revenue when I raise an invoice. How difficult can revenue recognition be in Australia? It's always been I raise an invoice, I recognise in revenue, and I recognise the invoice based on the billing schedule that's in the contract. So on revenue, appalling. What other things go wrong? That we do if we recognise goodwill. Whatever you do, recognise goodwill, and I will go to the market and tell everybody this earnings is going to be earnings accretive. And anybody that's complying with IFRS3, complying with FASB 141, 142, you're supposed to recognise amortizing intangibles. You're supposed to recognise profits in inventory, profits in contracts, and it's very difficult to have profit after acquisition. But don't you worry, in Australia, we have goodwill. So I would be extraordinarily cynical about the technical competence in Australia, from the accountants, from the audit profession, and from the regulators. And, you know, the whole drive of IFRAS and the beauty of IFRAS was we've got world-class standards and it allows us to be comparable with companies in Canada, comparable with companies in London. And they don't understand what a IFRAS is, because AIFRAS, I'm not sure whether it's even adopted IS-18, but so it's I'm very skinny. 20 years on, I don't think it's necessarily worked.

SPEAKER_00 10:35

Well, James, I mean, you did mention people were trying to do the right thing, and that you know, sometimes people don't do it because it's not material, it didn't make a difference. So does adopting IFRS actually help investors understand business better? Or, you know, all the work that the ISB has done is it wasn't wasted effort, it's right.

SPEAKER_02 10:56

That was definitely like having consistent standards is a good starting point, right? I absolutely agree with Wade on that. And it does make, you know, it doesn't mean you can read a set from anywhere in the world. I mean, should even have American standards should be the same. Uh the same information, the same way in the same place that I'm saying. So I guess the two points just coming to what Wade was saying is one is you know, actually it doesn't matter. Well, again, it's a good example, right? If we did it properly in America commerce, uh actually most people do it. Um I think most people do pretty close. Yeah, so that like you end up with a materially as I said, yeah, as I'd say close enough. Because the thing is if you do it with a materially recognition pattern, uh if you adopt it in the college, pretty critical finding is one of the critical findings find your controller to actually understand and be educated and doing CPG to learn how the second critical finding then is an auditors, where the auditors are, and that's everybody can use the salt rackage for through and big forecasts because the author is the critical finding of the regulator who clearly does up and doesn't have to get it hard enough. You know, people are genuinely scared or singing in the United States in Britain. Uh I don't think that happens with that very often here in Australia. Um so you know, there's a there's a regulatory failure, potential failure there, I suspect as well. And um, you know, the UK regulator would say get more teeth over the last couple of years, and we see I see that as on my clients within UK auditors who now petrify to their audit of their of their regulators. So um back to the question, like you know, if we did it properly here in Australia, would it give much of a different revenue recognition patterns? And I suspect not.

SPEAKER_01 12:49

James, I I think the answer is it definitely would, but year on year, it's always wrong. You know, if I were to look at how much revenue do people in Australia historically generate in period 12? And it's an um it's a lot. So but and since we consistently pull July sales into June, and we do that every year, you're right, year on year, and I've done these adjustments. I've gone in and map when I used to do the US GAAP adjustments, I would amazingly restate revenue, but because we consistently do it wrong, year on year the revenue on a steady state company ends up the same. But where it goes wrong is either on a growth company or a declining company. And the thing that amazes me in Australia, and again, I I still 20 years on, I still look at a lot of stuff through a US revenue lens. The the the amazing debate that's been raised by the SEC for the last 25 years is agent versus principal, and you can't believe the difference in revenue between agent versus principal. And I understand, yes, net profit ends up at exactly the same level. But I, if I was prodding some of the Australian accounts, are you truly the principal? Why are you recognizing those tens, hundreds millions of dollars of revenue? And it's not it's not right, and and people are being misled that you are not as big as your balance sheet and your PL tries to tell people because you're not the principal.

SPEAKER_02 14:53

And uh you know, have changed depths of accounts when I'm consulting with clients. Um to go from one of the principal transaction they get transactions, and you point it out to the old yes to get it out, and then point the auditors and they go buy. And so you know, one of the one of the problems there is a lack of knowledge and lack of understanding of you know, growth companies, you know, that the controller you put into place won't necessarily do technically with controller. None of them knowledge. They're probably also juggling some magic reporting, they're also juggling, you know, and all sorts of businesses. So their technical skills in this particular area probably a lot of these guys are um it's not that it's they get it when you tell them, but it's like it's just not front of mine because they're doing six other things at the same time. So I think and I've heard, you know, and until I mean comes in and looks at it and goes, Oh, that's actually the agency transaction, then you then have a whole other discussion. So I don't disagree with that, but like I said, I often I think um this comes from a lack of understanding, but also comes from a lack of understanding for the order teams as well, because they don't seek to some of them um, you know, seek to understand. And again, back to the regulator. There's no there's no big push from our regulator here to make you not quite make accounting sexy, but you know, to do it the right way. Um I don't know how to sales program, this sort of stuff. But it's it's nowhere near, as you as you're well aware, nowhere near what the SEC would have doing this. Um but I think if you focus people's minds on it, things might change. But I don't know that doesn't seem to happen here in Australia.

SPEAKER_00 16:38

If you're finding this discussion useful, please take a moment to click like, subscribe, and share. It helps others in the financial reporting community discover financial reporting conversations and keeps you up to date with every new episode. Thanks, James. So yeah, I mean, that's definitely like a new good point, like good observation if you're without like our regulator here is nowhere as tough as the SEC or the PCAOB for that matter. Women and I have have have a client that is listed on the um on the NASDAQ and you know, the papers that we have to prepare for the position papers we have to prepare for now US auditors. We need to cross our eye, cross our T's and dot our I's and put in the actual, you know, the the reference in the standard. And you know, if we miss something, there's a there's a comment. Where, you know, where's this bit of the standard?

SPEAKER_01 17:34

It it is the regulator. There is a big problem that people are getting people are getting old, and at what point do they stop keeping up to date? I live through transition and I watched a number of older audit partners, and one of them won't name him, but one of the audit partners that was good, was absolutely on top of everything, was one of the most diligent audit partners I knew. Back in 2003, he looked at the adoption of Ifras and said, I it's not worth me learning all of this stuff. I'm coming towards the end of my career. And he he he he retired early. And he gave up his green pen and he stopped signing audit opinions because that guy was really good. And then if I look at the vast majority of those audit partners that continued auditing in 2006-2007, they were amazingly happy through complete ignorance. And you then go from all this training, you know, all the three of us, we've run the training programs on the big new standards. We've only ran them for two years, three years. And were people paying that much attention when we ran those two days of training, three days of training? Did I keep on saying, well, you know, this is get this is hard, this is hard, this is you know, you've really got to get through this, you've got to change your systems, you've got to put in controls to do this. And if I look at those same audit partners now the same way, and we you were talking all this rubbish. It was nowhere near as bad as you said it was gonna be. And they are right, but I'm sure deep down I was right.

SPEAKER_02 19:29

And I think that's one of the things. I mean, you know, I I also work in report tax and you know, we're report tax well tax. I think I'm required year tax 30 hours in CPD tax. You're not required to do it if you buy the speed. And I've got some guys here who are ex big four seniors, they're really great guys, fantastic people. The gap between what they know coming out of say three to five years total experience, include qualifying qualified, um, and what you need to know uh to be able to do a good technical or even even a financial controlling role is is is quite vast. There's a hell of a lot more that goes on. So there's no requirement at all to do any CPD in financial reporting. You can you can run, you know, you can be the group controller for the biggest companies in the world, and there's zero requirement to do CPD in financial accounting and financial reporting. And that might be one of the issues, is that you know there's no compulsion to keep up. Institute charter accountants, CPA and others don't say if you're in a controller role, you must do some CPD in the status.

SPEAKER_01 20:46

That might help. If I do look at the institute rules, I do think we're obliged to do relevant CPD and the so much PA.

SPEAKER_02 20:55

You can do a lot of things in within a control role, for example. It's not just pure tech FO accounting, there's lots of other systems and stuff you can do at all counts.

SPEAKER_01 21:02

Even when you look at some of the larger listeds, their CFOs aren't actually qualified. There's a number that aren't truly true qualified accountants.

SPEAKER_02 21:12

I mean, there's lots of bankers and lawyers who are good CFOs. CFOs roles really broad, and I agree. With any luck, though, you've got a good controller there who's technically competent across accounting and financial reporting. And I've you know CFOs that are wearing many hats, financial reporting is just one of those, you know, those many hats. Um, you know, investor relations, market reporting, systems, tax, um, funding, lots of different sorts of areas.

SPEAKER_00 21:42

And isn't also the issue of, you know, not weighing your point about yeah, they do check our C P D, but it's also isn't the quality of what they're getting trained at. I mean, I think, you know, I there's so many sort of courses out there that can qualify. As your CPD points rather than, I mean, the probably the most closest thing they'll get the more is is the uh the financial reporting module in the CA.

SPEAKER_01 22:13

To be honest, when you look at the way now I there's very likely another another episode of who do I hold responsible for financial reporting, I always point the finger at the chairman of the audit committee because that's the person whose ultimate responsibility is to make sure the systems are in place. And I'd agree with you, James, that we've got good we've got big entities, top end of town with some really, really great financial controllers that have got far better things to do with their time than get an accounting paper right. So we're we're retained by some some quite big ASX 100s to be their accounting technical division. So as and when they do a new transaction, as and when they're doing something new, rather than get that CFO, who's got all sorts of things to do, like run the business, range finance, control budgets, and even the deputy CFO or their accounts team, they just come straight to us. And you know, do you know going back to does the CFO need to be as good an IFS9 as Judith is? The answer's no. But does the organization need access to somebody like Judith? Yes. Yes, absolutely. And you know, you know, that's the solution.

SPEAKER_02 23:41

Yeah. Oh, yeah, and also knowing that you know they when they go and need to operations right and getting the getting the help and when they when they need it. Um you know, one of the frustrations I've was over the years about any control holes is often you end up doing wherever you had when you end up uh then you wander off and you go out why this is the outcome, everybody goes, What the hell? Uh you go well. So I think that's how things happen uh and accounting in the end the closing that feels needed to get an under I know. Um you you can still see it. But I'm understanding what I need to ask the question because that bit needs to go into the into that mix. It needs to go under that mix in the capital base. Even if it's just a you know the outcome and nobody's getting surprised. Um yeah, you're right.

SPEAKER_00 24:57

So James, we talked about this before about um timing, and sometimes standards does come out quite late. You I think pref previously mentioned, and by the time it actually comes out, you know, does it actually improve business or even impact the share price? And I think we talked about uh you've mentioned uh an upcoming stem IFRS 18, and like you know, I'm even thinking IFRS 16. You know, that was a huge change for like a lot, it was reported on in the press, you know, Willis is gonna bring all these lease liabilities on balance sheet in a virgin as well. You know, did that even was there like a share price impact? Did that actually, you know, or was it change for changes sake? That, you know, it was 20, 15 years ago that sort of intuities that one of his jokes was, you know, his his aim was to have uh British Airways bring all of their all of their uh aircraft on the on the balance sheet. Like, you know, when we finally got through to 16, that that was like 15 years. And you know, analyst was already putting that calc in into the valuation already.

SPEAKER_02 26:10

So that's a great point, June. And and you know, I I can get back to blood on counting 15, 16, 17, indeed 18 was being spoken about quite 13, 14 years ago. So yeah, this start very, very long time. Um sort of circulating systems and be created as a standard. I think anybody needs low things. Oh, who is using all the accounts? So it's wildly interesting as a positive liability on the books. Um ISIC uh it ultimately it's not gonna think one of the problems that accounting standards has got is that it it's yeah, they're making these changes, but ultimately I think whoever uses these accounts, and again we there was all debate about who actually uses finances, and I think that people's getting smaller and smaller and smaller every year in, year out, um as the number of analysts and active fund managers reduce. So that's one issue. And that's the other issue is yeah, 16. Nobody did it, but it gets back about. It's like, well, here's the number what it used to look like previously. 16, now we're backing out, here's our real number. Yeah, that's a real, I mean real in the accounting, in the management sense, the word of here's our real profit, uh, which is equivalent to cash if we hadn't analyzed other things, marking up our wonderful results. Um I slightly cynical hat on there for a second. Um, so that's that's one of the problems that Calics out has got is that they make a change. And 18's coming up. Um why? I don't really understand why we're doing it. Well, sort of understand why. I understand the theory, but it's like, well, does that have any uh benefits to anybody? Do my little charities that produce GPFRs uh are they gonna get any better for it? Probably not. Does anyone understand it at that level? Probably not. And uh does it matter if even the Telstra CBA West Barmist level of the world? Maybe. Maybe not. You know how many analysts follow Telstra? 20, 30, maybe 40. If you're doing it for them, you take your entire accounting status for those 40 people?

SPEAKER_01 28:56

You know, to be honest, you've got to look at the context of what we've lived through. So yeah, you would have been with me 06, 07 back in the day. So you you were transitioning, and Judith, you joined me how many years ago? Around that time? Oh six, so we we were all around that that transition. And remember, there isn't anything really in the pipeline, you know. So from all this weirdness, we had the the big three, we had nine, fifteen, sixteen. Yes, if you're into insurance, we've had 17, but we've got 18. And uh to be honest, am I exciting, jumping up and down saying you really should get excited about 18? Uh no, I know there's a lot of people in the little tech our tech world that are jumping up and down and saying you need to get on top of it now, which even I'm struggling to get excited on. Um, so check we haven't got much change. You know, remember the ISB has run out of money. You know, you could look at them and say, I really wish you could explain equity accounting to me. I really wish you could explain to me what we should be doing with associates and JVs, but they're not gonna do that. And even as you touched, I know we'll go into further episodes on it. I am the least excited person about IFRS 16. I do not get excited about 16. I I struggle to see whether anybody's gonna get sued because they did or didn't put a lease liability on it, whether they actually worked out the renewal correctly, whether the discount rate was right. But talking against myself, I spent most of my career up until IFS 16 came out getting leases off balance sheet. You know, I looked and saw a finance lease and interpreted it and looked at it a different way and changed a few clauses and turned it into an operating lease.

SPEAKER_02 31:08

I I have spent when I spent many, many, many years of my life with clients at the start of the conversation is what answer do you want? We work backwards and it's an awful to work out the accounting answer starting backwards. And yeah, absolutely right.

SPEAKER_01 31:24

It's it's manipulate. You always wanted to create an operating lease. So this idea that analysts they did, because if they've not, I've got no idea why I've stared at operating leases for so many years. There was a view of the balance sheet. We don't want to show all that debt. We just don't want to show the balance sheet. So I do think, you know, in all fairness to if it's 16 answer David Tweedy, it may have worked. Even if I begrudgingly say IFRS 16 may have worked.

SPEAKER_00 32:01

Well, yeah, I think um for this episode, we'll um we'll wrap up now and we'll be talking a lot more later on different episodes because it's a very interesting conversation we're having, and I'm wanting to keep exploring. So thank you very much for both of you for this start of this series. And and so we're gonna continue looking at this gap and in more detail in each episode, just for the our viewers, our listeners, we're gonna focus on our plans to focus on specific areas. 15, 16, 9, sustainability, segment reporting, impairment, IAS36 and IFRS 18. Um, as you have got a taste of here, Wayne, James, and I bring very different perspectives. And that's exactly what makes these conversations valuable and interesting. So very looking forward to seeing where our discussions lead. And thank you again for joining us, and we hope you join us next time as we continue to explore the chasm between iFres and reality and how we can do financial reporting better.

SPEAKER_01 33:09

Thanks for listening to Financial Reporting Conversations. For guidance on applying accounting and auditing standards or to access our online training programs, please visit batsfordconsulting.com.

SPEAKER_00 33:20

Don't forget to like, subscribe, and share this episode with your colleagues and contacts. We'll see you next time where we make the unknowns in financial reporting known.