Mixed Views on Ending IFRS Reconciliation

The Securities and Exchange Commission’s proposal to accept filings from some foreign companies without reconciliation to U.S. Generally Accepted Accounting Principles is drawing mixed reviews from the financial reporting community.

Under the current rule proposal, which drew more than 100 comment letters before the deadline last week, the SEC would accept filings from foreign private issuers in International Financial Reporting Standards, without the reconciliation to GAAP that historically has been required. Foreign private issuers would still need to prepare their statements in accordance with the English-language version of IFRS as published by the International Accounting Standards Board, rather than any specific nation’s interpretation of IFRS.

A related SEC concept release on whether to allow U.S. issuers the same choice to file in IFRS is out for comment until Nov. 13.

Eliminating the reconciliation requirement does have plenty of support; critics say the reconciliation statements provide no useful information to serious investors—who conduct their own analyses of financial statements anyway—and waste the filer’s time and resources.

Still, some argue that limiting the proposal only to filings made in accordance with IFRS as published by IASB will prevent a large number of foreign companies from taking advantage of the rule, since their statements are filed in accordance with IFRS standards of their home country.

Among those who support the current proposal are the Canadian Accounting Standards Board, SwissHoldings, Financial Executives International’s Committee on Corporate Reporting, and the European American Business Council, which counts IBM, Intel, and Apple among its members.

“The true benefits of a consistent, worldwide set of accounting standards will only be achieved through the required use of the same set of standards,” the EABC wrote in a comment letter. Limiting filings to those in accordance with the official IASB version of IFRS will cause some challenges, the group admitted, but it praised the SEC’s “active cooperation” with the Committee of European Securities Regulators, additional bilateral agreements between the SEC and certain national regulators in Europe, and the IASB’s “willingness for an open dialogue with the European Commission.”

The Council of Institutional Investors also supported the SEC’s plan to accept filings in strict compliance with the IASB version of IFRS only. But long-term success would depend on IASB’s independence as a standards setter, and the SEC’s proposal fails to address questions of IASB funding and independence from the European Union, the CII wrote.

Citing concerns that IASB “may be compromised by the source of its funding,” the CII called for the SEC to “thoroughly assess” those issues and report its findings and recommendations prior to any final rule ending the reconciliation requirement.

Weight of the EU

Others complained that companies in the European Union are required to use IFRS as adopted by the EU—which can differ from what the IASB approves. None of the EU’s 27 member nations specifically require compliance with the IASB version. Several commenter letters, including those submitted by the European Commission; executives at the AXA Group, UBS, Shell, and BP; and by two partners from the law firm Cleary Gottlieb, all suggest that the SEC should instead consider accepting filings prepared in accordance with IFRS as adopted by the EU.

From a practical perspective, the lag between the IASB’s approval of a new IFRS rule and its adoption by the EU “make it unlikely that IFRS as adopted by the EU would always mirror IFRS as published by the IASB at a given point in time,” a letter from the European Commission notes.

Others wrote that limiting acceptance to IFRS as per the IASB could lead some companies to raise capital outside the United States or to deregister, rather than determine in every financial statement whether any material difference exists between their IFRS rules and IFRS as published by the IASB.

Bernstein

While most companies could meet that burden today, any significant split between IASB and EU versions of IFRS could make compliance much more difficult, wrote Cleary Gottlieb partners Andrew Bernstein and Nicolas Grabar. Under such circumstances, they said, companies would either need to publish a second set of IFRS statements to satisfy the SEC, reconcile their primary IFRS statements to GAAP, or deregister.

Echoing that same view, Axa Chief Financial Officer Denis Duverne noted: “The bottom line effect of the Commission’s proposal would be to make our U.S. listing and financial reporting processes ‘hostage’ to EU political decisions over which we have little or no control.”

Duverne

And the auditing firm Deloitte & Touche suggested the SEC allow foreign private issuers to choose among U.S. GAAP, IFRS, or some local accounting system in their home country, reconciled either to U.S. GAAP or IFRS. Such an approach would make IFRS and U.S. GAAP “equally prominent” and require the SEC to evaluate continuously all the differences that arise between IFRS and local interpretations of it.

Insufficient ‘Current Symmetry’

Other voices warned that ending the reconciliation requirement is premature. A letter from the Investors Technical Advisory Committee of the Financial Accounting Standards Board said the two accounting systems still lack “sufficient current symmetry” to warrant an end to reconciliation. “We would prefer to see concrete evidence that the two sets of standards are substantially equivalent before the reconciliation is eliminated,” the ITAC letter said.

ITAC members said the SEC should evaluate and periodically report on differences between GAAP and IFRS that commonly appear in reconciliation statements; they also called for the development of a separate inventory of the differences between the two sets of standards. The reconciliation requirement should be dropped “only when the inventory of all identified differences has been satisfactorily resolved,” ITAC said.

Meanwhile, members of two committees of the New York State Society of Certified Public Accountants said significant differences between IFRS and GAAP will create an “uneven competitive field” for domestic and foreign registrants and make it difficult for investors to compare the performance of companies from different nations.

According to the NYSSCPA committees, the principles-based guidance under IFRS could “unintentionally foster abuse.” For example, they said, revenue recognition requirements under IFRS are “much less detailed than U.S. GAAP and lack sufficient guidance in many important areas.” Without GAAP reconciliation, “the greater flexibility allowed under IFRS would give an advantage to foreign filers.”

Tweedie

Citing a recent comment by IASB Chairman Sir David Tweedie that U.S. GAAP and IFRS “should be pretty much the same” by 2012, the NYSSCPA committees added: “If such rapid progress is expected, we see no reason in eliminating the reconciliation before the frameworks are substantially converged.”

Both ITAC and the NYSSCPA committees say eliminating the requirement now might delay convergence. Removing the reconciliation “may stifle the convergence process and render pronouncements by U.S. standards setters less relevant in the international accounting community,” the NYSSCPA letter states.