SEC Kills GAAP Reconciliation Requirement

As widely expected, the Securities and Exchange Commission has abolished a long-standing requirement that overseas companies listed on U.S. exchanges reconcile their financial statements to U.S. Generally Accepted Accounting Principles—a crucial step toward adopting a single, globally accepted set of accounting rules.

The Commission voted last week to end its reconciliation requirement for foreign issuers that submit financial statements using International Financial Reporting Standards as issued by the International Accounting Standards Board. Issuers using other accounting standards, including IFRS “tweaked” by individual nations, will still need to file the reconciliation statement.

The change is effective for financial statements for fiscal years ending after Nov. 15, the day the SEC approved the proposal. Under the rule approved, issuers and their auditors must assert that the financial statements comply with IFRS as issued by IASB. A final text of the rule was not immediately available, but one should be posted to the SEC Web site in the near future.

The move drew praise from overseas. In a statement, IASB Chairman Sir David Tweedie said his Board was “delighted” by the move. Tweedie added that IASB “remains strongly committed” to its joint work with the Financial Accounting Standards Board to converge the two sets of accounting standards by 2009, as set out in a February 2006 Memorandum of Understanding.

McCreevy

Charlie McCreevy, commissioner of the Internal Market for the European Union, also welcomed the decision, which he called “a historical step by the SEC on the road toward global accounting standards” that will benefit EU companies with a U.S. listing. “We are making major strides toward one global accounting language, and many more countries are likely to follow,” he said.

Nasdaq officials, hungry to lure more companies onto their exchange, also lauded the move. Bruce Aust, executive vice president of Nasdaq’s corporate client group, said the decision will make the United States a more attractive place to raise capital.

Aust

“It removes unnecessary costs and steps that create barriers to attracting international companies,” Aust said in a statement. “The SEC’s decision clearly communicates that the U.S. markets are dedicated to wringing the cost and inefficiency out of doing business in the U.S.”

To help Nasdaq-listed companies take advantage of the change, Nasdaq submitted a proposal last week to the SEC to allow non-U.S. companies to satisfy their financial listing requirements by using IFRS.

Critics have long complained that reconciliation statements are expensive and unnecessary, since the financial data is several months old by the time the statement is filed, and savvy investors ignore the statements and conduct their own analyses anyway. Regulators say the move will lower costs to issuers, facilitate cross-border capital flow, and enhance the comparability of financial statements.

Still, not everyone believes eliminating the reconciliation so soon is a good idea. As Compliance Week has previously reported, some voices in the financial reporting community worry that the decision could hinder convergence efforts.

SEC officials disagree, saying the ultimate goal is still to affirm one set of global standards—which is expected to be IFRS.

“The SEC, our fellow regulators, and the market will continue to provide an ongoing incentive for continued converge,” SEC Chairman Christopher Cox said during last week’s meeting.

Another concern has been the funding of IASB and its accountability to the public and investors. At last week’s meeting, Cox and SEC Chief Accountant Conrad Hewitt said those concerns are being addressed. Cox noted that the SEC staff is working with the European Commission, the Japanese Financial Services Agency, and the International Organization of Securities Commissions on a “proposed framework for formal ties between regulatory stakeholders and the International Accounting Standards Committee Foundation,” which oversees IASB.

“I think initiatives currently underway that directly address these concerns will be more effective than any indirect effects of retaining an IFRS to U.S. GAAP reconciliation requirement,” Hewitt added. (For a related story on IASB’s moves, please see “International Accounting Rulemaker Gets New Overseer” in this week’s Accounting Industry Update.)

White

As for consistent application of IFRS—another worry mentioned by commenters when the rule was proposed—Division of Corporation Finance Director John White said that during the SEC’s second year of reviewing IFRS filings, companies generally followed comments made by SEC staff on their prior year filings. Further, he said the items the staff identified for comment in the IFRS filings “don’t appear to be more pervasive or significant than those seen in regular GAAP reviews.”

The rule includes an optional, temporary provision for foreign issuers currently using an exception to International Accounting Standard 39, Financial Instruments: Recognition. and Measurement, which the European Union created to help companies account for derivatives. The SEC provides a two-year transition period for companies that use the carve-out to reconcile financial statements to IFRS as issued by IASB. For subsequent years, those issuers have to report in the same manner as any other FPI.

Erhardt

Deputy Chief Accountant Julie Erhardt said the accommodation was made because companies using the IAS 39 exception would have made the decision to do so before they knew the direction the SEC was headed on IFRS. Hewitt noted that the carve-out affects only a few companies.

Meanwhile, the SEC is also exploring another controversial idea: giving U.S. companies the same choice to file financial statements in IFRS without a reconciliation. The comment period on an SEC concept release on the topic ended last week. The SEC will hold roundtables on Dec. 13 and Dec. 17 to gather more input on the subject.