RSS feedsChristmas came early for the International Accounting Standards Board. It could barely conceal its glee when the US Securities and Exchange Commission announced that it was to remove the requirement for non-US companies reporting under international financial reporting standards to reconcile their financial statements to US GAAP.
The decision has to be seen as one of the most significant steps forward in the quest for a single language for financial reporting for the world’s capital markets. But while significant, it is not surprising. In June 2007, the SEC started a consultation process to remove the reconciliation barrier.
The task now is for the SEC to sell the idea to the US public, which is by no means a shoo-in. Even when announcing the idea, the SEC was selling the benefits before it turned to the features. It promoted the decision as one that helps “American investors better analyse and get more readily-comparable financial information from the USregistered foreign companies in which they invest”. The SEC says that a record number of US investors now own foreign securities with two-thirds of US investors holding shares in foreign companies. The change is happening quickly as it can be applied to financial statements covering years ended after the middle of November 2007. That could mean for reports and accounts covering 2007 calendar year-ends. This sets up the eventual likelihood that the IASB’s standards become de facto in the US, as they are becoming elsewhere in the world.
But events are not always as straightforward as they seem. For a start, the SEC is facing opposition in its own backyard. Senate banking committee chairman Christopher Dodd and Senator Jack Reed, who chairs its securities subcommittee, wrote to SEC chairman Christopher Cox telling him that the decision was unduly rushed and “many prominent investors and users of financial statements… have concluded that it is premature for the SEC to eliminate the reconciliation requirement”.
The senators wanted the SEC to wait until after the convergence of US GAAP and international standards, which isn’t expected until 2010. However, the SEC argued that eliminating the reconciliation was a necessary step towards the goal of high-quality accounting standards. The SEC is treading a delicate path in its desire to lure foreign companies to US markets in an era of increasingly globalised financial markets and the need to uphold standards which provide adequate protection for investors. But of more significance to European finance directors is the consequence of the US move for them.
Among the first to congratulate the SEC on its decision was Charlie McCreevy, the European commissioner for the internal market and services. Welcoming the move, he emphasised it would benefit European Union companies with a US listing.
The SEC has said that the acceptance without reconciliation in the US is part of a push to establish IFRS as a “uniform global standard, not a divergent set of standards applied differently in every nation”. That is a clear statement that national or regional variations on the IFRS rules would not be acceptable to the US. The most notable such variation is the European Commission carve out, largely at the instigation of French banks, which allows companies to avoid key parts of the IASB’s rules concerning derivatives accounting.
So are European companies frozen out by the EC carve out? Astonishingly not. Under a deal worked out between the US and Europe for the next two years, European companies that took advantage of the carve out would have to reconcile their financial statements to show the effect of complying with the full set of international rules. After that time they would have to comply with those rules if they wished to list their securities in the US.
US regulators said the exemption will help the transition of European companies away from accounting decisions made before it was clear that US regulators would accept only one version of international accounting. Not unreasonably, Europe is going to have to accept accounts based on US GAAP without reconciliation and that change is set to take place this year.
Before the SEC announcement, IASB chairman Sir David Tweedie told the US senate banking committee “first and foremost” the IASB was encouraging countries “to resist the temptation of creating national flavours to IFRS”. He added: “The IASB cannot force countries to accept its standards, it can only convince that its process is robust and that the outcomes merit the respects of the markets.” Some in Europe wanted the SEC to accept an EU brand of IFRS, alongside IASB IFRS, but that was never going to happen and quite right, too – such an idea is nonsense. The carve out is tiny in financial terms (possibly only 30 European companies have taken advantage, though exact data does not exist) but it has enormous political ramifications. The key question in 2008 for the three players is how the EC carve out is going to be reversed to meet the demands of the US and the hopes of the IASB, without upsetting those French bankers.
