Christmas 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
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.
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