By James Hamilton, J.D., LL.M.
In an announcement of enormous import, the SEC said that it would consider giving US issuers the choice of reporting financial statements in GAAP or international financial reporting standards. In addition, this summer the SEC will propose rules allowing foreign private issuers to use IFRS, which is part of the roadmap towards the elimination of the reconciliation of ISFR-driven financial statements to US GAAP.
At the same time, the SEC, the UK Financial Reporting Council, and the Financial Services Authority signed a protocol for implementing the work plan between the SEC and the Committee of European Securities Regulators (CESR) as it relates to sharing information on the application of IFRS by issuers listed in the UK and the US. This is an important parallel development because CESR’s role is seen as crucial to the consistent interpretation of IFRS.
IFRS are principles-based standards promulgated by the International Accounting Standards Board (IASB). They have been adopted by over 100 countries and their use is mandated in the European Union. Last summer, I noted that people were asking why not end the sturm und drang over convergence of accounting standards by simply adopting IFRS in the US. The SEC’s concept may be a step in that direction, albeit that it envisions a choice between GAAP and IFRS.
In the view of Corporation Finance Director John White, the rulemaking is a critical step towards a future regulatory framework in which IFRS may be used on a stand-alone basis by foreign private issuers and possibly also by U.S. issuers.
The possible inconsistent interpretation of IFRS by national authorities is being increasingly viewed by regulators as the primary threat to uniform international accounting standards. The information-sharing protocol implementing the work plan agreed to by the SEC and CESR last August is important because CESR is viewed as the primary bulwark against the inconsistent interpretation of IFRS.
Thus, the work plan envisions a dialogue on the consistent global application of IFRS. Chairman Cox has emphasized that the consistent application of IFRS is critical to the future of global accounting standards.