Sunday, December 16, 2007

Securities Industry Backs SEC Proposal to Let US Issuers Report in IFRS

By James Hamilton, J.D., LL.M.

A joint industry working group supports the SEC’s proposal to allow U.S. issuers to prepare their financial statements in accordance with IFRS rather than GAAP. In a letter to the Commission, the group praised IFRS as high quality accounting standards that provide a means for faithful representation of economic events and transactions, and that provide investors and creditors with transparent and comparable financial information needed to make economic decisions. The letter was signed by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA).

The working group believes that the widespread use of IFRS will lead to improved comparability in financial reporting among global enterprises and among entities that operate within the same industry sectors. Also, over time, IFRS will reduce financial statement preparation costs and resources requirements.

But the group cautioned that the use of IFRS must be linked to the broad-based acceptance of IFRS by all relevant U.S.-based constituencies. Potential problems might arise, for example, if tax authorities insisted upon continued use of financial statements prepared under US GAAP.

The industry urged the SEC and the Treasury, perhaps operating under the auspices of the President’s Working Group on Financial Markets, to establish a task force, including preparers, auditors, taxing authorities, and banking regulators to assist in facilitating the acceptance in the U.S. of financial statements prepared in accordance with IFRS, whether the issuers are foreign or domestic companies.

In the group’s view, the use of IFRS could substantially impact the reporting of financial positions and performance of U.S. issuers as well as impact liquidity and solvency measures, such as a bank’s leverage ratio or a company’s loan covenant measures. It is thus important for the SEC to play an active role in coordinating broader acceptance of IFRS.

More specifically, the working group is concerned that, should the SEC provide U.S. issuers the opportunity to report under IFRS, very few banks would be able to realize the benefits of this opportunity unless current banking regulations are modified. For example, due to the remaining differences between IFRS and U.S. GAAP in areas such as derecognition, consolidation and offsetting of derivative fair value amounts, the reported leverage ratios would be appreciably lower for the same positions reported under IFRS versus U.S. GAAP. Absent a change in banking regulations, reasoned ISDA, this would represent a significant barrier to many financial institutions in adopting IFRS.

Another significant barrier to a successful implementation of IFRS reporting in the United States is regulator-specific or jurisdiction-specific interpretations of IFRS. This phenomenon exists in the European Union and elsewhere, which have differing gold plated versions of IFRS.
The group strongly opposes jurisdiction-specific interpretations of IFRS since such would diminish many of the benefits of providing an option for U.S. issuers to report under IFRS, including a reduction in comparability among companies that report under differing interpretations. Jurisdiction-specific interpretations may also impair users’ confidence in IFRS financial statements.

Given the principles-based nature of IFRS, there is also concern that the U.S. could be one of the jurisdictions in which specific interpretations of IFRS are applied. While the SEC concept release suggests that interpretations by securities regulators may be limited to interim views on accounting issues not yet addressed by the IASB or its International Financial Reporting Interpretations Committee (IFRIC), the group remains concerned about the willingness to accept the diversity in practice that may result from principles-based standards. Reasonable judgments that are consistent with the principles in IFRS standards should be accepted.

That said, the group asked the SEC to refrain as much as possible from issuing interpretations on narrow technical topics within areas that are broadly addressed in IFRS. In their view, interpretations that are specific to the U.S. are just as harmful to the comparability of, and confidence in, IFRS financial statements as any other jurisdiction-specific interpretation. Rather, the SEC should participate in the IASB’s existing standard setting process, where the experience and knowledge of the SEC’s staff could be of enormous benefit in developing high quality standards and interpretations for all IFRS users