Qualified Support Shown for SEC Proposal to End Reconciliation of IFRS to GAAP

While there is broad support for the SEC’s proposal to eliminate the reconciliation of the IFRS-prepared financial statements of foreign private issuers to US GAAP, a firestorm is brewing over the perceived narrowness of the proposal. The reconciliation can be dispensed with only for issuers who use IFRS as published by the IASB. The problem with this requirement is that no company anywhere in the world is legally required to use this standard. And it appears that no jurisdiction has adopted the identical set of IFRS as published by the IASB.

In its comment letter to the SEC, the Cleary Gottlieb firm pointed out that, if the proposal is limited to IFRS as published by the IASB, then companies that are legally required to publish financial statements in accordance with IFRS as adopted by the European Union will have the burden of determining, as of each financial statement date, whether there is any material difference between their legally required standard and IFRS as published by the IASB. Currently, the sole difference is a hedge accounting option for banks, but that could change.

While there is great respect for the IASB as an independent and sophisticated standard setter, there is the also the question of whether it is appropriate for the SEC to adopt a rule that relies exclusively on the IASB, with no regulatory oversight.

But even more, the European Commission is not happy with the fact that IFRS as adopted by the EU will not satisfy the SEC’s proposal, which means that European companies would not benefit from the proposal but instead would still have to draw up another set of financial statements solely for US listing purposes. The Commission urged the SEC to recognize IFRS as adopted by the EU as equivalent to IFRS as published by the IASB.

The EU is working on the possibility for US issuers listed in the EU to continue filing their financial statements using US GAAP without any reconciliation requirement. But the Commission cautioned that such a possibility requires a common understanding of the Commission and SEC on the equivalence of IFRS as adopted by the EU and US GAAP.

The German Accounting Standards Board was blunter, warning that not recognizing IFRS as adopted by the EU could result in the EU ceasing its current efforts to continue allowing U.S. companies to file U.S. GAAP financial statements without reconciliation to IFRS, which GASB said would lead to a scenario that cannot be desirable from anyone’s point of view.