European Commission Working Group Sees US GAAP Equivalent to IFRS

Noting that the convergence of US GAAP and IFRS is proceeding at an appropriate pace, a European Commission working group found that US GAAP is equivalent to IFRS for use in EU markets. In its report, the working group also praised the SEC for its recent elimination of the need for foreign private issuers to reconcile IFRS-driven financial statements to US GAAP.

In reaching the conclusion that US GAAP is equivalent to IFRS, which was in concurrence with a CESR recommendation, the working group observed that the IASB and FASB have publicly committed to convergence between IFRS and US GAAP under a mechanism ensuring that new standards or interpretations do not create new differences between the two sets of standards. In addition, the report emphasized that the two boards plan to issue joint standards in future and are generally working together in a proactive manner.

The SEC abolished the reconciliation to US GAAP for foreign companies using IFRS as published by the IASB, not IFRS as published by the EU. There is concern over the carve out for hedge fund accounting in IAS 39, which makes IFRS as published by the EU different from IFRS as published by the IASB. While recognizing that such an exercise would be far less onerous than reconciling to US GAAP, the report notes that the overall EU objective is to eliminate all reconciliation.

The European Commission will continue to pursue this goal during the two-year transition period. Efforts will continue to resolve the issue of the carve-out of IAS 39. In this context, the working group calls on the IASB to play a full role. The European Commission adopted IAS 39 with two carve outs. One of those carve outs, the fair value option, has been removed. However, the other, on hedge accounting, remains.

Under the SEC’s rule, the reconciliation can be dispensed with only for issuers who use IFRS as published by the IASB. For the European Commission, the problem with this requirement is that no jurisdiction, including the European Union, has adopted the identical set of IFRS as published by the IASB.

The German Accounting Standards Board has noted that there is only one issue, which is the carve-out in IAS 39 of hedge accounting, in which the IFRS as adopted by the EU differ from the IFRS as published by the IASB. Since this difference relates to an accounting policy option, GASB reasoned, it does not result in an unavoidable difference in the financial statements.

The working group report also considered countries which are already successfully applying IFRS, including Australia; Hong Kong; and Singapore. Israel has made IFRS mandatory for all listed companies except for banks and dual listed companies as from January 2008. In these cases, the working group calls for an explicit and unreserved statement of such a compliance with IFRS to be included in the audited financial statements.