Will the SEC Let U.S. GAAP Die?

When the SEC finally recognizes the use of IFRS by foreign firms, it may find that American companies want to ditch U.S. GAAP too.

The Securities and Exchange Commission is getting closer to allowing foreign firms to report their financial results in the United States using international accounting standards. But if that happens, why shouldn’t U.S. companies be allowed to do the same?

That was the question raised by several panelists at Tuesday’s SEC roundtable, convened to explore whether the regulator was ready to accept financial statements prepared using International Financial Reporting Standards (IFRS) instead of U.S generally accepted accounting principles.

Convergence between IFRS and GAAP has been a long-term goal of accounting standard setters, and the SEC’s goal of accepting filings that use the foreign standards by 2009 has been widely seen as a sign of success.

But as the use of IFRS increases, U.S. companies hoping to stay competitive with foreign issuers may also want to use the international standard, said Ken Pott, managing director and head of Morgan Stanley’s capital markets execution group. Indeed, John White, director of the SEC’s Division of Corporate Finance, said SEC Chairman Christopher Cox has hinted that such an option might be available.

The three-panel, day-long event marked another milestone in the the SEC’s so-called convergence roadmap — first described in 2005 and affirmed last February by Cox — which would eventually eliminate the existing costly requirement that foreign firms reconcile their IFRS statements with GAAP.

While praising the SEC for moving closer to recognizing IFRS, some of the panelists warned that the change will motivate U.S. issuers to request the option of choosing between the two standards. The business community would welcome the option of using IFRS, which is a more principles-based accounting method than GAAP, explained Catherine Kinney, president and co-chief operating officer of NYSE Group. “Many companies may go in the direction of IFRS,” she said.

“The SEC will probably have to allow U.S. issuers the choice in the future,” added Roberta Karmel, a law professor and co-director of the Center for the Study of International Business Law at Brooklyn Law School. She cautioned the regulator to take small steps in giving the go ahead for a dual system, saying that the commissioners could delay making such a decision until the SEC begins recognizing IFRS.

To be sure, if the SEC allowed the choice, it likely would proceed with caution. The move to eliminate private issuers’ requirement to reconcile with GAAP is in itself a “significant” change for the SEC, Cox noted. Nevertheless, allowing the use of both accounting systems could encourage more companies to invest in U.S. capital markets, he said.

The change would also mean quicker results for investors, noted Nicolas Grabar, partner with Cleary Gottlieb Steen & Hamilton. Because the current reconciliation process happens only once a year, and sometimes six months after financial results already have been reported, investors show little interest in the information, no matter how GAAP-friendly it is, says Grabar.

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