The Securities and Exchange Commission has proposed changing its rules to allow foreign firms to file financial statements using international accounting standards. The proposal marks a “significant next step in the road toward a single set of globally accepted accounting standards,” SEC Chairman Christopher Cox said.
By accepting foreign financials prepared by using International Financial Reporting Standards instead of U.S. generally accepted accounting principles, the SEC will cut filing costs for foreign companies and encourage more companies to raise capital in the United States, the commissioners said. They approved the proposal unanimously on Wednesday, agreeing to release it for a 75-day comment period. If approved, the changes would go into effect in 2009.
Convergence between IFRS and GAAP has been a long-term goal of accounting standard-setters, and the SEC’s intent to eventually accept filings that use the foreign standards has been widely viewed as a sign of success. The ultimate result would be more comparable financial statements for investors, according to Julie Erhardt, a deputy chief accountant for the SEC.
Currently, foreign companies filing with the SEC must reconcile their financial reports with U.S. GAAP. Critics of the process say the filings aren’t useful for investors. That’s because the current reconciliation process occurs only once a year–sometimes as much as six months after financial results have already been reported.
The SEC’s proposed rules specify that firms can avoid the reconciliation requirement if they file their financial reports using the International Accounting Standards Board’s version of IFRS (and not a locally derived set of standards) in English. Nearly 100 countries mandate or allow the use of the IASB’s version of IFRS, said Conrad Hewitt, the SEC’s chief accountant .
The commission’s staff predicts that few if any current foreign filers will not take advantage of being able to file in only IFRS (or continue to file using just U.S. GAAP). Thus, while the commission’s recent vote may be good news for foreign issuers wanting to save money on their transaction costs, where does that leave U.S. companies? Will the tilt toward one global accounting standard mean that U.S. issuers could also have the option of filing their financial statements in IFRS?
The SEC is at least mulling those questions. During a March SEC roundtable on allowing foreign filers to use IFRS, Cox hinted that the commission is thinking about whether to give U.S. companies the same choice. According to the meeting’s participants, the SEC will soon face a lot of pressure from corporations: U.S. companies’ desire for the choice will be inevitable, they said.
On Wednesday, however, the commissioners mostly avoided that topic, merely alluding to the idea and teasing members of the SEC accounting staff about their job security. “If we allow U.S. issuers to report with IFRS, then what does that do to GAAP? Will it require a different standard-setter than IASB?” commissioner Roel Campos theorized. “Those are questions for another day.”
For now, U.S. companies could get an early take on what it would be like to file with IFRS by viewing the SEC’s comment letters and foreign firms’ IFRS financial statements from 2005. The staff plans to prominently feature these documents on the SEC website soon .
During the meeting, the commission’s staff discussed the challenges posed by global-company compliance, including the fact that some countries’ versions of IFRS differ from the standards published by the IASB in London. The SEC specifies in its proposal that the reconciliation requirement applies only to foreign private issuers that use the English version of IASB’s IFRS.