Will Foreign Accounting Standards Fly Here?

The SEC puts out feelers about whether allowing U.S. companies to use International Financial Reporting Standards would be a good idea.

Should U.S. companies be allowed to use international financial reporting standards? It’s a question the Securities and Exchange Commission — prompted by the growing use of IFRS by other countries — will formally pose over the next three months.

On Wednesday, the SEC commissioners agreed to release a list of questions to explore what might happen if the regulator gave companies the choice between U.S. generally accepted accounting principles and the International Accounting Standards Board’s version of IFRS. The announcement comes as the SEC’s proposal to lift its requirement for foreign companies to reconcile their financials with U.S. GAAP is out for public comment. SEC Chairman Christopher Cox touted that proposal as a significant step toward one set of globally accepted accounting standards.

At the same time, the Financial Accounting Standards Board and IASB have been working to converge their respective sets of rules by 2009. The SEC’s new concept release — which has yet to be published in the Federal Register, formally launching a 90-day public comment period — will ask whether that work would be hampered in any way by allowing U.S. companies to use IFRS. Indeed, that was a concern voiced by commissioner Annette Nazareth. “I hope these actions will not halt or slow the convergence process,” she said. “We need high-quality global accounting standards.”

Part of what the SEC wants to know is how many U.S. companies would even want to use the international accounting standard. The staff speculated that the airline industry and investment banks — concerned about their ability to raise capital overseas among competitors using IFRS — would want to use it. They said smaller companies might be less interested in making the switch. “We recognize that not all U.S. issuers would choose to use IFRS,” said John White, director of the SEC’s Division of Corporation Finance.

To be sure, the SEC staff said, allowing the use of IFRS would be a huge adjustment for U.S. businesses and the accounting profession here. In fact, Conrad Hewitt, the SEC’s chief accountant, said that the concept is so new that an American textbook for teaching the subject doesn’t yet exist and there is no IFRS-related question on the CPA exam. During a recent speech, in fact, Hewitt suggested that the University of Washington consider teaching IFRS in the classroom.

The concept release won’t contain any specifics about how the SEC would go about allowing U.S. companies to use IFRS. For example, it won’t include a timeline for making it possible, said Hewitt. Instead, it will call on the public to throw any possible advantages and disadvantages of using another standard the commission’s way. Among the topics touched upon at the meeting that could be included in the final document:

• Will the use of IFRS create an undue burden on investors, who could end up comparing the financials of U.S. companies by using IFRS or GAAP?

• Along with investors and companies, how would accounting professors, auditors, and actuaries be affected?

• How many U.S. companies would even be interested in using IFRS?

• How long would it take for the accounting profession or a company’s accounting staff to get up to speed on IFRS?

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