Regulator’s Quandary: Which IFRS to Use?

The SEC's efforts to reconcile GAAP with IFRS run into concerns that include how to choose among varying international standards.

A proposal to allow foreign companies to use international accounting standards when filing in the United States is drawing cautionary reactions from the U.S. and abroad. Some comments submitted to the Securities and Exchange Commission, for example, reflect a lack of clarity about which version of international standards should be used.

For some time, the SEC has been pushing to accept financial statements from foreign private issuers that use International Financial Reporting Standards (IFRS), without requiring reconciliation with U.S. generally accepted accounting principles (GAAP). The move is intended in part to make it easier and cheaper for foreign firms to list on U.S. exchanges, particularly in light of recent U.S. fears that foreign exchanges are growing more competitive. Accepting foreign issuers’ statements also would represent something of a culmination of efforts by the Financial Accounting Standards Board, which sets GAAP, and by the International Accounting Standards Board (IASB), which sets IFRS, to converge the two standards.

But some observers have expressed doubt that the standards are close enough to be interchangeable. Many more have noted a growing problem with IFRS itself: Though meant to be a single, global standard, it is increasingly coming in different flavors.

In a letter sent to the SEC, Jack Ciesielski, president of the investment research firm R.G. Associates and author of The Analyst’s Accounting Observer, said that he does not support current plans to eliminate reconciliation. “Many material differences remain between the two bodies of accounting literature that are exposed by the reconciliation,” Ciesielski wrote. For example, he noted, IFRS lacks comprehensive standards for insurance contracts and for activities in extractive industries.

Meanwhile, the European Association of Listed Companies sent a letter to the SEC this week saying that, while it supports reconciliation between GAAP and IFRS, it sees European Union laws as requiring them to adopt the version of IFRS approved by the EU, rather than the pure version issued by IASB.

“While European companies would prefer that there be only one ‘IFRS’ (and not an IASB version plus jurisdictional variants), they are faced with the reality that they are legally bound to publish financial statements in accordance with IFRS as adopted by the European Union,” the association wrote.

Although the EU’s changes to IFRS so far have been minor, according to the association, “there is no guarantee, however, that it will always be true.” Because a future conflict between IASB’s version of IFRS and the EU’s “could result in confusion for investors,” the association said it strongly recommends that the SEC allow companies to list in the U.S. using the EU-approved version of IFRS.

The International Swaps and Derivatives Association (ISDA) remains supportive of ending reconciliation requirements. But it warned that the SEC should “not be tempted to address areas not covered by IFRS,” and that it should not offer guidance on interpretation of the international standard. ISDA went on to say that the commission should consider reconciling GAAP to IFRS in cases — such as in Europe — where companies are prohibited from using the international standard as published by IASB.

Citigroup came to a similar conclusion, noting that “potential problems could arise where local ‘jurisdictional’ IFRS standards already exist and diverge from ‘pure’ IFRS as published by the IASB.” Citigroup urged the SEC to stick closely to the existing IFRS framework and to resist creating American interpretations of the standard.

The Investment Management Association (IMA), a trade group representing Britain’s asset management industry, also supports eliminating reconciliation between IFRS and GAAP, but has concerns over the impact of the greater convergence that could follow. “In particular, investors support the current approach to IFRS in that they tend to be principles-based and professional judgment is used within the overall objective of a true and fair view,” said Liz Murrall, senior corporate governance advisor at IMA. “They are concerned lest a converged set of accounting standards that is acceptable to the SEC may need to be more rules-based with little or no scope for judgment.” IMA said that a mutual recognition policy might work better than full convergence.

On the home front, the U.S. Chamber of Commerce praised the SEC’s potential embrace of convergence. “This rule will encourage foreign businesses to look to the U.S. for their capital needs and will benefit U.S. investors by providing access to new investing opportunities,” said Michael Ryan, of the U.S. Chamber Center for Capital Markets Competitiveness.

However, the Chamber also cautioned the SEC to be reasonable in dealing with companies from places that use different versions of IFRS. “Requiring rigid adherence to the IASB version of IFRS would in effect be forcing foreign private issuers to transition from one reconciliation process to another,” Ryan said.

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