Senate Pokes Holes in SEC’s IFRS Push

As the American regulator builds momentum for allowing U.S.-listed companies to use international accounting standards, industry experts tell lawmakers that the SEC's proposals have come too early.

Recent proposals from the Securities and Exchange Commission could lead to a dual accounting system in the United States. But U.S. Senator Jack Reed thinks such a move would be “premature,” and on Wednesday, the Rhode Island Democrat found out that he was not alone in that assessment.

During a hearing of Reed’s Securities, Insurance, and Investment subcommittee, all of the participants agreed that the ultimate goal for improved financial reporting in the U.S. would be to establish a high-quality set of global accounting standards — an objective that has been underway for the past five years via a convergence project between the Financial Accounting Standards Board and the International Accounting Standards Board.

However, the majority of the hearing’s participants, including IASB Chairman David Tweedie, FASB Chairman Robert Herz, former SEC Chief Accountant Lynn Turner, and accounting expert Jack Ciesielski, lined up behind Reed, expressing their disapproval of the SEC’s recently proposed methods for speeding up convergence. They said the regulator should let the accounting standard-setters finish improving and aligning the rules before allowing the current version of International Financial Reporting Standards to be used in financial statements that are filed with the SEC.

“We do not support permitting U.S. companies a choice between IFRS and U.S. GAAP for any extended period of time,” Herz said. “Rather, we believe it would be preferable to move all U.S. public companies to an improved IFRS over a transition period of several years.”

To be sure, Herz would like the transition to happen sooner rather than later, and suggested that a blueprint be created to “accelerate the convergence effort and the movement in the U.S. toward IFRS.” However, he emphasized that convergence may be hindered if the SEC approves its proposal to eliminate the requirement of companies using the IASB’s version of IFRS to reconcile their financial statements with GAAP. “The decision in the near future whether or not to eliminate the reconciliation requirement may well have important implications for the continued development of the global reporting system,” said Herz, who did not specify FASB’s preference on the SEC’s proposal.

He also pointed out that FASB would be opposed to another SEC proposal, the one suggesting that U.S. companies be given a choice between preparing their financial statements using IFRS and GAAP. Indeed, Herz commented that he does not support a “two-GAAP system” for U.S. companies. Earlier this year, the SEC published a questionnaire to gather public comment on whether offering such a choice would work. The commission is collecting feedback though November 13.

Herz’s counterpart at the IASB, David Tweedie, also affirmed that the two standard-setters are making progress in their convergence project. Herz and Tweedie estimate that there are still 10 outstanding differences between their two standards, including lease accounting, the subject of a major convergence project.

Noting his support for convergence, but not the SEC’s timetable, Tweedie said the elimination of the reconciliation requirement would show the world that the U.S. is committed to IFRS. “This is the best chance ever to merge our two standards and come up with the world’s best set of standards, and that’s what we’re trying to do,” he said.

The Senate hearing was prompted by the increasing attention the SEC is giving to global standards. Reed said he is worried whether the accounting profession can handle such a change and whether U.S. universities are prepared to teach IFRS. One of the hearing’s participants, Teri Yohn, a professor at the University of Indiana, said a full-scale switch to IFRS would not be possible today because of the lack of education about international standards.

For the SEC’s part, John White, director of the commission’s corporate finance division, said the regulator is analyzing the more than 100 letters it received related to the reconciliation proposal. The proposal could affect up to 180 foreign private issuers, he added.

Critics of the current requirement to square IFRS-based financial statements with U.S. GAAP say the reconciliation reports are of little use of investors, a claim that investor advocates and analysts dispute. At the hearing, some of the attendees claimed that the reports offer users a first step in the transition to international standards.

The SEC has promoted its proposals by saying that the directive will help U.S. companies stay competitive in an increasingly global marketplace. “It is imperative that the commission be vigilant in keeping our regulatory standards up-to-date for the protection of investors, for the maintenance of efficient and orderly markets, and for the promotion of capital formation,” said SEC Chief Accountant Conrad Hewitt.

However, other attendees at the hearing, such as Ciesielski and Turner, think the SEC is jumping the gun. Ciesielski compared the SEC’s push for change before convergence is complete to smoking three cigarettes a day because a cure for lung cancer is in the works.

Moreover, Turner believes FASB and IASB are on the right track, and should continue. “Let Herz and Tweedie take care of reconciliation by eliminating the differences,” Turner said. “Let them eliminate the reconciliation. It should not be the SEC doing it.”

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