EU Commissioner Welcomes GAAP

Charlie McCreevy wants to allow American private issuers to report financial results using U.S. GAAP by next year.

In an act of trans-Atlantic reciprocation, Charlie McCreevy, the European Union Commissioner for Internal Market and Services, called on the governing body to eliminate the reconciliation requirement for American companies that list their stocks on European exchanges. Currently, U.S. private issuers must reconcile their financial results with international financial reporting standards.

McCreevy, speaking at an industry conference in Brussels on Tuesday, praised U.S. Securities and Exchange Commission Chairman Christopher Cox for last week’s decision to allow foreign private issuers to file financial results using IFRS, without reconciling accounts to U.S. generally accepted accounting principles. Calling the SEC’s vote an “extraordinary breakthrough” in the push to develop a global set of accounting standards, McCreevy said that “it will be Europe’s turn to accept accounts in U.S. GAAP,” asserting that the EU needs to eliminate its reconciliation rule some time next year.

“It is certainly my intention to propose that no reconciliation to IFRS will be needed for companies filing their accounts under U.S. GAAP. This is the only sensible way forward,” added McCreevy in a speech delivered at the European Federation of Accountants’ Conference on Audit Regulation. The commissioner, a chartered accountant and a former finance minister of Ireland, pointed out that over 100 countries require or permit the use of IFRS, and “the number is rising constantly.” What’s more, all major stock exchanges in the world accept IFRS, added McCreevy.

The push to adopt a single global standard has been fueled by the idea that investors in an increasingly global capital market would be better able to compare corporate results if a single set of accounting standards were in place. What’s more, the elimination of reconciliation requirements may be an indication that IFRS and U.S. GAAP are more closely aligned than originally thought, and that converging the standards will happen much sooner than standard-setters predict.

EU McCreevy2.bmpEU Commissioner Charlie McCreevy says U.S. private issuers should be allowed to file their results using GAAP.

But some experts believe that by eliminating the reconciliation requirement regulators are rushing the convergence effort. They contend that the rulemakers’ alleged haste leaves gaping discrepancies — such as those related to lease and hedge accounting. The danger in accelerating convergence, some critics say, is that regulators would be forced to be more lenient with accounting oversight until a single set of standards were adopted.

Currently, the International Accounting Standards Board and the U.S.-based Financial Accounting Standards Board are elbow deep in a convergence project aimed at producing a “single set of global standards.” But FASB Chairman Robert Herz has publicly stated that full convergence of IFRS and U.S. GAAP is still about five years away.

Herz is concerned about the potential consequences of the SEC’s vote, suggesting that the regulator may soon give U.S. companies a choice between reporting results in U.S. GAAP or IFRS, and in so doing create a dual accounting system. In fact, the SEC has raised the dual-system idea in a proposal currently being circulated for public comment.

At a conference held earlier this month, Herz stated that he would only support a transition from U.S. GAAP to IFRS if time limits on such a change were clearly delineated; “choice with a timetable,” he called that approach at a conference earlier this month, emphasizing that he does not endorse a “two-GAAP system.”

Others agree with Herz. Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board, said that he was “a bit troubled by the speed” of the SEC’s march toward the convergence of U.S. and international accounting standards. Speaking at a separate accounting conference held before the SEC vote, Niemeier asserted that, “If we eliminate reconciliation, what have we done? I have some fear that we’re crossing the Rubicon — that we’ve lost leverage in order to get closer [to global uniformity].”

Meanwhile, European countries and companies have been making noise about the SEC’s new reconciliation policy. Their gripe is that the U.S. regulator should be recognizing two versions of IFRS – the so-called full set of standards and a European version. Many of IASB’s European constituents have proposed local or industry-specific exceptions to IFRS known as “carve-outs,” which would yield a European version of IFRS more in line with their thinking.

“I am not sure if these [SEC] critics suffer from amnesia,” said McCreevy on Tuesday, reminding attendees that for the past five years, the EU – including the Council of Ministers and the European Parliament – has been “asking [the United States] with indefatigable stamina to accept IFRS … so let us be serious here. We have got what we have been asking for. One hundred percent.”

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