SEC Allows Dual Accounting System

The commissioners erase the requirement that non-U.S. companies must reconcile with GAAP financials filed under non-U.S. standards.

Some non-U.S. companies no longer must reconcile their financials with U.S. GAAP, as long as they use International Financial Reporting Standards.

The Securities and Exchange Commission voted unanimously on Thursday to eliminate the reconciliation requirement immediately. Those eligible foreign private issuers that have yet to file their financials for the 2007 fiscal year don’t have to create a reconciliation report. The original SEC proposal, raised earlier this year, would have gone into effect in 2009.

Commissioner Annette Nazareth hopes that the dual reporting system that the SEC’s vote creates in the United States is temporary. The ultimate goal is one set of global accounting rules that can be used worldwide, she said.

The SEC’s decision is a first step in a process that could later give all U.S. public issuers the choice between filing their financials in GAAP or IFRS, commission officials have said. In fact, critics of the SEC’s vote worry that it could hinder future progress in the ongoing convergence project between the Financial Accounting Standards Board and the International Accounting Standards Board. Instead of contributing to the goal of a single set of high-quality standards, offering all U.S. companies a choice between GAAP and IFRS before a significant number of IFRS flaws are corrected, could lead to a uniform set of standards — but a low-quality one.

Indeed, the SEC’s proposal inspired the commissioners to raise that very issue earlier this year. The concept of allowing U.S. companies to prepare their financials using IFRS instead of GAAP received mixed feedback, particularly from FASB board members and other U.S. accounting experts who worry that the current quality of IFRS isn’t yet adequate.

But the SEC staff and commissioners brushed aside that concern, saying they’re confident the work on convergence will continue. “Our acceptance of IFRS is based on the continuation of the robust process of the IASB and FASB to establish a high-quality set of internally accepted accounting principles,” said SEC chairman Christopher Cox.

What’s more, SEC chief accountant Conrad Hewitt predicted substantial progress from the standard-setters in the next two to five years on their convergence work. IASB chairman David Tweedie has said the project could be completed by 2012, at the earliest.

The proposal before the four SEC commissioners on Thursday has been in the works since 2005. At that time, then SEC chief accountant Donald Nicolaisen detailed a “roadmap” to the goal of ending the reconciliation reports that foreign private issuers have been required to use. The SEC has specified that the proposal applies only to those businesses that prepare their financials using the IASB’s version of IFRS, and not a modified version used by some European countries.

According to Cox, the SEC’s decision could put a shine on the image of the United States in the global capital markets system, improve capital-raising opportunities for companies, and provide better comparability of financial statements for investors. He has been encouraged to push for the allowance by European business constituents.

The reconciliation requirement was criticized by some businesspeople as a costly and timely burden that wasn’t of much use for investors. The reports were typically issued six months after the initial financials were filed with the SEC.

Critics of the proposal wondered if the commission was being too impatient with the convergence project. Opponents also expressed concerns during the proposal’s public-comment period that the IASB’s governance and funding mechanisms aren’t up to snuff with the what U.S. investors are used to with FASB.

Addressing those concerns, Hewitt said the IASB’s trustees are working to set up a governing body to monitor the IASB and are aware of the limitations in how the board is funded. Unlike FASB, which is funded by SEC registration fees, IASB receives funding from private donations — a situation that could produce conflicts of interest, some say.

The SEC isn’t sure how many companies will take it up on the offer of filing their financials solely using IFRS. Of the 1,100 foreign private issuers, up to 180 could qualify for the allowance. Some companies may continue to generate a reconciliation report or file their SEC financials using GAAP.

Since 2005, when companies in the European Union were mandated to use IFRS, the SEC has been reviewing IFRS-prepared financial statements filed with it. According to SEC corporation finance director John White, the approximately 100 companies that have been reviewed by the commission have been responsive to the SEC’s questions and generally consistent in their use of the standard.

As for the SEC’s proposal to consider enabling U.S. issues to choose between GAAP and IFRS, the comment period ended earlier this week. Cox said the commission is in the process of looking over the letters and has two roundtables planned for mid-December to address the issues raised by giving U.S. companies the option of using IFRS. The roundtables will include representatives from accounting firms, publicly traded companies, analyst firms, law firms, and rating agencies.

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