Deloitte Analyzes SEC’s Take on IFRS

The regulator has been paying close attention to filings that use the international standards, though some critics in Europe contend they don't cut it.

The Securities and Exchange Commission’s November 2007 decision to drop the requirement for foreign issuers to reconcile financial statements with U.S. GAAP did not happen overnight. One measure the SEC took was to carefully review the IFRS filings of foreign issuers and comment on what was wrong with them.

A new Deloitte & Touche report analyzes the 100 comment letters the SEC sent to companies during the last two years so that future filers will know what the regulator is looking for.

Until the November change in policy, non-U.S. companies could file their financials using IFRS but also had to provide a version reconciled to U.S. generally accepted accounting principles. Now they don’t have to do the reconciliation, but the SEC wants companies filing in IFRS to provide some clarifications and additional information.

The SEC’s primary focus, according to Deloitte, was on financial statements, particularly areas of presentation and disclosure. It also paid close attention to “converged” standards on items such as income taxes, which the Financial Accounting Standards Board and the International Accounting Standards Board are working on jointly. Further, the SEC made an effort to understand the “judgments made and assumptions used” when applying IFRS, particularly those regarding impairment rates, discount rates, and expected rates of return.

The SEC in some cases asked filers to improve on certain areas for future filings or to make restatements. One of the most closely watched areas of the IFRS statement was the portion regarding hedge disclosures, or IAS 39. This standard has been controversial in Europe, as the European Union has adopted a less-rigid accounting standard — a so-called carve-out — for derivative instruments.

The SEC asked some companies to revise their IAS 39 disclosures. It asked that firms clearly state the types of risks they were hedging against and the instruments used. The commission also requested some companies to plainly indicate the periods when cash flows are expected to occur for cash-flow hedges, and that they disclose how they account for gains and losses from re-measuring the hedging instrument for fair value hedges.

Although the SEC has begun to firmly embrace IFRS, some in Europe remain skeptical. Last week Nicolas Veron, a research fellow at Bruegel, a Brussels-based think tank, wrote that many Europeans think IFRS financial statements are based on a “dogmatic notion of fair value, lead to financial statements that bear little relationship to economic reality, and encourage first speculation then panic on the markets.”

Véron noted the “severe criticism” of IAS 39 for trying to make European firms disclose more about their use of derivatives. He also took a slap at the SEC, saying that a strict reading of its own standards would not have allowed the recent decision to deconsolidate securitized products and keep them off balance sheets.

The SEC is allowing companies to use the European Union’s carve-out of IAS 39 for a two-year period, as long as they reconcile their financial statements with the full version of IFRS. After that period they will need to either file with the full version or reconcile their statements with U.S. GAAP.

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