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SEC Hosts Roundtable on International Financial Reporting Standards Roadmap

The SEC yesterday hosted a roundtable on international financial reporting standards ("IFRS") featuring panel discussions on the effect of co-existing IFRS and U.S. GAAP on the capital raising process and on investors and issuers in the U.S. capital markets. The SEC's roadmap, first described by former chief accountant Donald Nicolaisen in April 2005, contemplates the elimination of the requirement to reconcile financial statements prepared in accordance with IFRS to U.S. GAAP by 2009. SEC Chairman Christopher Cox noted that IFRS is a new set of standards with a limited history of interpretation and application. The consistency and faithfulness in interpretation and application of IFRS is critical, he said, given that allowing two accounting standards to co-exist in the U.S. will represent a significant departure from historical practices.

Cox said the risk is not that IFRS is not high quality, but that it may not be comparable to U.S. GAAP. Last summer, the first wave of non-U.S. companies filed financial statements using IFRS that were reconciled to U.S. GAAP. The number of companies filing with the SEC was smaller than expected, Cox said, but was helpful. The Office of the Chief Accountant and the Division of Corporation Finance are working hard to understand the new standards.

The staff comment letters should be viewed as information-seeking, according to Cox, rather than as conclusions. The staff is trying to understand that which is not clear, and is not attempting to straightjacket IFRS or turn it into a rules-based system, he explained. Some interpretations may be incomplete, or wrong, he added, so any interpretation has to be susceptible to explanation. The SEC wants a shared understanding of the principles of IFRS. The SEC and the Commission of European Securities Regulators have created a work plan that will provide a forum to discuss questions that arise with respect to IFRS.

Cox applauded the efforts of FASB and the IASB to converge accounting standards. Some believe that convergence is impossible, Cox noted. The SEC does not expect total convergence before it will eliminate the reconciliation requirement and remains committed to the roadmap. Cox contemplates that U.S. GAAP and IFRS will be available side-by-side.

The roadmap has a destination and an estimated time of arrival, according to Cox. It is not dependent on FASB and the IASB resolving all of the differences between their regimes. Once reconciliation is eliminated, Cox said there should be no roadblock to convergence.

Charlie McCreevy, the European Commissioner for the Internal Market and Services, said he is very pleased by what the SEC and the European Commission have accomplished. The changeover to IFRS has not been easy, he said, but the feedback is generally positive. The 40 new standards and attendant interpretations have raised a number of issues, but McCreevy said that is how it should be with a principles-based system.

McCreevy said the CESR/SEC work plan is an important step within the roadmap to ensure the consistent application of IFRS and U.S. GAAP. There is much work to be done, but they are on the right track, he said. McCreevy believes the elimination of the reconciliation requirement will have a positive effect in the U.S. as well as in foreign jurisdictions. He agreed that differences between IFRS and U.S. GAAP should be narrowed but the standards need not be identical.

McCreevy said that U.S. and European regulators must have confidence in each other and trust each other. The elimination of the U.S. reconciliation requirement will lower the cost of capital and create a friction-free transatlantic capital market, he said.

McCreevy also reported that he and PCAOB Chairman Mark Olson have agreed to launch roadmap discussions on a collaborative effort among auditor oversight bodies. The goal is to enable the PCAOB and EU audit regulators to move toward full reliance on home country inspections by 2009. Reliance on home country regulators will save resources and reduce regulatory overlap, he said.

Jacquelyn Lumb