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Roundtable Panelists Discuss Impact of IFRS on U.S. Investors

One of the panels at the SEC's recent roundtable on international financial reporting standards addressed the effect of the co-existence of IFRS and U.S. GAAP on investors in the U.S. capital markets. Joel Osnoss, with Deloitte & Touche LLP, agrees that the reconciliation requirement of IFRS to U.S. GAAP should be eliminated, but believes that major differences should be disclosed. Osnoss said that reconciliation has been a huge source of quality in the implementation of IFRS. The disclosure of major differences will retain some discipline in the system on issues such as critical accounting estimates, he said. Otherwise, there may be a little relaxation "on both sides of the pond," in his view.

Gregory Jonas, with Moody's Investors Services, noted that the ratings business is a "global sport" which must apply global rating methodologies. Rating agencies have no choice but to live with the diversity of multiple GAAPs, he said. Financial analysis is best served by a single GAAP accepted everywhere. The roadmap to eliminate the reconciliation requirement is important, Jonas said, but it leads to "a rest stop." He called for the convergence of auditing standards as well as accounting standards.

Stephen Todd, with Ernst & Young Global, agreed that the convergence of auditing standards is very important, particularly in areas such as fair value. Even with robust IFRS around the world, Todd said the auditing standards are important to determine the final accounting.

Professor Christian Leuz, with the University of Chicago Graduate School of Business, reported that there is little evidence that markets reward one set of standards over another. Markets reward a commitment to transparency, he said. Leuz sees too much focus on accounting standards and too little on the underlying issues. Reconciliation is focused on standards rather than reporting quality and outcomes, in his view.

Leuz predicted that once the reconciliation requirement is eliminated, the news will report it and the markets "will yawn." Companies come to the U.S. exchanges to show they are willing to play under very strict rules, he said, and markets reward this commitment. A company that wants to obscure its financial performance will do so under any GAAP, in Leuz's view.

Jonas said that Moody's analysts do not rely on Form 20-F reconciliations. Their analysis is done in IFRS. Most of their analysts who rate foreign private issuers reside outside the U.S. and did not grow up with U.S. GAAP. A foreign private issuer's peer group typically is not based in the U.S. Jonas added that the reconciliation is filed too late for Moody's purposes and does not provide enough data to compute key metrics. However, to the extent the elimination of reconciliation is a step toward global standards, Jonas said he supports it.

Dennis Johnson with CalPERS does not believe investors will demand a continuation of the reconciliation requirement. Auditors will play a very important role in determining that the financial statements are a fair representation, in his view. Todd said that the elimination of the reconciliation requirement is a statement that IFRS is ready and is being consistently applied around the world.

With respect to the U.S. having a two-GAAP system, Todd said that if U.S. companies are to be permitted to adopt IFRS, that decision must be made pretty quickly. There is not a lot of IFRS expertise floating around, he said, so it would be good to know in advance.

Jonas urged regulators to keep the momentum going on the roadmap as long as it is viewed as a path to global accounting standards. Regulators should be committed to convergence, he said, and to global auditing standards.

Jacquelyn Lumb