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Panelists Say Elimination of GAAP/IFRS Reconciliation Will Not Harm Capital Raising Process

The broadening acceptance of international financial reporting standards ("IFRS") is making it increasingly clear that the requirement that financial statements prepared under IFRS be reconciled to U.S. GAAP is no longer necessary, according to panelists at the SEC's March 6 roundtable on IFRS. Experts from around the industry discussed the potential impact on capital raising of the planned elimination of the reconciliation requirement.

Several commenters, including NYSE Group president Catherine Kinney, think it will have a positive effect on capital raising. It is reasonable to assume that there will be a larger pipeline of foreign issuers coming to the U.S. once reconciliation is gone, she said. There will be new listings and greater access for U.S. investors to foreign issuers, in her opinion.

Morgan Stanley's Ken Pott agreed, noting that U.S. investors are already investing outside of U.S. markets. If ending the reconciliation requirement brings more foreign companies to the U.S. and under the SEC's oversight, that will provide additional protections for investors, he said.

David Kaplan of PricewaterhouseCoopers believes that eliminating the reconciliation requirement will remove the perception of barriers to the free movement of capital, and the perception that the SEC does not think IFRS is a robust accounting system. Both of these would be positive developments for capital raising, he said.

Nicholas Grabar of Cleary Gottlieb is confident that when reconciliation goes away, it will not be missed. Reconciliation is good for recognizing the differences in the two accounting systems, he said, but is not that useful for comparing financial statements.

Kinney noted that, in connection with its merger with Euronext, the NYSE had to reconcile Euronext's financial statements to U.S. GAAP. "Because they had been so acquisitive, this was a very expensive process," she said. "It is not clear that investors appreciate the small difference that reconciliation made."

In keeping with its investor protection mandate, Corporation Finance Director John White said that the Commission is interested in whether investors will still be receiving the information they need to make an informed decision without reconciliation. All of the panelists said that they would, particularly since there are many additional sources of disclosure and information available to investors.

There is no question that investors need high quality financial statements to make their decisions, Grabar said, but he believes the SEC will soon determine that IFRS-based financial statements are high quality. Pott said that the quality of information will be no less than investors are currently receiving. "I cannot say which accounting system is better, but IFRS is not inferior to GAAP," he said.

White asked panelists to discuss the impact of ending reconciliation on U.S. issuers, and there was general agreement that it could cause some U.S. issuers to change to IFRS reporting. SEC Chairman Christopher Cox had alluded to this possibility in his opening remarks to the roundtable.

Brooklyn Law School professor Roberta Karmel said that this could be an interesting side effect of ending reconciliation. The SEC will probably have to allow U.S. issuers the choice of GAAP or IFRS in the future, she noted. In her view, allowing U.S. issuers to report in IFRS would generally assist the convergence effort, which would be a positive development.

Kaplan sounded a note of caution, saying that U.S. companies would have to go through a potentially costly transformation of their systems and processes. In addition, opening up IFRS would require a huge educational effort for the accounting profession. He acknowledged, however, that the U.S. would be doing no more than what the European Union has just done --namely, to educate its constituents on the transition to IFRS.

Kaplan said that he would not want to see the elimination of the reconciliation requirement held up by the decision of whether or not to allow U.S. companies to report using IFRS. Karmel recommended that the Commission not wait until it has solved every possible problem before eliminating the reconciliation requirement. "The government works better when it handles issues in increments," she said. "It is better for the Commission to do what it can as soon as possible."

John Filar Atwood