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SEC Official Discusses Roadmap for Eliminating U.S. GAAP Reconciliation Requirement

Ethiopis Tafara, the director of the SEC's Office of International Affairs, stood in for Chairman Christopher Cox in delivering remarks before the Federation of European Accountants about the roadmap for eliminating the U.S. GAAP reconciliation requirement. The roadmap, first outlined by former chief accountant Donald Nicolaisen, provides the milestones that must be reached in order to permit foreign issuers to sell their shares in the U.S. using international financial reporting standards ("IFRS") without reconciliation to U.S. GAAP. Tafara urged patience while the SEC assesses the consistency and faithfulness of the interpretation and application of IFRS, and reminded the Federation that IFRS has almost no track record in terms of implementation and interpretation.

IFRS, although relatively widely used, differs from U.S. GAAP in that it has little history of application and interpretation, Tafara explained. The European Union is trying to create a single capital market comprised of 25 different countries with widely varying financial cultures, legal traditions and disclosure standards, he said. The next step will rest with the jurisdictions requiring IFRS, the issuers using IFRS and accountants, according to Tafara. He emphasized that the time the SEC is seeking to assess IFRS is not long, although some Europeans may think otherwise. 

Tafara said the SEC does not expect full, or even a finite, degree of convergence between IFRS and U.S. GAAP before it will be willing to eliminate the reconciliation standard. Investors in the U.S. must be able to understand the financial statements prepared under IFRS, he said, which is clearly possible, even if there are differences between IFRS and U.S. GAAP.

The SEC does not expect a specific level of convergence to be reached before eliminating the reconciliation requirement, Tafara added. However, the SEC would like to see that a robust process is in place for converging the two standards and will examine the progress of FASB and the IASB convergence project as part of its review.

The SEC staff will identify the changes to its rules that will be necessary to eliminate the reconciliation requirement, according to Tafara. With 300 foreign private issuers filing their 2005 home country financial statements using IFRS, the SEC will have the opportunity to evaluate the faithfulness, consistency and transparency of IFRS, he said. The staff plans to share the results of its analysis, including areas where IFRS is inconsistently applied or interpreted. It is important to get it right, Tafara said. The speed of change should be a secondary consideration when market reputation is concerned.

Tafara repeated the expectations that are critical to the SEC's decision to end the U.S. GAAP reconciliation requirement for issuers using IFRS. The overarching philosophy behind the development of IFRS must remain the best interests of investors, he said. The IASB standards-setting process must be fully transparent and IASB must be wholly independent. The IFRS and U.S. GAAP convergence process must continue, as must the dialogue among financial regulators.

Tafara applauded the creation by the Committee of European Securities Regulators of a database to share member views about the application and interpretation of IFRS in the EU. IOSCO has created a similar database for its members. Tafara called on accounting firms to ensure that IFRS is applied consistently across their clientele, wherever they are based. IFRS must be applied and interpreted consistently across all companies or it will cease to be a single set of accounting standards, he advised. In that event, the arguments for eliminating the reconciliation requirement would collapse.