Is Reconciliation to U.S. GAAP for IFRS Filers Ending?

Not yet, if it is up to FASBís investors technical advisory panel.

from BNA Tax and Accounting

October 4, 2007
by Steve Burkholder, BNA Tax and Accounting

(Excerpted from Accounting Policy & Practice Report, September 7, 2007)

NORWALK, Conn. — When the Securities and Exchange Commission (SEC) issued a proposal in July that would let foreign private issuers file financial statements prepared in accordance with International Financial Reporting Standards (IFRS) without reconciling to U.S. generally accepted accounting principles, it said there is widespread support for the idea. But an investor’s advisory committee to the Financial Accounting Standards Board (FASB) August 31 urged the SEC to drop or revise the pending proposal because it could undercut convergence between U.S. GAAP and IFRS.

“To eliminate the reconciliation at this time would amount to nothing more than achieving convergence by decree, rather than by achieving it in fact,” according to the letter from FASB's Investors Technical Advisory Committee (ITAC). “It would effectively demote U.S. GAAP to a lower common denominator — a poor public policy.”

A number of members of FASB's 12-person ITAC have spoken over the years in support of harmonizing U.S. and other national accounting standards with a set of high-quality, comprehensive rules issued by the six-year-old IASB. One of ITAC's members, Lynn Turner, as SEC chief accountant in the late-1990s through mid-2001, was instrumental in the formation of IASB.

However, ITAC suggested in the letter to the SEC that dropping the reconciliation now actually would undercut efforts to achieve convergence.

“We believe elimination of the reconciliation at this time will actually hinder the convergence process,” ITAC said in the letter.

Along with affording information that is valuable to investors, the committee wrote, “The reconciliation provides a visible reminder that convergence has not yet been achieved, and provides direction for standard setters in setting their priorities for convergence projects. More importantly, as long as there are two standard-setters, the reconciliation injects a dynamic tension into the convergence process.

“We are concerned that without a reconciliation requirement the IASB, and those who participate and oversee its process, might not act with a sense of urgency on convergence issues,” ITAC concluded. The panel held its initial meeting in January.

General Support Expected

The comment period on the SEC's proposal closed September 24, and it received broad support for dropping the reconciliation requirement from companies in the U.S. and abroad. Investors expressed more doubt. Meanwhile European Union officials and other foreign filers who have adopted less than full IASB-approved IFRS said they also should be permitted to eliminate reconciliation, or at least reconcile
to full IFRS, rather than to U.S. GAAP.

For example, a group known as the Transatlantic Business Dialogue (TABD) wrote to the SEC in late July to congratulate the commission on the proposal to eliminate the reconciliation. In a letter signed by the chief executive officer of Citigroup's global banking and the chairman of British Airways, the U.S.-European business group wrote that the planned action by the SEC “has long been a TABD priority and is a key step along the path of the roadmap agreed by FASB and IASB set for the convergence of U.S. standards and IFRS.”

Other Reasons for ITAC Opposition

In its August 31 letter, ITAC listed several reasons for the SEC to drop or revise its proposal, including statements that:

  • “there remain many highly material differences in the results produced by the two systems” and “in the absence of the required reconciliation, those important differences generally could not be quantified or even reasonably estimated”;
  • the panel would prefer to see “concrete evidence that the two sets of standards are substantially equivalent before the reconciliation is eliminated”;
  • along with its concern about differences in accounting standards, ITAC is "not yet certain that there is consistent auditing and enforcement of the application of IFRS,” noting lack of widespread familiarity with international accounting rules both in the auditing profession and among the staff at the SEC; and
  • if IASB and its standards were effectively to be accorded more legitimacy, as connoted by the SEC's proposed action, ITAC voiced concern that the London-based board's current funding mechanism — contributions from companies and other enterprises that apply its rules – “could have an effect on the quality and timeliness of the standards it produces and may jeopardize its independence.”

In its letter, ITAC noted that the trustees of IASB's parent foundation are searching for a new funding program to take effect next year.

Because of these and other reasons stated in the letter, FASB's investors technical committee argued that the time is not right for dropping the reconciliation requirement.

“In our view the reconciliation remains a critical repository, providing visibility to investors of the material variations between the accounting systems that are otherwise generally not determinable," ITAC wrote to the SEC. "Given the aforementioned trends, we believe it is clearly premature to consider its removal because the data in the reconciliation has even greater significance to investors during a period of frequent underlying changes to the respective GAAPs.”

The SEC's proposed rule on the dropping of the reconciliation requirement is at http://www.sec.gov/rules/proposed/2007/33-8818fr.pdf (PDF).

Comment letters on the proposed rule change are at http://www.sec.gov/comments/s7-13-07/s71307.shtml.