In a joint letter to the US Securities and Exchange Commission (SEC), the chairmen of the Financial Accounting Standards Board (FASB) and its oversight Foundation have recommended that SEC wait before dropping the requirement for foreign firms using IFRS to submit a reconciliation of earnings and equity to US GAAP figures.

The two bodies said that investors would be better served if all US public companies used accounting standards promulgated by a single global standard setter as the basis for preparing their financial reports. They believe this would be best accomplished by moving US public companies to “an improved version” of International Financial Reporting Standards (IFRS).

Unnecessary complexity

“We believe permitting extended periods of choice between US Generally Accepted Accounting Principles (GAAP) and IFRS results in a two-GAAP system that creates unnecessary complexity for investors and other users of financial information. Permitting choice would add to the overall complexity of our reporting system,” they said in their letter.

They add that their organisations, the SEC, and other affected parties should work together to develop a transition plan or “blueprint” for moving US public companies to IFRS. They point out that a move to IFRS by all US public companies would be a complex, multi-year endeavour. They said that the US needs a blueprint that provides an orderly move to IFRS that minimises the disruptions and costs to capital market participants and to other US entities that use FASB standards.

The FASB and its Foundation agreed that the blueprint should identify a target date or dates for completing the transition to IFRS along with interim milestones. The target date should allow adequate time to make the many necessary changes to the various elements of the US financial reporting infrastructure, including auditing standards, GAAP-based regulations, education systems and licensing requirements.

“The blueprint should identify the areas of IFRS that should be improved during the period of transition to IFRS by US public companies,” the chairmen wrote. “We believe the best way to make those improvements would be through the continued joint development of common standards by the International Accounting Standards Board (IASB) and the FASB. To complete the move to IFRS, the blueprint should outline the process by which we would adopt IASB standards in other areas “as is.””

Sustainability

They said that the SEC should seek international cooperation to identify and implement changes they believe are necessary to sustain the IASB and to secure it as the independent global body that establishes high-quality international accounting standards.

In particular, they call for mechanisms to be established to provide the IASB with sufficient and stable funding and staffing levels, thereby ensuring its sustainability as an independent setter of high-quality accounting standards.

They added that agreements are needed to eliminate the separate review and endorsement processes that various jurisdictions apply to each IFRS after it is issued by the IASB.

“These after-the-fact jurisdictional processes are inconsistent with the objective of a single set of high-quality international accounting standards, as evidenced by the local variants of IFRS that have developed in some jurisdictions. Jurisdictions, including the US, need to make their views known as part of the IASB’s due process rather than after the standards are issued,” they concluded.

Difficult and sensititive issue

They called for international cooperation in these two areas to foster the sustainability of the IASB as a global standard setter and to ensure that IFRS, as promulgated by the IASB, becomes and continues to be a single set of high-quality international accounting standards. If the recommended changes in these two areas are not made, they believe the benefits from transitioning US public companies from our well-established financial reporting system to IFRS could “decrease dramatically”.

“The removal of the requirement that foreign private issuers reconcile their reported results to US GAAP is a difficult and sensitive issue that could have important implications for the continued development of a truly international financial reporting system,” the FASB and its Foundation said in their letter to the SEC.

They suggest the timing of any removal of this requirement should coincide with the development of and commitment to the blueprint by key parties in the US, and a commitment by key international parties to undertake the steps necessary to strengthen and sustain the IASB as the independent body responsible for establishing high-quality international standards.

“We strongly agree with the SEC that the reconciliation requirement would be removed only for companies applying IFRS as adopted by the IASB,” the chairmen said.

Greatest possible benefit

The EU's Commissioner for Internal Market and Services Charlie McCreevy told a conference of German public auditors last Wednesday that he would be visiting the US on Thursday and Friday to try and reach an agreement on the SEC's proposal to allow foreign issuers to file accounts under IFRS without reconciliation to US standards.

"We are still working on some details to ensure that proposal is of the greatest possible benefit to EU issuers in the US. But I am very confident that the objective - to be able to harvest the benefits of friction-free transatlantic capital markets - is within our grasp," McCreevy said.

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Related links

• FASB
• SEC