Closing the GAAP?

Nearly two and a half years in the making, a team of staff at the US Securities & Exchange Commission (SEC) has revealed its findings on whether, when, and how the current US financial reporting system would transition to international standards.

The plan provided no specific recommendations on whether transitioning to International Financial Reporting Standards (IFRSs) would be the right approach for US issuers but listed many concerns if that were the route ultimately taken by the SEC.

Perhaps the biggest cause for concern has been the International Accounting Standards Board (IASB), representing much of the world community and its US counterpart, the Financial Accounting Standards Board (FASB), failure to complete a number of joint projects agreed in 2006 that aimed to strip key differences between US and international accounting standards. The boards have completed, either wholly or partially, a number of their joint projects, however, “there are several projects that both boards acknowledge are in need of improvement, but the boards are not currently devoting resources toward completion of those projects (e.g., financial instruments with the characteristics of equity)”, the report said.

In the report the team of SEC staff noted a number of differences between US GAAP and IFRS but said that their elimination would not be necessary for the SEC to adopt international standards. “However, the existence of differences indicates a need for the [SEC] to consider specifically such differences to determine whether investors and other users of the financial statements would be losing or gaining significant informational content and to determine the effect on transitional considerations if IFRS were to be incorporated.”

Looking forward, the working paper will now be used by the SEC’s top brass to evaluate the implications of adopting international standards as the financial reporting system for US issuers, meaning no final policy decision on the matter has yet been reached. The SEC declined to comment past what was released in the 127-page report. 

Sources say that if adopted the SEC will have to address the low support shown for international standards among US issuers. Having to convert US GAAP – which is embedded in laws and regulations and in a significant number of private contracts – was cited as one reason why conversion was not embraced by the financial community.

However, the paper said there was still “substantial support” for exploring other methods of incorporating IFRS that demonstrate the US’ commitment to a single set of global accounting standards that would make reading financial reports across borders more simple.

No matter what the outcome it has now been more than a decade since governments worldwide set out what was, in retrospect, an ambitious project: the convergence of international accounting standards. Indeed Scott Saks, co-chair of the international securities practice at law firm Paul Hastings, told PE Manager that “it makes no sense that there is not a more immediate roadmap for the US to convert to IFRS as have most major economies”.

The US for its part has been paying lip-service to the convergence goal but is in actuality signaling an “endorsement” approach of international standards. So instead of a wholesale adoption, sources say, the US envisions the SEC working alongside international standard setters in finding common ground, all the while reserving the right to tweak the rules as they see fit. That’s not exactly the outcome many had been hoping for.