Despite the steady march toward a single, global set of accounting standards for public companies, it’s premature to expect U.S. investors to comprehend financial statements prepared under two different accounting systems.

That may be the view of a wide range of accounting experts, who are urging the Securities and Exchange Commission to ease up on its apparent zeal to lift the requirement for non-U.S. companies to reconcile their financial statements to U.S. standards.

But there’s also pressure on the SEC from outside accounting circles and even outside the United States to eliminate the reconciliation burden on non-U.S. companies—to make U.S. capital markets more appealing globally and to demonstrate America’s interest in signing on to use international accounting rules.

The tension came to the fore in the halls of Congress recently, when the U.S. Senate Subcommittee on Securities, Insurance and Investment convened a hearing to get an update on where accounting rules are headed. Sen. Charles Schumer, D-N.Y., said U.S. adherence to its Generally Accepted Accounting Principles is a “key factor” in the migration of initial public offerings to non-U.S. exchanges.

“The U.S. requirement that non-U.S. companies must reconcile their financial results to GAAP is a very costly and unnecessary one and is a deterrent for many foreign companies that might otherwise choose to list in the United States,” he said.

The SEC has asked for feedback on two separate measures: Whether to lift the current requirement that non-U.S. companies on listed U.S. exchanges submit financial statements reconciled to U.S. GAAP, and whether to allow U.S. companies to prepare their financial statements under International Financial Reporting Standards as written by the International Accounting Standards Board.

Hewitt

SEC Chief Accountant Conrad Hewitt told the Senate panel that the SEC has received 120 comment letters on the reconciliation question, and the only common thread is a general support for the notion of moving toward a single set of global accounting standards. He provided no statistical breakdown, but said comments offered a full range of views on the extent to which U.S. accounting rules and other accounting rules could co-mingle in U.S. markets.

Teri Lombardi Yohn, associate professor of accounting at Indiana University, told the Senate subcommittee she’s analyzed academic research on international accounting rules and determined that eliminating the reconciliation requirement will give investors a “significantly diminished set of relevant information for investment-related decision making.”

Yohn

Yohn tells Compliance Week she’s not sure why the Senate is showing such interest in the SEC’s proposals at this stage, but she wanted to focus her remarks on the readiness of U.S. investors to understand financial statements prepared under international rules. “We are much closer to convergence than we were several years ago,” she says. “But to the extent there are material differences between IFRS and GAAP and there’s no reconciliation, it will be very difficult to compare two companies.”

Least Disruptive, Least Costly

Robert Herz, chairman of the Financial Accounting Standards Board, was careful not to offer a direct view on whether the SEC should lift the reconciliation requirement today. He acknowledged investors will sacrifice comparability, as the process of making U.S. GAAP and IFRS comparable is far from complete. However, he said, only a small portion of publicly traded companies would be affected and the SEC is under some pressure to demonstrate its long-term intentions.

“Maintaining the current reconciliation requirement could be viewed by some parties outside this country as a clear signal that the U.S. is not truly interested in participating in an international reporting system,” he said.

Herz was more direct in his disapproval of an IFRS option for U.S. companies, especially if it is permitted for some indefinite time frame without a plan for eventually transitioning all companies to IFRS. “We are generally opposed to allowing companies to elect different accounting standards for economically similar transactions,” he said. “Accordingly, we do not support permitting U.S. companies a choice between IFRS and U.S. GAAP for any extended period of time.”

Herz suggested a better path to a single, global accounting standard is for the U.S. to develop a national plan for how it will eventually transition U.S. companies to use International Financial Reporting Standards while standard setters continue to make improvements to the rules. While Herz has advocated such an approach before, he offered the Senate panel some new details about what such a plan might contain.

He says the U.S. needs a plan agreed by all major stakeholders that would provide for “the most orderly, least disruptive, and least costly approach” to moving to IFRS, with defined target dates to give companies plenty of time to prepare for the change.

Herz

The plan, Herz says, should address a range of institutional issues that would reduce or eliminate the tendency by some countries to adopt IFRS with national variations. The European Union is perhaps the most notable jurisdiction to adopt IFRS, but with some controversial changes because it didn’t like some of the IASB’s provision for derivative accounting.

The SEC touched that nerve when it proposed eliminating reconciliation only for those who follow IFRS as written by the IASB. The SEC said some comments propose dropping reconciliation to variations of IFRS.

Herz says a transition plan must also address timetables to accomplish changes in the financial reporting infrastructure necessary to move to IFRS, including training and education for issuers, auditors, investors, and others who use financial statements. It must provide some guidance to companies on how to implement specific changes to align with IFRS, including training, system changes, internal control changes, and various contractual issues.

Even further, the plan would have to provide for how a switch to IFRS would affect audit firms and auditing standards, regulatory agency policies, contractual arrangements, and even state legal requirements that are currently based on U.S. GAAP, Herz said.

“We expect that the myriad changes to the U.S. financial reporting infrastructure would take a number of years to complete,” he said. In the meantime, FASB and the IASB should be allowed to work toward improving IFRS and rolling in common standards as they are ready, he added, in an approach he called, “improve and adopt.”

Prof. Yohn says it’s not clear where the Senate or the SEC may be heading next with reconciliation or convergence of accounting standards, but she says the SEC proposals have definitely changed the dialogue around convergence. “There’s a new tone, a new pace,” she notes. “Everyone is for convergence. The question now is are we converged enough now to get rid of reconciliation?”