Those looking for a little “light” summer reading can count on the Securities and Exchange Commission to deliver.

One of the latest installments in the Commission’s recent flurry of rulemaking is its 121-page proposal to allow foreign private issuers to file financial statements prepared in accordance with International Financial Reporting Standards without a reconciliation to U.S. Generally Accepted Accounting Principles, which is likely to be of interest to both domestic and foreign issuers.

The lengthy proposing release seeks comment on nearly 50 questions on dozens of issues. Among them: Whether convergence between GAAP and IFRS should be a consideration in the SEC’s acceptance of IFRS; whether there is sufficient comparability among companies using IFRS as published by the International Accounting Standards Board to allow investors and others to use and understand their financial statements without a U.S. GAAP reconciliation; whether the timing of any adoption of the proposals should be affected by the number of registered foreign companies that use IFRS; and whether the Form 20-F deadline ought to be shortened from the current six months. Comments are due by Sept. 24.

Beresford

“This would be a major step if the SEC goes ahead with it,” says Dennis Beresford, former chairman of the Financial Accounting Standards Board and now an accounting professor at the University of Georgia.

Under the proposal, only FPIs filing financial statements that comply with the English language version of IFRS as published by the International Accounting Standards Board could file those financial statements with the SEC without a reconciliation to GAAP. Issuers filing financial statements that include deviations from IFRS as published by the IASB would still have to file a reconciliation.

“That’s going to be a big issue,” says Beresford, since many foreign companies use a local version of IFRS. Another will be enforcing that requirement. “While a lot of countries require or permit the use of the IASB [version of the] standards, there’s a general suspicion that the enforcement is pretty light, in that people say they’re following IASB standards when they really aren’t,” Beresford contends.

As proposed, an issuer would be required to “state unreservedly and explicitly” in a footnote that its financial statements comply with IFRS as published by the IASB. In addition, the independent auditor must opine similarly in its report on whether the financial statements comply with IFRS as published by IASB.

Beresford adds that the proposal is likely to draw complaints from domestic issuers, who will say that giving foreign companies—but not U.S. filers—the choice between IFRS and GAAP will create an uneven playing field. That concern was raised earlier at a March roundtable on elimination of the requirement. The SEC has said it will publish a concept release this summer on allowing U.S. issuers to file in IFRS without a reconciliation. But, Beresford says, a concept release “isn’t a rule proposal.”

“That suggests that while they’re ready to move ahead on this idea for foreign companies, they’re not as far along in their thinking on allowing U.S. companies to do the same,” he says. “It will be hard to for U.S. companies to fairly evaluate this proposal until they see what the SEC has in mind for them.”

The change would mark a major shift for the SEC, which currently requires FPIs that prepare their financial statements in anything other than U.S. GAAP to reconcile those statements to GAAP in their filings with the Commission. Participants in a March roundtable on the topic told the SEC that the reconciliation is outdated, unnecessarily time consuming, and costly.

The proposal to eliminate the reconciliation requirement is in keeping with the widely discussed 2005 roadmap to convergence of American and international accounting standards, which called for the end of the requirement by 2009. It’s also intertwined with separate efforts by U.S. and international accounting rulemakers to converge their standards and eventually develop one global set of accounting standards. One concern raised about elimination of the reconciliation is whether that will slow momentum to continue work on convergence, an issue the SEC acknowledges in its proposing release.

While stating in its proposing release that IFRS still leaves specific accounting subjects and other matters unaddressed, that the two boards might not continue to support convergence if IFRS financial statements are accepted without reconciliation, and that the future work of the IASB and FASB may result in standards “that are significantly different or that are not timely in their development,” the SEC said that, “Nonetheless, we believe that if robust processes for the joint development of high-quality standards by the IASB and FASB are in place, we need not delay considering the acceptance of financial statements that comply with IFRS as published by the IASB without reconciliation to U.S. GAAP.”

Meanwhile, the SEC also reported on its general observations about the application of IFRS based on staff reviews of annual reports from more than 100 FPIs containing financial statements prepared for the first time using IFRS. The Commission also launched a webpage to make it easier to find SEC staff correspondence and company responses on completed IFRS filing reviews. For links to the report and the webpage, as well as other related resources, see the box above right.