Foreign private issuers registered with US regulator the SEC could soon be allowed to use international standards to file their financial reports.
The commission plans to table a proposal in the next few months that would allow foreign private issuers a choice between IFRS and US GAAP. The SEC is also considering treating US and foreign issuers equally by providing US issuers the choice to use IFRS.
‘The next steps the commission announces will keep us on course with the roadmap announced in 2005,’ says SEC chairman Christopher Cox. Pending public comments on the proposal, ‘we remain on track to eliminate reconciliation by 2009,’ he adds. In fact, the change could affect companies well before 2009 because the proposal is for reconciliation to disappear for accounts published that year; many companies have a December year-end, so that would mean the 2008 figures (published in 2009) would be the first affected.
Given the likelihood that this proposal will be approved, how difficult might companies find the reconciliation? And what are the issues for foreign companies communicating with US shareholders?
‘It all depends on the type of firm,’ says Ian Wright, a partner at PricewaterhouseCoopers (PwC) responsible for PwC’s development of financial reporting division. ‘Financial services businesses, reporting in compliance with many jurisdictional requirements, might find it hard. But an advertising business, for example, may find it easier. We know of a Swiss company that chose not to list in the US, and compliance was a key issue in its decision’.
Compliance costs
Indeed, for ICI, compliance costs led to a decision to de-list and deregister, as it no longer made sense ‘from a cost and administrative perspective to submit to the reporting obligations under the Exchange Act,’ the company said.
‘This decision is linked to the hard work we have done to improve our governance and control processes,’ explains John Dawson, vice president of IR and corporate communications at ICI. ‘And we feel that IFRS is a strong standard, well understood by US investors.’
Chris Prior-Willeard at Bank of New York supports this view. ‘For large, well-resourced, diversified and multi-listed issuers, reconciliation is less of a problem,’ he points out. ‘Smaller companies with American depositary receipts (ADRs) find it a burden, however, and they will welcome the changing compliance culture in the US. Nonetheless, in the context of a decision to list in the US, with its valuation rewards and commercial attractions on things like branding, the need for reconciliation is a smaller consideration’.
Investors, however, may view things differently. Citigate Dewe Rogerson’s Scott Fulton believes they are already familiar with the differences between the two systems. ‘Clearly, IFRS requires certain disclosure on joint ventures, pensions, the use of derivatives and the treatment of goodwill that may prompt companies presenting to investors experienced with US GAAP to present on a different basis in future,’ he says.
Some suggest that the equity capital markets are already adjusting for many of these issues. ‘I suspect US investors will be able to see through the accounting treatments and base their decisions on ‘clean’ metrics,’ Fulton adds. He has noted an increasing tendency for equity markets to assess value on a cash flow basis. This is an area where US and IFRS accounting are far more comparable, reducing the importance of the income statement. ‘Companies presenting to US investors under IFRS should consider placing a greater emphasis on cash flow statements and internal investment criteria,’ he advises.
‘Given the number of reports investors can access – from a home exchange, a home regulator, the US regulator and the US exchange – the overall picture an investor gets can differ,’ Prior- Willeard adds. ‘Companies must ensure their investment proposition and financial progress are well understood by investors.’
Reconciliation roots
The background to the change is, predictably enough, political. US markets have failed to win their share of new listings. ‘Sustaining New York’s and the US’ global financial services leadership’, a report endorsed by Michael Bloomberg and Senator Charles Schumer, has called for the recognition of IFRS without reconciliation, as part of the solution. And at the SEC’s IFRS roundtable held on March 6, participants gave broad support to the removal of the reconciliation requirement as a further step toward winning back new listings.
The effect, however, could be greater than simply easing the burden on companies. Much of the recent work of the International Accounting Standards Board and US counterpart the Financial Accounting Standards Board (FASB) has been aimed at converging IFRS and FASB’s standards. The idea was that if they could show positive results on merging the two systems, the SEC would feel confident enough to end the reconciliation requirement.
This reminds Wright of the introduction of IFRS in Europe. ‘It was important for creating a single market in financial services across the EU, so the Lamfalussy report pressed hard for it,’ he recalls. This resulted in mandatory use of IFRS in 2005.
Another component of the SEC’s proposals is to allow US domestic users the choice of reporting under US GAAP or IFRS. Wright believes major multinationals with consolidated accounts would welcome the chance to standardize internal reporting. This is a marked change from the last time the issue was discussed seven years ago.
The SEC plans to consult the market on these proposals in the fall. For now, talking to investors about their preferences between IFRS and US GAAP is clearly the way forward.
