The SEC unanimously approved a plan last month to allow some US companies to apply international accounting standards beginning with next year's financial statements, and for all US companies to follow by 2016. Allowing all US companies to apply International Financial Reporting Standards reflects a decisive shift away from a rules-based accounting regulatory framework to a more principles-based system.
Multinational companies have long complained about the burden imposed by requiring them to prepare multiple sets of accounts, in order to comply with the accounting regulations of different jurisdictions. Streamlining global accounting standards has been a high priority for Securities and Exchange Commission (SEC) Chairman Christopher Cox, and is just one manifestation of his penchant for business-friendly policies. Last month, Cox largely achieved his long-term objective of allowing US companies to adopt international accounting standards.
Cox's new plan. The SEC has asked for public comments within 60 days on its roadmap for moving to global accounting convergence, which will formally abandon the framework embodied in the longstanding United States Generally Accepted Accounting Principles (US GAAP) in favor of International Financial Reporting Standards (IFRS): •A concrete timetable for proposed changes could be agreed by the end of this year that would nonetheless require final approval in 2011 to implement. •About 110 companies -- those that are among the 20 largest global companies in their industries, and for which a large number of competitors currently apply IFRS -- would be allowed to apply the global standards beginning with any financial statements issued after December 15, 2009. •Other large companies would apply IFRS beginning with their financial statements issued in 2014, smaller firms would make the switch in 2015, and the smallest publicly reporting companies would move in 2016. •There is broad bipartisan political support for the shift, making it likely that this programme will go forward even if, as expected, Cox soon resigns. The SEC's permanent staff strongly backs the move.
Significant cost savings could be achieved if the proposed changes are adopted, and investors may find it easier to make cross-industry comparisons. However, the transition period may be difficult, and increase confusion for investors who are only familiar with US standards. Sup-prime crisis impact. The move towards IFRS has been facilitated by the perception that US GAAP was not obviously superior to IFRS in terms of its effectiveness at revealing issues related to the sub-prime crisis (and that indeed, both systems have weaknesses that need to be addressed). The SEC recently conducted a roundtable discussion with interested parties in which the relative performance of the two standards was assessed; this is only one of three public roundtables conducted since March 2007 that compared US GAAP to IFRS. Oversight concerns. The planned shift will greatly circumscribe the ability of the SEC to shape accounting standards applied by US companies. Currently, US accounting standards are set by the Connecticut-based Financial Accounting Standards Board (FASB), and the SEC retains considerable control over the content of such standards, as it must approve any new rules the FASB develops. By contrast, the London-based International Accounting Standards Board sets IFRS, and as such the SEC's relationship with that body is more as an adviser than an overseer. Therefore, the Commission's ability to shape accounting standards will necessarily diminish. If fully implemented, the SEC's decision should make it easier for investors to compare the performance of companies in the same industry, regardless of company domicile. However, the plan will necessarily diminish the SEC's ability to dictate accounting standards for US companies.