US edges closer to standard harmony

Coming to you soon ­ a world where US national domestic issuers and
multinationals abandon US accounting standards to report under international
financial reporting standards. Get that: US companies using IFRS.

In three rapid-fire moves at the end of April the possibility of one true set
of global accounting standards moved distinctly into view. At their political
summit meeting held in Washington on 30 April, US president George Bush and two
European leaders ­ Angela Merkel, president of the European Council, and José
Manuel Barroso, president of the European Commission ­ resolved to work to
promote transatlantic economic integration under six headings, including
financial markets. In particular, they resolved to promote conditions for US
generally accepted accounting principles and IFRS to be recognised in both
jurisdictions without the need for reconciliation by 2009, or possibly sooner.

A week before that, the chairman of the Securities and Exchange Commission,
Christopher Cox, announced plans to get rid of the need for any non-US company
with a US listing to reconcile its reported figures to US GAAP. This is an
intriguing prospect. Cox says the SEC is on track to eliminate reconciliation by
2009. The SEC went on to add, ‘Because the elimination of the reconciliation
requirement will permit some, but not all, registrants to have a choice between
IFRS and US GAAP, it raises the question whether all registrants should be able
to report under IFRS or US GAAP.’

At the same time that Cox was promising to eliminate US/international GAAP
reconciliation by 2009, the SEC was signing a protocol with the UK’s Financial
Reporting Council and the Financial Services Authority to share information on
companies’ application of IFRS.

So game, set and match to the standard setting body behind IFRS, the
International Accounting Standards Board. Well, maybe, but the IASB should not
be taking anything for granted. It does see the move by the US government and
the US regulator as an endorsement of the quality of the standards which it is
producing. The move by the SEC is seen as another vote of confidence in the IASB
and a reward for the progress it is making.

Working together

But the IASB should not get carried away. It still needs to work with the US
Financial Accounting Standards Board in what both perceive to be a genuine
partnership improving global financial reporting.

More worryingly for the IASB it still faces some searching strategic
questions. Speaking as the news of the SEC’s next steps and the SEC/FRC/FSA
protocol was breaking, John Tiner, chief executive of the FSA, was making a
speech entitled ‘Harnessing the market through principles and disclosures’. He
remarked that US accounting standards are perceived ‘as a highly detailed set of
rules where every standard has exceptions to the principle, with hundreds of
pages of interpretations and guidance, and specialist application of the
standards for various arcane industries.’ This is because they are rigorously
enforced by the SEC and presumably that tough process will carry on whatever the
GAAP being used.

While making it clear that he was not criticising US standards, and that the
convergence process would help the drive towards more principles-based
standards, Tiner added that ‘there are dangers in a focus on convergence as an
end in itself.’

According to Tiner there is a widespread and growing concern across Europe
that the costs of greater convergence may outweigh the benefits. ‘There is a
sense that the IASB and FASB are seeking to converge on a model of financial
reporting that is technically more complex than the framework that either
follows currently. It would be better if they were to focus on simplifying the
current model, both in moving towards principles, and in reducing the levels of
disclosure.

‘We need practical standards that reflect the way management runs the
business, and the standard setters should spend their time on the important work
of making sure the current standards are effective before they embark on
technical improvements in areas where there may not be evidence of a market
failure.’ A challenge for the IASB that the politicians may not care about, but
an issue close to FDs’ hearts.

The price of sarbox is still too high

Regulators may be in the process of making US markets more attractive by
embracing international standards, but companies are still quitting Wall Street
because of the burdens created by Sarbox.In recent weeks three major FTSE
companies have pulled out of the US citing the costs of Sarbox – the financial
controls legislation introduced in the wake of the Enron and WorldCom
collapses.International Power, said last week it was pursuing a withdrawal ‘with
the aim of reducing compliance costs.’ The company seemed intent on joining ICI
and United Utilities in turning its back on US capital markets.

ICI’s CFO, Alan Brown, said: ‘It no longer makes sense to submit to the
reporting obligations under the Exchange Act’, and insisted the move was all
about improving the company’s ‘long-term cost effectiveness’.That said, the US
is in the process of watering down Sarbox after a slew of other companies
decided enough was enough.

The exodus of UK companies began in 2004 when Lastminute.com bailed out of
NASDAQ. A year ago up to a third of all European companies listed in the US were
said to be contemplating their departure directly because of Sarbox.

But US regulators are nothing if not responsive. While London may have
benefited from disaffection with the US, it’s unlikely that markets across the
Atlantic will remain unattractive for much longer.