‘Convergence for convergence sake’ is a phrase on many accountants’ lips at
present, but eliminating the need for reconciliation to
US GAAP has
become a matter of much greater concern, especially as many in the UK financial
community think convergence is proceeding too fast.
But how far down the line are we in aligning IFRS with US standards? Not
very, say most experts, although there are more similarities than differences
between the two nowadays.
‘If you look at a lot of recent standards there are similarities,’ says Ian
Dilks, IFRS partner at PricewaterhouseCoopers. ‘You can see recent examples of
where either IFRS has drawn on the US experience or things have been done on a
But along the highway of convergence two big obstacles have emerged. First is
the age-old issue of principles over rules. But perhaps a more pressing concern
for FDs on this side of the Atlantic is why bother to reconcile IFRS statements
with US GAAP when IFRS is now widely accepted throughout the rest of the world.
Last year the extent of the principles versus rules debate was highlighted
when the IASB and the US FASBstepped up their convergence programme to revise
the business combinations standard.
Resistance to the proposed changes, particularly from the finance directors
of European companies, was swift and harsh. What standard setters may have
underestimated is their ability to sell it to users and preparers of accounts.
‘The IASB and FASB need to be clear in making their case for change,’ says
Mark Vaessen, IFRS partner at KPMG. ‘The world wasn’t ready for business
combinations phase II and the boards didn’t make the case for change, which is
why they got the push back.
‘Convergence alone isn’t enough. It has to be driven by better standards and
improvements in quality.’
The first attempts at convergence have made clear that the process is going
to take longer than initially thought. This acknowledgment has made many
question the leisurely US timetable to get rid of reconciliation. Business
leaders in Europe, in particular the UK’s influential Hundred Group of Finance
Directors, are dissatisfied with the status quo and the SEC’s intention not
commitment to drop reconciliation by 2008.
It is understood that the Hundred Group has written to SECchairman
Christopher Cox to lobby the SEC to drop the requirement by next year. It argues
that the benefit to investors of reconciled financial statements which are
typically published weeks or months after the IFRS statements is limited. The
market, they argue, is confident in the quality of IFRS reporting.
Indeed, confidence in IFRS is growing rapidly. New research by
PricewaterhouseCoopers and Mori show that IFRS is already influencing fund
managers’ investment decisions in Europe.
This is what the SEC is really waiting to see. It has dispatched IFRS experts
to analyse the reaction in Europe to the first round of full-year IFRS
statements that will be released in spring.
Other factors might help persuade the SEC to act more quickly. In private,
many companies admit to reticence about listing in the US due to the high level
of regulation and the slow acceptance of IFRS.
If the SEC doesn’t cede some ground there’s always the possibility, suggest
observers, that the European Commission could reconsider its position and
require US companies to reconcile financial statements to IFRS.
‘What’s important is how the first year of IFRS full-year reporting goes and
what the reaction in the US is. If over the next few months the conclusion is
that the accounts are consistent and of high standard, then the likelihood of
removing reconciliation earlier is higher,’ says Dilks.
The drop in IPOs in the US of foreign companies should be further evidence of
the attractiveness of European markets.
‘If you take the whole mix, then I’m sure the US regulators are conscious of
the fact that their share of those going to the capital markets is declining, so
they are keen to eliminate artificial barriers to listing,’ says Dilks. ‘If the
view is that IFRS is a good method of reporting, then why continue to require
In the tangle of interests a temporary solution has emerged in the form of
mutual recognition. This cuts a provisional route through the quagmire into
which reporting could potentially slip while debate rages over how convergence
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