SEC and IFRS - Embrace, extend and extinguish?

The US SEC yesterday released the proposed rules allowing foreign issuers to file their financial statements using the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. This proposal is certainly welcome, but one consequence of this is likely to be the emergence of a US flavour of IFRS.

Many countries that have adopted IFRS as their national accounting standard have effected some carve-outs or made some modifications in the interpretation of these standards. When foreign issuers file under IFRS, the US SEC reviews the financial standards for conformity with the original IFRS and not with the jurisdictional variant followed in the issuer’s home country.

Moreover, IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors,” suggests that when the IASB’s standard or interpretations do not address a matter, issuers should look to the most recent pronouncements of other standard-setting bodies. The SEC’s proposal states (page 61-62):

An issuer using IFRS as published by the IASB, although not required to follow U.S. GAAP guidance, may find reference to FRRs, ASRs, SABs, and Industry Guides and other forms of U.S. GAAP guidance useful in the application of IAS 8.

In addition, the SEC states (page 61):

We believe that a company that would no longer be required to reconcile its IFRS financial statements to U.S. GAAP under the proposed amendments, and its auditor, would continue to be required to follow any Commission guidance that relates to auditing issues.

In addition, foreign private issuers are required to have audits conducted in accordance with the Standards of the PCAOB (U.S.)/U.S. Generally Accepted Audit Standards regardless of the comprehensive basis of accounting they use to prepare their financial statements.

The SEC also points out (page 79) that under current PCAOB standards when SEC filings are audited by foreign audit firms, these audit firms must have policies that provide for review of these filings by persons knowledgeable in accounting, auditing and independence standards generally accepted in the United States.

What all of this means is that the US which has not adopted IFRS at all might still be able to create a US variant of the IFRS. Over time, this variant (more rule based than principles based) may become highly influential and could even become the dominant flavour of IFRS. If this happens, the SEC’s stance could begin to resemble the “Embrace, extend and extinguish” strategy long associated with Microsoft.

Posted at 1:36 pm IST on Wed, 4 Jul 2007         permanent link

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