As reported in my previous blog post, on November 15, 2007, the U.S. Securities and Exchange Commission (SEC) voted unanimously to accept from "foreign private issuers" (FPIs) financial statements that are prepared using International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB) without reconciliation to U.S. Generally Accepted Accounting Principles (GAAP). That vote indicates that the SEC considers IFRSs to possess quality and comparability similar to U.S. GAAP. In other words, U.S. GAAP is still sufficient but no longer necessary to protect the interests of U.S. investors.
Of course, the SEC and the world's capitalists know that when it comes to financial reporting standards, it doesn't make economic sense to be different if it's not necessary. Back in March of this year when I was interviewed for a Forbes.com article, I had characterized the SEC's then-potential removal of the reconciliation requirement for FPIs as being likely to represent "Domino One" in triggering significant changes in the U.S. financial reporting environment. On November 15, "Domino One" tumbled. In particular, I believe that one consequence of the SEC's vote is to increase the likelihood of the SEC requiring all public companies under its jurisdiction (both domestic and foreign) to use IFRSs in the future.
The likelihood of the SEC requiring the use of IFRSs by registrants has been bolstered by the FASB and AICPA, who have each recently encouraged the SEC to require U.S. public companies to prepare financial statements using an improved version of IFRSs rather than U.S. GAAP. It seems that U.S GAAP's biggest supporters are falling like, well, dominoes.
An interesting question to ponder is whether we will end up with two sets of accounting standards in the U.S.–one for public companies and another for private companies. I see three possible scenarios as being more likely than others:
We do end up with two sets of standards: Public companies will use IFRSs but private companies will use U.S. GAAP. However, if public companies stop using U.S. GAAP, advocates of differential standards for private companies (e.g., The Private Company Financial Reporting Committee) will finally get the opportunity they've always wanted: to transform what we now know as U.S. GAAP into a radically simplified, more cost-effective set of standards that is no longer biased towards the needs and capabilities of public companies.
We don't end up with two sets of standards: Private companies will use IFRSs just like public companies.
We sort of end up with two sets of standards: Private companies will have the option to use "IFRSs for SMEs," a differential variant of full IFRSs that the IASB recently introduced specifically for "Small to Medium Entities."
The most important implication is this: Under each of the most-likely scenarios, accounting and financial reporting standards for both public and private companies will be significantly different from current U.S. GAAP.
It will certainly be interesting to see how the dominoes continue to tumble.
"Domino One"
As reported in my previous blog post, on November 15, 2007, the U.S. Securities and Exchange Commission (SEC) voted unanimously to accept from "foreign private issuers" (FPIs) financial statements that are prepared using International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB) without reconciliation to U.S. Generally Accepted Accounting Principles (GAAP). That vote indicates that the SEC considers IFRSs to possess quality and comparability similar to U.S. GAAP. In other words, U.S. GAAP is still sufficient but no longer necessary to protect the interests of U.S. investors.
Of course, the SEC and the world's capitalists know that when it comes to financial reporting standards, it doesn't make economic sense to be different if it's not necessary. Back in March of this year when I was interviewed for a Forbes.com article, I had characterized the SEC's then-potential removal of the reconciliation requirement for FPIs as being likely to represent "Domino One" in triggering significant changes in the U.S. financial reporting environment. On November 15, "Domino One" tumbled. In particular, I believe that one consequence of the SEC's vote is to increase the likelihood of the SEC requiring all public companies under its jurisdiction (both domestic and foreign) to use IFRSs in the future.
The likelihood of the SEC requiring the use of IFRSs by registrants has been bolstered by the FASB and AICPA, who have each recently encouraged the SEC to require U.S. public companies to prepare financial statements using an improved version of IFRSs rather than U.S. GAAP. It seems that U.S GAAP's biggest supporters are falling like, well, dominoes.
An interesting question to ponder is whether we will end up with two sets of accounting standards in the U.S.–one for public companies and another for private companies. I see three possible scenarios as being more likely than others:
The most important implication is this: Under each of the most-likely scenarios, accounting and financial reporting standards for both public and private companies will be significantly different from current U.S. GAAP.
It will certainly be interesting to see how the dominoes continue to tumble.