On December 13, 2007, the U.S. Securities and Exchange Commission (SEC) held a roundtable discussion on the use of International Financial Reporting Standards (IFRSs) in the capital markets of the United States. The roundtable focused specifically on issues arising from the co-existence of multiple sets of financial reporting standards in U.S. markets. This roundtable and a second roundtable scheduled for tomorrow relate directly to the SEC's "Concept Release on Allowing U.S. Issuers to Prepare Financial Statements In Accordance With International Financial Reporting Standards," which I previously wrote about here.
Background
IFRSs have emerged as commonly-used financial reporting standards among foreign companies that participate in the U.S. capital markets largely due to the European Union's decision to mandate IFRSs for all public-company consolidated groups listed in the EU, many of which are also listed in the U.S.
The SEC has traditionally required non-U.S. companies that are listed in the U.S. to either (1) prepare their financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) or (2) reconcile financial statements prepared under other standards (such as IFRSs) to U.S. GAAP. However, as permitted under SEC rules, foreign companies often file reconciliations many months after filing original non-GAAP statements. Thus, as established in the SEC's roundtable of March 6, 2007, the reconciliations are nearly useless to U.S. investors and other users of the financial statements, who long ago acclimated themselves to analyzing and comparing financial statements prepared under multiple sets of standards rather than waiting months to be able to do "apples to apples" comparisons.
The uselessness of the reconciliations led the SEC recently to eliminate the reconciliation requirement for foreign companies under its jurisdiction if the foreign companies prepare their financial statements in accordance with IFRSs (see my previous blog post here). Thus, while U.S. companies must still use U.S. GAAP, non-U.S. companies that participate in U.S. capital markets may now use either U.S. GAAP or IFRSs.
The December 13th Roundtable
The December 13th roundtable consisted of two panel discussions, both of which revolved around the same key question posed by SEC Chairman Christopher Cox in his opening remarks: "What is the effect of allowing foreign companies the choice of whether to use IFRS or U.S. GAAP, and denying that same choice to U.S. companies?" Panelists included individuals representing institutional investors, educators, issuers, auditors, credit rating agencies, and exchanges. The first panel explored the effects primarily from the perspective of U.S. capital market participants, whereas the second panel explored the effects primarily from a global perspective.
Webcast archives and a raw transcript of both panel discussions may be found here.
Commentary
The SEC's roundtables represent major milestones in advancing the dialog about Convergence and related issues here in the United States. Let me say for the record that I applaud the SEC for conducting the roundtables and that I have high regard for the individuals who participated in the panel discussions of this past week's roundtable. But having said that, I must say that I often felt uncomfortable observing the roundtable proceedings, as if I were witnessing the ancient fable of "The Blind Men and the Elephant" being played out in real life.
There are different versions of the fable, but in the one that I was reminded of, a group of blind men encounter an elephant -- a creature previously unknown to any of the men. Each man, touching a different part of the elephant (tusk, ear, trunk, leg, etc.) and lacking the ability to see the whole elephant, announces a different conclusion about what the strange animal is like. The fact that their individual perceptions differ so dramatically from each other baffles the group. And failing to reconcile their idiosyncratic experiences, the group ends the encounter with none of the men any wiser about the true nature of the elephant, or how each of their individual observations was actually valid but incomplete.
The comments of the December 13th roundtable panelists reflected a variety of subjective perspectives that often related poorly to each other. The overall result was rambling and disjointed; occasionally nonsensical but occasionally brilliant as well. Fortunately, from the discussions, I have begun to gain a deeper understanding of why there has been so much confusion and disagreement in the U.S. about the global convergence of financial reporting standards and the various issues related to Convergence. I'll have more to say about that in next week's blog post after I attend tomorrow's roundtable in person.
Dec. 17th SEC Roundtable on the Use of IFRSs in U.S. Capital Markets
On December 17, 2007, the U.S. Securities and Exchange Commission (SEC) held a roundtable discussion on the use of International Financial Reporting Standards (IFRSs) in the capital markets of the United States. Specifically, the roundtable focused on "practical issues surrounding the use of IFRS in the U.S. in recent years and its potential expanded use in future years." This roundtable and an earlier roundtable on December 13, 2007 (see my blog post) relate directly to the SEC's "Concept Release On Allowing U.S. Issuers To Prepare Financial Statements In Accordance With International Financial Reporting Standards," which I previously wrote about here.
The December 17th roundtable consisted of two separate panel discussions. Each panel included individuals representing various stakeholders in the capital markets. Both panels addressed the issues of whether, when, and how the SEC should permit or require U.S. companies to transition to IFRSs, with the first panel exploring the issues from the perspective of U.S. capital market participants and the second panel exploring the issues from a global perspective.
Webcast archives and a raw transcript of both panel discussions may be found here.
Commentary
I would like to say again that I applaud the SEC for conducting the roundtables and that I have high regard for the individuals who participated in the roundtable panel discussions. I attended the December 17th roundtable in person and had the opportunity to talk to several panelists with whom I was not previously acquainted.
Despite the subject matter of this roundtable being somewhat different from that of the December 13th roundtable, the nature of both roundtables was disappointingly similar -- as I put it in last week's post, "rambling and disjointed; occasionally nonsensical but occasionally brilliant as well."
Prior to the roundtables, I had started to suspect that most individuals and organizations who express opinions on the use of IFRSs in the United States actually have no idea what they are talking about. Now, after observing the roundtable discussions, I am convinced of it. More importantly, now I know why -- that is, why there is so much confusion and disagreement about the use of IFRSs in the United States. Understanding the "why" puts me in a better position to fulfill the purpose of this blog (and my forthcoming book), which is to educate corporate managers about the growing impact of the global convergence of financial reporting standards on financial reporting in the U.S.
I have concluded that misunderstandings about IFRSs represent the biggest obstacles to understanding the phenomenon of Convergence and its impact on financial reporting in the U.S. The roundtable discussions have inspired me to begin to cataloging dozens of misunderstandings that folks have about the role of IFRSs in the phenomenon of Convergence. Going forward, my blog posts will focus on addressing those misunderstandings.