Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, April 05, 2007

Beginning of the end for US GAAP reconciliation?

And what about US domestic issuers?

IRO’s in the UK will have a rueful smile at the antics in the US on IFRS. Bearing in mind the communications challenges that many companies faced in introducing IFRS in 2006, the conversations with analysts unfamiliar with IFRS, the reconciliation documents that had to be created, European IRO’s will be watching the proceedings at the SEC workshop held on March 6th on IFRS with interest, for 2 reasons.

First, for those (foreign) companies with an obligation to reconcile the numbers in the 20F to US GAAP, there is growing hope that Regulation G will be amended or even ended. At the SEC workshop, there were contributions from all sides of the capital markets industry.

For example, investors pointed out that they were not really using the reconciliation and in some sense preferred IFRS to U.S. GAAP. And many noted that they had already moved to analytic models that do not use the reconciliation. They pointed out that for many industries and peer groups, IFRS is the most common accounting standard and so in order to understand that industry or sector, analysts must know IFRS. Indeed institutional investors sometimes "reconcile" U.S. GAAP financial statements to IFRS in order to make their comparisons and investment decisions.

And timing is key. Foreign private issuers are not required to file their annual reports on Form 20 F until six months after their fiscal year end. This compares to the filing deadlines for U.S. issuers which range from 60 to 90 days, so investors frequently rely on issuers home country disclosures – in IFRS.

And, the SEC was told, reconciliation to US GAAP is costly, not only in monetary terms but also in terms of resources and personnel as well as lost investment opportunities for U.S. investors, who can lose out on being included in rights offerings and other investment opportunities.

The CFO of AXA, the global insurance and asset management company headquartered in Europe, reported that the annual reconciliation for AXA's Form 20 F cost his company approximately $25 million.

Second the big one; should U.S. issuers also be able to use IFRS for their financial reporting?

Phillip Jones, Director of External Reporting and Accounting Policies and Procedures at Dupont, believes it should. At the workshop, he spoke of the benefits and appeal of being able to report in IFRS. Many US companies are already using IFRS for various reasons, whether at their international subsidiaries or for reporting purposes with various regulators in other jurisdictions. It could improve their disclosure and reporting processes overall, in terms of transparency and internal consistency, if they were allowed to file with us using IFRS.

At minimum U.S. issuers would like the choice. And IRO’s on my side of the Atlantic will empathise with the change if it does happen.


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