Views on improving the integrity of global capital markets
17 January 2013

Optional Use of IFRS and Private Company Standards: Both Reduce Comparability in U.S. Financial Reporting

At the 18th Annual New York Society of Security Analysts’ International Financial Reporting Conference in New York last week, Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), made the case for the U.S. Securities and Exchange Commission (SEC) to allow the optional use of International Financial Reporting Standards (IFRS) by U.S. publicly listed companies.

Mr. Hoogervorst has promoted this position for some time now, positing that in the absence of an SEC decision on incorporating IFRS in the U.S. financial reporting regime, the optional use of IFRS by U.S. public companies would improve comparability in financial reporting for public companies across the globe. Allowing this, in his view, would also signal a commitment by the U.S. towards eventual adoption of IFRS.

Concerns over Two-Tier System in U.S.

However, Leslie Seidman, chair of the Financial Accounting Standards Board (FASB), warns against a two-tier system. She believes a system with two sets of generally accepted accounting principles (GAAP) would be a “mess” and “unmanageable.”

In a similar vein, former SEC Chief Accountant Jim Kroeker, prior to his departure, raised concerns about permitting such optionality for U.S. publicly listed companies. He suggested having a two-GAAP system would not advance the U.S toward the goal of having, domestically, a single set of accounting standards.

If the SEC were to permit an option for listed entities to file IFRS financial statements, it would reduce comparability between:

  • The financial statements of U.S. public companies that applied IFRS and those that applied U.S. GAAP.
  • The financial statements of U.S. public companies that applied IFRS and U.S. private companies.

The question then becomes whether the increased comparability of U.S. and foreign public companies who apply IFRS poses a greater good than comparability of financial statements within the U.S.

Mr. Hoogervorst proposes a way to enhance comparability across public companies internationally. Ms. Seidman and Mr. Kroeker appear concerned that the suggested course will reduce comparability at home.

Indeed comparability is very important to investors. Comparability across financial statements within, and across jurisdictions, is essential for the financial analyses investors perform during their capital allocation process. And, as we know, such capital allocation decisions are increasingly more global as investors look across jurisdictions for investment opportunities.

Private Company Standards Also Create Two-Tier System

What’s ironic in the comparability debate is the lack of acknowledgement of the impact of the FASB’s recently initiated project to create separate private company U.S. GAAP standards on the comparability between financial statements within the U.S.

Separate private company standards will certainly reduce comparability between the financial statements of U.S public and private companies. As previously stated, such a reduction in comparability is not beneficial for the investment community. After all, capital allocation decisions are made by investors across both public and private companies.

Without adequate consideration of reduced comparability within the U.S., and its impact on the investment community, a Private Company Council (PCC) to set private company standards has been formed. In addition, in July 2012 the FASB issued a discussion paper that lays out a decision-making framework for the PCC and the FASB to determine whether, and in what circumstances, exceptions or modifications should be made to U.S.GAAP for private companies – seemingly a second set of U.S. GAAP.

Nor does it appear there has been adequate consideration of what this reduction in comparability between financial statements within the U.S. entails for the optional use of IFRS in the U.S. Interestingly, reduced comparability between the financial statements of public and private companies in the U.S. is one of the SEC’s stated reasons for U.S. public companies not adopting IFRS.

Given that comparability between U.S. private and public companies will be reduced by separate private company standards, should the SEC now reconsider its position and allow U.S. public companies to adopt IFRS to improve comparability between public companies across the world?

Contradictory Moves Hurt Investors

As it stands, the SEC will not permit optional use of IFRS because it will reduce comparability in financial reporting within the U.S., and the FASB has set forth on its path to producing separate private company standards that will reduce comparability in financial reporting in the U.S.

The end result appears to be a lose–lose situation for investors.

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About the Author(s)
Mohini Singh, ACA

Mohini Singh is director of financial reporting policy at CFA Institute. She represents membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

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