Mapping a path around US accounting principles ASIC REPORT

  • Date:01 Jul 2005
  • Type:CompanyDirectorMagazine
If you’re part of an Australian company which is a US foreign issuer, your company will be interested in the discussions about removing the requirement for companies applying International Financial Reporting Standards (IFRS) to reconcile to the US’s Generally Accepted Accounting Principles (GAAP).

Mapping a path around US accounting principles

ASIC chief accountant Greg Pound discusses removing the requirement for relevant companies to reconcile to US accounting principles

If you're part of an Australian company which is a US foreign issuer, your company will be interested in the discussions about removing the requirement for companies applying International Financial Reporting Standards (IFRS) to reconcile to the US's Generally Accepted Accounting Principles (GAAP).

This article outlines the US SEC's issues that will need to be addressed for the requirement to be removed.

After recent talks between the US Securities Exchange Commission (SEC) and the European Union Commission, a "road map" has been developed, outlining what the SEC will consider when evaluating whether to remove the reconciliation requirement for foreign issuers using IFRS to reconcile to US GAAP in their financial reports filed with the SEC. This move could possibly happen as soon as 2007, but no later than 2009.

SEC considerations

A recent article by US SEC chief accountant Donald Nicolaisen sets out his views on a possible "road map" to removal of the reconciliations requirement. Nicolaisen points out that, from the US perspective, acceptance of financial reports prepared under IFRSs without reconciliation will require the SEC to be satisfied that its financial reporting objectives are achieved and both reporting frameworks provide comparable information.

One of the significant elements of the process is the "convergence' project being undertaken by the IASB and US FASB where those standard-setting boards have agreed to use best efforts to make their existing standards fully compatible as soon as possible and to coordinate future work programs to maintain compatibility.

In addition, from the US perspective, SEC staff guidance issued to supplement US standards also needs to be reviewed for its applicability to foreign companies applying IFRSs.

A significant element of the "road map" is an evaluation by the SEC of the application of IFRSs by foreign companies.

The SEC has indicated that it will be assessing the consistency of implementation of IFRSs for the first financial reports filed in 2005 by foreign companies from a cross-border perspective. This will also provide the SEC with information to assess remaining IFRS/US GAAP differences.

This review of 2005 annual filings using IFRS will be aimed at assessing whether the application of IFRS is faithful to the standards and consistent across companies.

This makes it critical that SEC foreign private issuers and their auditors be particularly diligent in their initial IFRS applications.

This information will provide a basis for the SEC to consult with investors, standard-setters, practitioners, auditors and other regulators on the implications of removing the reconciliation.

According to the "road map", this process of review of IFRS filings and monitoring of the "convergence" process would proceed for at least two to three years with a view to determining whether to recommend to the commission removal of the reconciliation requirement by 2009 or sooner.

Nicolaisen also outlined the importance of maintaining an independent and professional standard setter for IFRSs in terms of providing high quality and transparent information in the public interest. He acknowledged as significant the IASB's "due process" in seeking views from a wide variety of stakeholders and having members of the board apply their skills and experience to the process, as well as the ability to continue to resist excessive and unreasonable pressure.

One issue Nicolaisen raised which is also receiving attention in most IFRS jurisdictions is the matter of interpretations. This is clearly a focus for the SEC in assessing any future decision to remove the reconciliation.

While advocating the minimisation of differing interpretations, he recommends that where in the interim differing interpretations cannot be avoided, transparency in the financial report as to the practice followed is essential.

This is also an area where regulators such as ASIC have a role. Like most regulators, ASIC takes the view the view that interpretations should be undertaken by the standard setter. However, as part of our regulatory and enforcement activities, it is often necessary to take a position on an accounting issue.

Where a regulator thinks that a company has not complied with an accounting standard, it often reflects a difference of interpretation as to the application of that standard. This is not new in the context of a national environment, but under IFRS the international aspect adds another dimension.

It is incumbent upon regulators to strive for consistent IFRS application across jurisdictions.

ASIC is active in dealing with this through its membership of the International Organisation of Securities Commissions, which is in the process of establishing a process whereby securities regulators internationally can communicate on how they have dealt with interpretation and application issues as a means of promoting consistent regulatory interpretation.

In summary, the SEC position is that it will need to be confident that the needs of their investors are adequately met without a reconciliation requirement.

For Australian companies which are US foreign issuers, it is important therefore that the IASB/FASB convergence project is supported, the IASB is supported as an independent standard setter and that forthcoming Australian IFRS-based financial reports reflect the appropriate and consistent application of the AASB-IFRS-based standards.

From an ASIC viewpoint also, these issues are just as important from a domestic financial reporting perspective.

Benefits of this move

Australia, through the AASB, has been a leader in the adoption of IFRS and actively participated in the process to have IFRS accepted as a set of accounting standards that could be globally adopted.

The SEC "road map" is useful in understanding the US regulator's view on how it will address the process of evaluating whether to remove the reconciliation. Any such discussions will facilitate reporting by Australian companies in the US and also encourage US investment in the Australian capital market.

More generally, it should enable Australian companies to better access finance from the US and other jurisdictions as Australian company financial reporting is seen as convergent and high quality.

From an international and national perspective, the proposed "road map" and high quality national reporting support Australia's decision to move to IFRS as the basis for Australian accounting standards.

For more about applying IFRS, visit


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