A Perspective on the SEC’s Proposal to Accept Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) without Reconciliation to U.S. GAAP

Abstract

SYNOPSIS: The Securities and Exchange Commission (SEC) recently issued a call for comment on a proposal to accept financial statements prepared in accordance with International Financial Reporting Standards (IFRS) without reconciliation to U.S. GAAP. Accounting researchers have attempted to assess the quality of IFRS using different methods and criteria. While we are skeptical of drawing direct conclusions about the SEC’s proposal based on this research, there is adequate evidence that both IFRS and U.S. GAAP provide useful information to investors and other users of financial statements. Moreover, we see no conclusive research evidence that financial reports prepared using U.S. GAAP are better than reports prepared using IFRS. The prudent approach when faced with alternatives with no clear difference in quality is to promote competition among them, which supports adopting the SEC’s proposal to permit foreign private issuers a choice between IFRS and U.S. GAAP. Furthermore, to help improve U.S. and international GAAP through standards-setting competition, we recommend that the Commission extend the choice of IFRS to U.S. companies, and require all companies to indicate clearly whether they are filing under U.S. GAAP or IFRS. Finally, we recommend that the Commission and its staff investigate and seek feedback on the educational consequences of its proposed actions. This attention will help educators to better prepare future professionals to implement these proposed regulatory changes.

Do earnings reported under IFRS tell us more about future earnings and cash flows?

“…1 Hopkins et al (2008) suggest that the decision to eliminate the previously-required Form 20-F reconciliation between IFRS and U.S. GAAP for foreign registrants is premature because material differences exist between the two standards, because information in the reconciliation is currently impounded into stock prices, and because differential implementation and enforcement of standards across countries may reduce the comparability of financial reports across jurisdictions. 2 Jamal et al (2008Jamal et al ( , 2009) assert that there is no conclusive evidence that financial reports prepared using U.S. GAAP are better than reports prepared using IFRS, and recommend that the SEC allow U.S. companies to choose between IFRS and U.S. GAAP rather than mandate the adoption of IFRS. Similarly, Kothari et al (2010) provide a survey and economic analysis of the properties of GAAP and conclude that, rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.…”

“…However, our results suggest that along at least one dimension -the ability to predict future cash flows -the quality of U.S. financial reporting may actually decline with the adoption of IFRS. We suggest that this difference in the ability to predict future cash flows supports calls for allowing competition between IFRS and U.S. GAAP rather than requiring all U.S. firms to adopt IFRS or converging IFRS and U.S. GAAP (Jamal et al, 2008(Jamal et al, , 2009Sunder, 2009;Bradshaw et al, 2010;Kothari et al, 2010).…”

“…Two committees of the American Accounting Association -the Financial Accounting Standards Committee (see Jamal et al, 2008Jamal et al, , 2009 and the Financial Reporting Policy Committee of the Financial Accounting and Reporting Section (see Hopkins et al, 2008;Bradshaw et al, 2010) -have reviewed the extensive academic literature on IFRS. 1 Hopkins et al (2008) suggest that the decision to eliminate the previously-required Form 20-F reconciliation between IFRS and U.S. GAAP for foreign registrants is premature because material differences exist between the two standards, because information in the reconciliation is currently impounded into stock prices, and because differential implementation and enforcement of standards across countries may reduce the comparability of financial reports across jurisdictions.…”

“…More recently, Howell (2010) reports that plans for the U.S. to move to global standards are vulnerable to major delays and that chief executive officers have expressed concerns about incurring costs to convert to IFRS when the benefits of conversion are not clear. Finally, existing research has led some academics to suggest that competition between U.S. GAAP and IFRS is preferable to convergence of the standards or to the mandatory adoption of IFRS by U.S. firms (Jamal et al, 2008(Jamal et al, , 2009Sunder, 2009;Bradshaw et al, 2010;Kothari et al, 2010).…”

The Impact of IFRS Adoption on Earnings Quality: A Study Conducted on Foreign Issuers in the United States

“…Furthermore, so far, there is insufficient evidence indicating that specific reporting standards would be superior to the other reporting standards (Jamal et al, 2008). Leuz (2003) and Bartov et al (2005) found that there is no significant difference between IFRS and US GAAP earnings.…”