Response to the SEC’s Proposed Rule—Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers

Abstract

SYNOPSIS: The Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association (hereafter, the AAA FRPC or the committee) is charged with responding to discussion memoranda and exposure drafts on financial accounting and reporting issues. This response is to the SEC’s proposed rule, Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers. Based on a review of the literature, the AAA FRPC has concluded that a move to an international set of financial reporting standards is a desirable goal. We have also concluded that continued convergence of U.S. GAAP with IFRS by joint relations between the International Accounting Standards Board (hereafter, IASB) and the Financial Accounting Standards Board (hereafter, FASB) is preferable to near-term adoption of IFRS as a strategy for convergence.

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

“…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).…”

“…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).…”

Individual investors’ attitudes toward the acceptance of International Financial Reporting Standards in the United States

“…(3) the SEC should reexamine its plan to require the adoption of IFRS at set future dates; and (4) the adoption of IFRS should occur when the differences between it and U.S. GAAP are so minimal that the two accounting systems produce essentially equivalent financial statements (Bradshaw et al, 2010).…”

Equity Market Response to Form 20-F Disclosures for ADR Firms

“…Soderstrom and Sun (2007) survey the extant research literature pertaining to accounting quality and IFRS implementation and point out that the greatest number of studies focus on stock price-related measures of accounting quality (e.g., value-relevance, information content, timeliness, and etcetera) concluding that these studies do not provide a comprehensive view of the usefulness of IFRS since they focus solely on how information is impounded in equity market investors' expectations. Furthermore, Bradshaw et al (2010) find that, even though both IFRS and U.S. GAAP represent high-quality accounting standards, material reconciling items persist to the extent of establishing considerable uncertainty that IFRS constitute accounting standards which are of equivalent or higher quality when compared with U.S. GAAP.…”