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A Convergence Carrot

Apr 14

Written by: Jack Ciesielski
4/14/2005 6:41 AM

Plenty of attention on the yesterday's roundtable on Section 404 experiences; plenty of media coverage. I'm more interested in what comes out of the roundtable in 30 to 45 days rather than speculating about how much "relief" might be granted.

Being a subtle change, and not a PR earthquake, another SEC development yesterday captured much less attention - but it's noteworthy for investors, especially the ones who complain about the pace of international convergence in accounting standards.

International convergence of accounting standards is a long-term goal of the FASB, the IASB and the SEC. The IASB and the FASB have been working together on major projects for the last several years, and will continue to do so - if anything, they might accelerate their joint processes rather than retard them. The European Union is already requiring its constituents to issue their financials in conformity with IASB standards - and as U.S. standards and IASB standards become closer in substance, convergence is likely to occur naturally.

One perceived obstacle to convergence has been the SEC requirement that any foreign registrant must present financial statements on a consistent basis for three years in their 20-F filings and reconcile net income to U.S. accounting-basis measures. Foreign registrants would love to see the reconciliation removed from their reporting requirements - but until accounting everywhere speaks the same language, it's a valuable disclosure for U.S. investors.

Yesterday, the SEC announced changes to its filing requirements that will give foreign registrants more of an incentive to prepare financials on an IASB basis. (Keep in mind that they US standards and the IASB standards are mutating in the same direction and hopefully will be one body of accounting law in the future.) While not changing any reconciliation requirements, the SEC will allow registrants to file two years rather than three years of income statements, changes in shareholders' equity and cash flows prepared on IASB principles - as long as they do it before, or in time for, their 2007 fiscal year.

A small carrot, to be sure. But the whole process of convergence is an evolutionary one, not a revolutionary one. If you don't look for the changes happening, you'll miss them. Making it easier for the foreign filers to convert to IASB principles is an important event, because getting firms away from their provincial accounting system and on just one of two systems - IASB or FASB - makes their financials more universal. And eventually, those two systems will be pretty much the same.

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