IFRS & GAAP: The Urge To Converge Like a team of heart surgeons defibrillating a patient, the SEC has kick-started the moribund convergence movement between the FASB and IASB accounting standards. The first electrical jolt, administered last summer, was a proposal to eliminate the reconciliation requirement for foreign filers using full IFRS reporting. That proposal is now a rule: those foreign filers reporting on the IASB’s International Financial Reporting Standards (IFRS) no longer reconcile their earnings or stockholders’ equity to a U.S. equivalent under generally accepted accounting principles. The elimination of the requirement came about before the filing of 2007 financial statements for most firms, so there’s no up-to-date pool of firms making visible the differences between the two reporting systems.
The SEC’s second electrical shock, also administered last summer, contained even higher voltage: the Commission proposed that U.S. firms be allowed to choose between reporting under U.S. accounting standards and IFRS. While the SEC hasn’t issued a decision on that proposal yet, it would be hard pressed to let foreign filers report on an IFRS basis without reconciling to U.S. standards, while requiring domestic companies - who might be competing directly with those foreign filers - to report on the U.S. basis.
The underlying presumption in both SEC proposals: the two sets of standards aren’t all that different, and they produce pretty much the same results. It requires some imagination to accept that premise, however. This report analyzes the impact of the differences for 137 companies providing the reconciliation in 2006, and the differences can be wide. For 63% of the companies, the IFRS reporting basis increased earnings over the GAAP reporting; for 34% of the firms, IFRS reporting results were lower than GAAP results. The pattern held for return on equity: 64% of the firms showed higher ROE on IFRS compared to GAAP, while 33% reported lower return on equity on an IFRS basis.
While the data may seem old, it’s the most current available - and the results are still relevant because, save for business combination accounting, most differences between the two sets of standards remain at this time.