In the Drop Zone: Regulators Continue to Work toward One Global Set of Accounting Standards, but as IFRS and GAAP Are Converged, It's Not How You and, It's How You Fall

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Over the past few years, the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and a slew of other foreign regulatory agencies have been slowly working to meld together the world's two predominating accounting systems: U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). Over the course of 2007, the convergence of these two standards only accelerated, starting in April with an agreement on the protocol for sharing information on the application of IFRS between the SEC, the United Kingdom Financial Services Authority (FSA) and the United Kingdom Financial Reporting Council (FRC). According to SEC Chairman Christopher Cox, the agreement provided "the framework for the confidential exchange of information between the SEC staff and the staff of the FRC, which is charged with reviewing issuers' published financial statements in the UK."

"High-quality and consistent application of IFRS is critical to the future of global accounting standards. Sharing information under this protocol should help to promote this goal," Cox added. Even more indicative of the SEC's push for one global accounting standard are comments made by some of the SEC's other directors. "The document signed today represents a continuation of the deepening of the SEC's cooperative arrangements with its counterparts around the world," said Ethiopis Tafara, director of the SEC's Office of International Affairs. "In view of the growing acceptance of IFRS around the globe, information-sharing and cooperation among regulators is taking on increasing importance."

In the latter part of 2007, the SEC opened for public comment their consideration of the elimination of the reconciliation requirement for IFRS filers. When a foreign private issuer files financial statements according to IFRS, they're also required to reconcile the information with U.S. GAAE However, this requirement might soon be a thing of the past. "This proposal to accept financial statements prepared in accordance with IFRS as published by the International Accounting Standards Board (IASB) without a U.S. GAAP reconciliation represents another significant action to tailor the regulatory environment for foreign companies in the U.S. public markets" said John White, director of the SEC's Division of Corporate Finance, in a release from early July. In the same month, the commission addressed the matter more directly and opened up public comment on whether or not to offer U.S. issuers the choice to file financial statements in either GAAP or IFRS. "Having a set of globally accepted accounting standards is critical to the rapidly accelerating global integration of the world's capital markets" said Chairman Cox.

While it's hard to argue with the SEC's logic regarding how beneficial a universal accounting standard could be for export sales and global business, the journey from two separate systems to a single one could prove difficult for credit professionals, especially those who rely on scoring models to assist in their department's credit decisions.

Rules vs. Principles

The ongoing convergence of IFRS and GAAP follows a rather recent trend in the world of U.S. financial regulatory environments where concrete rules and regulations are being replaced with more abstract principles that allow for a broader scope of interpretation. The most visible manifestation of this trend is the passage, and subsequent revisions, of the Sarbanes-Oxley Act of 2002 (SOX). Passed in the wake of the Enron and WorldCom scandals of 2001 and 2002, SOX received criticism for the onerous reporting requirements it imposed on companies large and small--and also for its potentially debilitating effects on American business' position in the global market. After several years of widespread disapproval, the SEC and Public Company Accounting Oversight Board (PCAOB) began to issue new forms of guidance for businesses and auditors regarding the law's application. …