Academic journal article Academy of Accounting and Financial Studies Journal

An Analysis of the Content of Form 20-F U.S. GAAP Reconciliation by Foreign Entities Employing IFRS: Is the SEC IFRS Roadmap Premature?

Academic journal article Academy of Accounting and Financial Studies Journal

An Analysis of the Content of Form 20-F U.S. GAAP Reconciliation by Foreign Entities Employing IFRS: Is the SEC IFRS Roadmap Premature?

Article excerpt


Until recently, all foreign entities that are traded on United States (U.S.) stock exchanges were required to include a reconciliation to U.S. generally accepted accounting principles (U.S. GAAP) if the financial statements were not prepared in accordance with U.S. GAAP. The firms provided this information on the Securities and Exchange Commission (SEC) Form 20-F. This is a very expensive exercise that cost some companies millions of dollars annually (Scannell and Reilly 2007a). This burden, in conjunction with the additional costs associated with Sarbanes-Oxley compliance, has led to many U.S. de-listings by foreign entities (Uhlfelder 2007).

In an effort to combat these de-listings, coupled with concerns that the U.S. financial markets are losing their competitive edge to London and Hong Kong (Scannell and Reilly 2007), the SEC proposed that certain foreign entities be allowed to file financial statements under either U.S. GAAP or under the English language version of International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) without reconciliation to U.S. GAAP (SEC 2007). On November 15, 2007, the SEC voted unanimously in favor of the proposal. On December 21, 2007, the SEC issued the final rule which was entered into the Federal Register on January 4, 2008 (SEC 2008a). The rule applies to financial statements ending after November 15, 2007.

The IFRS promulgations to be used in lieu of U.S. GAAP are referred to as "full" IFRS. An analysis of the comment letters by LaFon (2007) to the SEC proposal revealed that most of the commenters endorsed the proposal. A few opposed it, however, with the most vehement opposition originating from the Investors' Technical Advising Committee (ITAC), a body whose charge is to render technical advice to the Financial Accounting Standards Board (FASB) from an investor's perspective. In the letter, the Committee stated that it would like to see "concrete evidence" that U.S. GAAP and IFRS standards are "substantially equivalent" before the reconciliation requirement is eliminated. The Committee went on to state, "We suggest that the Commission undertake an evaluation of the IFRS/U.S. GAAP differences commonly found in the reconciliations, and periodically publicly disseminate and report upon such an inventory." (ITAC 2007, 2)

Given this background, our research, in part, is intended to accomplish this challenge. Another objective is to ascertain if the SEC roadmap for the adoption of IFRS is appropriate. As we will indicate in an ensuing section, the incoming SEC Chairperson is apprehensive about the proposed schedule. Our results should be of interest to financial statement users, especially financial analysts and accounting standard setters. Our paper begins with a discussion of the background of the topic, continues with a literature review and our research questions, and then our methodology, summary and conclusions.


The SEC first required listed foreign entities that did not employ U.S. GAAP to submit supplementary information in 1967. The instructions associated with Form 20-F did not specifically require a reconciliation, but rather, the financial statements, audit report, and other schedules that domestic issuers were required to file. Prior to 1967, the foreign entities only had to file a balance sheet and income statement, with no requirement for this information to be certified. In 1982 the Commission implemented the current reconciliation requirement (SEC 2007).

Although the Commission has required this information for the past twenty-five years, the agency has long advocated reducing differences in accounting principles between the U.S. and other countries in an effort to facilitate cross-border capital formation. In 1994, it accepted the cash flow statement prepared in accordance with International Accounting Standard No. 7 (IASB 2004b) without reconciliation. …

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