Global Business

A Holiday Reconciliation Gift from the EU

With expiration looming, the European Union extends its policy of allowing American companies listed on EU exchanges to use U.S. GAAP.
Marie LeoneDecember 12, 2008

In the spirit of global reciprocation, the European Union has extended its directive that allows U.S. companies to file financial results using U.S. generally accepted accounting principles. The directive, which waives the reconciliation requirement, was set to expire at the end of the year.

The EU says it views U.S. GAAP — as well as the local accounting standards of Japan, China, South Korea, Canada, and India — as being “equivalent” to international financial reporting standards. As a result, companies in those countries will continue to be able to use local GAAP and list on European stock exchanges, rather than having to switch to IFRS.

Earlier this year, the Securities and Exchange Commission eliminated its reconciliation requirement for foreign issuers, allowing overseas companies to list on American exchanges without having to file results in U.S. GAAP. That move led to widespread speculation that the SEC was getting ready to require U.S. companies to file results in IFRS as prescribed by the International Accounting Standards Board. And while that still may be the case, the SEC is taking a slower route to that end than first expected.

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In November the SEC released its “roadmap” for moving U.S. companies to IFRS, and said it would decide in 2011 whether such a rule would be prudent. Since 2002 the IASB and its American counterpart, the Financial Accounting Standards Board, have been working to eliminate the differences between U.S. GAAP and IFRS, and ultimately converge the two volumes into one. Of the nations that mandate IFRS, 29 have not adopted full IFRS as sanctioned by the IASB, but rather international standards that include local exceptions, or “carve outs.”

Charlie McGreevy, the EU commissioner for European Internal Market and Services (EIMS), calls the rule extension a “momentous step,” marking the culmination of many years of work to help countries make the slow but steady transition to IFRS.

Dave Kaplan, a partner with PricewaterhouseCoopers who leads the firm’s IFRS consulting and accounting team, says the announcement was not a surprise, as the EU has been working on the transition process for some time. But he points out that the adoption of the extension “is a good move,” as it allows companies to avoid the costs associated with reconciling local GAAP to IFRS. The announcement “is a continuing step in the right direction [signaling that the EU] is in no way giving up on the transition to a single set of high-quality standards,” adds Kaplan.

The context of the equivalence discussions “was initially on cross-border reporting and allowing IFRS in those jurisdictions that still required disclosure of local GAAP information for foreign companies,” adds D.J. Gannon, a partner with Deloitte & Touche and leader of the firm’s IFRS efforts in the United States. Further, he notes that while the discussions facilitated the elimination of the SEC reconciliation requirement, that “does not change the overall movement toward IFRS.”

The extension is part of the EU’s Prospectus Directive and Transparency Directive, which also mandates a full review of progress made on the IFRS transition by 2011. Meanwhile, the EIMS Commission will regularly monitor the ongoing status of “equivalence” in financial-reporting standards, and report to the member states and Parliament when necessary.