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Statement No. 246
For Information Contact:
George Benston
404-727-7831
Peter J. Wallison
202-862-5864

April 30, 2007 was an important day for U.S. investors. On that day, President George W. Bush, German Chancellor Angela Merkel, and European Commission President José Manuel Barroso agreed to “promote and seek to ensure conditions for the U.S. GAAP and IFRS to be recognized in both jurisdictions without the need for reconciliation by 2009 or possibly sooner.” 

Currently, if the securities of foreign corporations are traded in U.S. securities markets the financial statements of these corporations must be reconciled with the U.S. GAAP. The cost of this procedure has discouraged many foreign corporations from offering securities in the United States and reduced the opportunity for U.S. investors to invest in their shares. With the adoption by the European Union (EU) of IFRS, U.S. corporations that issue securities in the EU will be required by December 2008 to present their statements in accordance with IFRS. This might require U.S. firms to have two sets of financial statements—one for the United States and the other for the European Union.

Both U.S. GAAP and IFRS offer investors valid ways to account for their financial status and the performance of their operations. Both are useful, and both have shortcomings. Allowing U.S. and EU corporations to prepare their financial statements in accordance with either U.S. GAAP or IFRS will have two important consequences. First, it will generate savings to investors from lower accounting and auditing costs and greater access to securities markets. Second, it will give investors and their advisers some insights into the benefits or defects of the alternative standards. 

The SEC has announced that it “anticipates issuing a Proposing Release this summer that will request comments on proposed changes to the Commission’s rules.” The Shadow Financial Regulatory Committee urges the Commission to adopt a rule as soon as possible and no later than April 30, 2008 that will give all issuers a choice between IFRS and U.S. GAAP. It may be that as a result of this change IFRS and U.S. GAAP will converge more rapidly or completely or that differences between the standards will be accepted by market participants. Investors and securities markets would benefit from either outcome.