Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

SEC and IFRS – Embrace, extend and extinguish?

The US SEC yesterday released
the proposed
allowing foreign issuers to file their financial statements
using the International Financial Reporting Standards (IFRS) issued by
the International Accounting Standards Board. This proposal is
certainly welcome, but one consequence of this is likely to be the
emergence of a US flavour of IFRS.

Many countries that have adopted IFRS as their national accounting
standard have effected some carve-outs or made some modifications in
the interpretation of these standards. When foreign issuers file under
IFRS, the US SEC reviews the financial standards for conformity with
the original IFRS and not with the jurisdictional variant followed in
the issuer’s home country.

Moreover, IAS 8 “Accounting Policies, Changes in Accounting
Estimates and Errors,” suggests that when the IASB’s
standard or interpretations do not address a matter, issuers should
look to the most recent pronouncements of other standard-setting
bodies. The SEC’s proposal states (page 61-62):

An issuer using IFRS as published by the IASB, although not
required to follow U.S. GAAP guidance, may find reference to FRRs,
ASRs, SABs, and Industry Guides and other forms of U.S. GAAP guidance
useful in the application of IAS 8.

In addition, the SEC states (page 61):

We believe that a company that would no longer be required to
reconcile its IFRS financial statements to U.S. GAAP under the
proposed amendments, and its auditor, would continue to be required to
follow any Commission guidance that relates to auditing issues.

In addition, foreign private issuers are required to have audits
conducted in accordance with the Standards of the PCAOB
(U.S.)/U.S. Generally Accepted Audit Standards regardless of the
comprehensive basis of accounting they use to prepare their financial

The SEC also points out (page 79) that under current PCAOB
standards when SEC filings are audited by foreign audit firms, these
audit firms must have policies that provide for review of these filings
by persons knowledgeable in accounting, auditing and independence
standards generally accepted in the United States.

What all of this means is that the US which has not adopted IFRS at
all might still be able to create a US variant of the IFRS. Over time,
this variant (more rule based than principles based) may become highly
influential and could even become the dominant flavour of IFRS. If
this happens, the SEC’s stance could begin to resemble the “Embrace,
extend and extinguish”
strategy long associated with


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