Reconciling Company Earnings
Companies reporting using accounting standards other than US GAAP (United States Generally Accepted Accounting Principles) typically have to reconcile their earnings under their foreign reporting standards to US GAAP. Starting with years ending after November 2007, the SEC no longer requires companies reporting under IFRS to disclose this reconciliation.
Problems with GAAP Reporting and SEC Requirements
Investors and companies reporting under US GAAP do not benefit from the SEC’s relaxed requirements. The lack of a reconciling statement makes it very difficult for investors to compare financial results of companies reporting under differing accounting standards. In addition, US GAAP is typically more conservative - meaning that earnings under US GAAP are less than earnings under other accounting methods. Companies reporting under US GAAP may appear to not be as financially sound, when in actuality they are financially stronger or at least as strong as a foreign company.
Benefits of Reporting Under IFRS
If not including a reconciling statement makes it difficult for investors to compare financial results across companies, then why remove the requirement? The SEC is pushing for IFRS-US GAAP convergence. Not requiring a reconciling statement reduces a significant amount of expense that foreign companies have to incur to have their stocks listed on the US Stock Exchanges. The SEC eventually wants all US companies to report under IFRS. Whether or not that is good for the economy is beyond the scope of this article.
What do You Think?
Whether you are an investor, a college undergrad, or someone who is just reading articles late at night because you cannot sleep - the US GAAP - IFRS SEC reporting treatment affects you. Financial statements should have full disclosure and should aid in the comparison of multiple investment options. The lack of a reconciliation from IFRS earnings to US GAAP could mislead investors one way or another. The way that accounting standards are set up, it is most likely that the company reporting under IFRS will look more attractive, as they typically show higher earnings.
On the other hand, not including a reconciliation in the footnotes to the financial statements saves a company a significant amount of money. This encourages companies to seek investors in the US markets, which helps the overall economy.
There will be many changes over the next few years and it will be interesting to see how any changes in accounting principles used for financial reporting will effect our overall economy.