Will reconciliation be part of EU's acceptance of U.S. GAAP?

• Author: Orenstein, Edith
• Position: Washington insights - European Union - Generally Accepted Accounting Principles

This month's column could perhaps be ceremonially renamed the "Brussels Insights" column in honor of the mutual efforts by the U.S. Securities and Exchange Commission (SEC) and European Union (EU) toward global harmonization and mutual recognition.

"Now it will be Europe's turn to accept accounts in U.S. GAAP," said EU Internal Markets Commissioner Charlie McCreevy, at a recent Conference on Audit Regulation. Given that the EU is already operating under a two-year extension to decide whether to accept U.S. GAAP as "equivalent" to International Financial Reporting Standards (IFRS), McCreevy noted, "this decision will have to be taken next year."

What are the chances the EU will require reconciliation from U.S. GAAP to IFRS? Currently, nothing of the kind is required, but that could change after the EU determines the equivalency of U.S. and certain other third-country GAAPs used by non-EU-based companies filing financial statements with EU stock exchanges.

"[I]t is certainly my intention to propose that no reconciliation to IFRS will be needed for companies filing their accounts under U.S. GAAP," McCreevy told the European Federation of Accountants.

Plain English or European?

However, it will be interesting to see how the "no reconciliation" position plays out in plain English (or plain European), with respect to the "mechanism for equivalence" for third-country (i.e., non-EU) GAAP recommended by the Committee of European Securities Regulators (CESR) in its report dated May 30, and its report specifically on the equivalence of U.S., Canadian and Japanese GAAP, dated June 2005 and updated last March.

"If there are no significant differences between the third-country GAAP and IFRS (for example, because a convergence programme has reached a point where no material differences exist any more)," said CESR in its May 2007 report, "such GAAP may be deemed equivalent without the need for additional rectification disclosures."

However, even for U.S., Canadian and Japanese GAAP, which were found to be "equivalent" by CESR, that finding of equivalence was "subject to" the provision of certain rectifying disclosures or remedies--some qualitative, some quantitative in nature--to explain significant differences in results under U.S. GAAP vs. IFRS.

Requirement or Not?

Although CESR claimed its 2005 recommendation for disclosure "remedies" was not a reconciliation requirement, others viewed it as a de facto requirement. For example, the joint letter filed by...