Mind the GAAP


New York – A Tail of Two Accounting Standards – The SEC is set to consider allowing foreign companies to report their US results using the foreign accounting standards set by the International Accounting Standards Board. The rationale is that it is too expensive for international firms to adopt two accounting standards, one for reporting outside the US and one for accounting under GAAP.

This additional expense is a deterrent to foreign firms listing on American exchanges. Let’s add up the reasons why firms are loath to list on US exchanges.

  • The expense of double accounting that is required (above)
  • The additional expense of living up to SOX requirements
  • The general migration away from exchanges and into private networks
  • Globalization, which means that IPOs can be launched outside the US with ease

Indeed, much of the concern voiced by policy makers revolves around the increasing tendency for firms to list in London or Hong Kong rather than listing on a US exchange.

Many see the eventual result of the SEC’s initiative as leading to the complete replacement of FASB’s GAAP with its international rules.  This would certainly level the playing field for investors, but it would also bring with it a Pandora’s Box of adjustment woes.  The accounting firms, especially the big three, will get a huge boon from any changes, as they would likely be hired by clients to interpret and set up the new accounting systems.

But equity research analysts (and buy-side investors) will end up with a massive headache.

  • Fundamental firms will need to reinterpret signals, ratios and earnings, etc.
  • Forensic research providers will need to look for other ways to uncover “financial shenanigans”
  • Earnings quality firms will have to recalibrate their models and recode their data grabbing software
  • Quantitative research providers that rely on fundamental data fields will need to recode their data specs and their models

There is some good news though. Once these changes are made, the international accounting field will finally be level.  Getting there, however, will result in massive upfront costs and will likely take 5 to 10 years to accomplish. As with other expensive accounting changes (SOX) the implementation will be proportionately more painful for the small companies than the large.


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