ecurities and Exchange Commission chairman Paul Atkins issued a warning that the SEC might eliminate a rule that allows multinational companies to present their financial statements in accordance with International Financial Reporting Standards without first reconciling them with U.S. GAAP.
He urged the IFRS Foundation to provide a stable source of funding for the International Accounting Standards Board and warned against the IFRS Foundation’s involvement in setting sustainability standards through the International Sustainability Standards Board, which it oversees alongside the IASB.
“With respect to accounting standards, U.S. companies must prepare their financial statements in accordance with U.S. GAAP, or Generally Accepted Accounting Principles,” Atkins said during a speech Wednesday at an OECD Roundtable in Paris. “During my previous tenure at the SEC as a Commissioner in 2007, I voted to support rule changes to permit foreign companies to present financial statements prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), without reconciliation to U.S. GAAP.”
He pointed out that when the SEC eliminated the reconciliation requirement, it noted that “the IASB’s sustainability, governance and continued operation in a stand-alone manner as a standard setter are significant considerations in [eliminating the reconciliation requirement], as those factors relate to the ability of the IASB to continue to develop high-quality globally accepted standards.” The SEC specifically pointed to the ability of the IASC Foundation, which was later renamed the IFRS Foundation, to obtain “stable funding” for the IASB, he added.
Atkins criticized the expansion of the IFRS Foundation’s mission to embrace sustainability reporting.
“In 2021, the IFRS Foundation announced the formation of the International Sustainability Standards Board, and its Trustees are now responsible for securing funding for both the IASB and the ISSB,” he said. “This recent expansion of the IFRS Foundation’s remit cannot divert its focus from its long-standing core responsibility of funding the IASB. In turn, the IASB must promote high-quality accounting standards that are focused solely on driving reliable financial reporting and are not used as a backdoor to achieve political or social agendas. Reliable financial reporting is critical to supporting capital allocation decisions. We all have a strong interest in the IASB’s being fully funded and operational, and I encourage the IFRS Foundation to meet its goal for ‘stable funding’ that prioritizes the IASB and its focus on standards for financial accounting, rather than specious and speculative issues.”
The IFRS Foundation reported a loss of $2.7 million last year, according to Bloomberg Law, and began a fundraising campaign. Much of its funding comes from donations from governments abroad, unlike the Financial Accounting Standards Board in the U.S., which receives funding from public companies. However, FASB’s funding has also recently come under threat from a spending proposal by House Republicans who want it to withdraw its income tax disclosure standard.
Atkins too threatened to re-impose the reconciliation requirement for multinational companies filing their financials in IFRS with the SEC.
“If the IASB does not receive full, stable funding, then one of the underlying premises for the SEC’s elimination of the reconciliation requirement for foreign companies in 2007 may no longer be valid, and we may need to engage in a retrospective review of that decision,” said Atkins.
An IFRS Foundation spokesperson said the group is developing a long-term funding strategy. “The SEC is an important stakeholder and we continue to maintain close dialogue with its leadership and staff,” said the spokesperson in an emailed statement. “The IFRS Foundation was created over two decades ago to enable the disclosure of financially material information for the capital markets and remains focused on this task. The IFRS Foundation was asked to establish the ISSB in response to investor and capital market demand globally for financially material sustainability-related financial disclosures. The IASB and the ISSB operate and are funded independently — a key consideration when the ISSB was established — whilst their respective standards do not impose requirements on each other. The IFRS Foundation is midway through a two-year transformation program to ensure we are efficient and effective in delivering for capital markets, including the development of our long-term funding strategy.”
Atkins also expressed concerns about the sustainability reporting requirements in the European Union from two recently passed laws: the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, which he said promote a “double materiality” regulatory approach. The laws also affect U.S. companies with operations in the EU, he noted.
“I have significant concerns with the prescriptive nature of these laws and their burdens on U.S. companies, the costs of which are potentially passed on to American investors and customers,” said Atkins. “While I am encouraged by the EU’s recent commitment to ensure that these laws do not pose undue restrictions on transatlantic trade,[vii] as well as efforts to streamline and simplify these laws, further work remains to refocus regulatory regimes on the principle of financial, instead of double, materiality. Indeed, as Europe seeks to promote its capital markets by attracting more companies and investment, it should focus on reducing unnecessary reporting burdens on issuers rather than pursuing ends that are unrelated to the economic success of companies and to the well-being of their shareholders.”
