United States

It’s a Two-GAAP World, but the US Market is Deeply Invested in IFRS

Feb 28, 2017
From the IFRS Institute

IFRS Perspectives: Update on IFRS issues in the US

Over the past few years, we've spoken with ever-decreasing certainty about the potential for convergence between IFRS and US GAAP. The IASB and the FASB are now pursuing their own independent agendas -- a two-GAAP world. 
Turning to the SEC, there has been no recent consideration of a plan for the United States to transition its domestic issuers to IFRS. The SEC's Chief Accountant, Wesley R. Bricker, in his keynote address before the 2016 AICPA National Conference on Current SEC and PCAOB Developments noted that "at least for the foreseeable future" US GAAP will continue to best serve the needs of users of financial statements of US domestic issuers. 
However, it does not mean that IFRS is not relevant in the Unites States. On the contrary, the US market is deeply invested in IFRS. First, because of the number and significance of foreign-based companies using IFRS in the US capital markets. Second, because of the number of US companies investing abroad and having to issue IFRS financial statements with the group, or use and analyze IFRS financial statements to manage their joint arrangements and other investment opportunities. And third, because of the significant volume of foreign capital investing in the US private markets. To understand more fully the economics of IFRS in the Unites States, read more below. 

The SEC recently reiterated1 that IFRS has become “very significant for both US investors and companies.” We estimate that, as of today, the use of IFRS and US GAAP as an accounting framework to support capital formation is about equal around the globe, when looking at relative market capitalization of shares publicly traded.2

More than 120 countries around the world have adopted IFRS, making IFRS a must-know for US companies that intend to attract foreign investors, are contemplating raising capital outside the United States, or that are engaged in cross-border M&A transactions. The SEC also confirmed1 that 525 Foreign Private Issuers with a combined worldwide market capitalization of more than $7 trillion currently apply IFRS for their US listing. In addition, nearly 90% of initial offerings of foreign equity in the United States were conducted through exempt offerings for which IFRS financial information is usually used.

At the same time, it has become clear that we will not see use of IFRS by domestic SEC registrants in lieu of US GAAP in the foreseeable future.

The IASB and the FASB have acknowledged that convergence, as a standard-setting strategy, is no longer a priority for either board. Since the formation of the IASB in 2001, the FASB and the IASB have worked on approximately 35 projects to achieve convergence of IFRS and US GAAP at various levels. There are notable successes, including revenue recognition, business combinations and fair value measurement. However, the IASB and the FASB have recently followed dissimilar paths for their projects on financial instruments and insurance.

As a result, a two-GAAP world has emerged. Preparers with a global footprint will continue to deal with US GAAP/IFRS differences. Indeed, this creates additional challenges for cross-border transactions: a higher cost of capital than would be the case with one GAAP, additional systems and/or processes to track both GAAPs, etc. But the fact that only 10 to 15 years ago more than 70 different accounting frameworks existed globally, having evolved into a two-GAAP world with the two GAAPs being broadly comparable is still a tremendous accomplishment.

For more information and questions related to IFRS please contact one of our Accounting Advisory Services professionals.

East region

Erik Lange
Partner, Accounting Advisory Services
T
: +1 212-872-6654
E: elange@kpmg.com

Ingo Zielhoff
Managing Director, Accounting Advisory Services
T
: +1 212-872-4423
E: ingozielhoff@kpmg.com

Reza Van Roosmalen
Managing Director, Accounting Advisory Services
T
: +1 212-954-6996
E: rezavanroosmalen@kpmg.com

West region

Jason Anglin
Principal, Accounting Advisory Services
T
: +1 415-963-7606
E: janglin@kpmg.com

Southeast Region

Jack Ingram
Partner, Accounting Advisory Services
T
: +1 404-221-2398
E: jtingram@kpmg.com

Midwest region

Marybeth Shamrock
Partner, Accounting Advisory Services
T
: +1 216-875-8158
E: mshamrock@kpmg.com

South region

Michael Nesta
Partner, Accounting Advisory Services
T
: +1 214-840-2730
E: mnesta@kpmg.com

1Working Together to Advance High Quality Information in the Capital Markets. Wesley R. Bricker, SEC Chief Accountant; December 5, 2016
2We estimate that the use of US GAAP is predominant for purposes of capital formation in the form of public or registered debt.

The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of the proposed standard or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors.