SEC eases accounting rule for foreign firms

ASSOCIATED PRESS

Federal regulators yesterday tentatively agreed to ease an accounting requirement for foreign companies that trade on U.S. exchanges.

The action by the Securities and Exchange Commission (SEC) paves the way for a related change that would allow public companies, when reporting financial results, to choose between international and U.S. accounting standards.

The first step taken by the SEC yesterday would eliminate a requirement for foreign companies to “reconcile” their financial results with U.S. standards called Generally Accepted Accounting Principles, or GAAP. Foreign companies, which already adhere to International Financial Reporting Standards, or IFRS, say the SEC mandate is burdensome and costly.

The SEC commissioners yesterday also adopted rule changes allowing investors to choose between receiving annual proxy materials from companies on paper or electronically, starting in 2008. Companies would be allowed to continue sending paper materials to shareholders provided they also post the information online.

Eliminating the GAAP mandate for foreign companies “will signal the [SEC’s] commitment to both investors and to the global capital markets,” John White, director of the SEC’s corporation finance division, said yesterday. The commissioners voted 5-0 to propose easing the accounting requirement.

The change, which awaits formal adoption after a 75-day public comment period, would apply to 2008 annual reports, which are submitted in early 2009.

Some analysts say eliminating the GAAP reconciliation requirement — and perhaps giving all companies their choice of accounting systems — would make it harder for investors to evaluate companies’ financial results and compare them.

The IFRS system is generally considered more flexible, and giving companies the choice could spell the end of GAAP, experts think. The international standards are deemed especially desirable for large U.S. companies with foreign subsidiaries, which now must maintain two sets of books.

The SEC commissioners are treading a delicate line between luring foreign companies to U.S. markets and the need to uphold standards and protect investors.

Their deliberations come after months of intense public debate over corporate internal-control rules under the Sarbanes-Oxley anti-fraud law that arose from the 2002 business scandals.

Eliminating the required squaring with GAAP standards “could help to make U.S. markets more attractive to foreign companies,” SEC Commissioner Paul Atkins said at yesterday’s meeting.