International Corporate Reporting

Chapter 17

USA
Institutional and external
influences
• Federal republic of separate states. Legal powers over
business from both sources.
• Business may be affected by Executive, Legislative
and Judicial arms of federal constitution, also
independent regulatory agencies within legal system.
• Chairman and chief accountant of SEC are appointed
by President (executive).
• US Congress passes laws on federal taxes.
• US stock exchanges provide new capital
• AICPA professional body.
• Exporting US GAAP to other countries
Development of accounting
regulation
• Until 1929 profession was in control
• 1929 crash led to formation of SEC in 1934
• SEC receives accounts of all listed companies for
public filing.
• Published on EDGAR depository.
• SEC can refuse accounts if they don’t comply with
standards it requires.
• SEC accepts FASB accounting standards.
Financial Accounting Standards
Board (FASB)
• 1930s to 1960s accounting standards set via
AICPA Boards.
• 1972 Wheat Committee recommended
independent FASB. Has become model for other
countries in setting standards.
• FASB is guided by Statements of Financial
Accounting Concepts.
• Financial Accounting Foundation supports and
oversees FASB (also GASB for governmental
accounts).
FASB/IASB convergence
2002 agreement between IASB and FASB
2019 becoming apparent that US GAAP and IFRS
Standards would remain separate.
Two main issues for US regulators:
• comprehensiveness, auditability, enforceability
and comparability of IFRS-based financial
statements within and across jurisdictions;
• IFRS give broad principles to account for
transactions across industries, with limited
specific guidance and stated exceptions.
(exhibit from chapter 6)

Main stages of convergence

1996-2007 and 2008-2012
Main stages of convergence
1996-2007
1996 Act of Congress. Urges SEC to support the development of IAS
Standards.
2002 Norwalk Agreement. Memorandum of Understanding. FASB and IASB
pledge to make their two sets of regulations compatible.
2005 SEC sets out an agreed Roadmap for the elimination of a reconciliation
to US GAAP for non US registrants on US capital markets who apply full
IFRS Standards.
2006 SEC/ FASB/ IASB Roadmap for Convergence 2006 – 2008, Goals set,
short and long term.
2007 Removal of requirement for reconciliations to US GAAP/ from IFRS
Standards by foreign issuers listed in US.
Main stages of convergence
2008-2012
2008 (November) SEC Proposed Roadmap for the adoption of IFRS
Standards by US companies from 2014 (with possible early adoption by
some companies from 2009)
2009 Incoming President Obama. New political appointments in SEC- Less
enthusiasm for adoption of IFRS Standards.
2011 Timeline removed for adoption of IFRS Standards for use by US
companies.
2012 SEC: Final Report on Convergence work plan: No demand from US
companies to have their main report under IFRS Standards but look at
possibility of companies providing IFRS-based measure of profits as an
additional item of information. IASB and FASB continue to work together
to eliminate differences when in the best interest of the capital markets.
Sarbanes-Oxley Act 2002 (SoX)
• Most significant piece of securities legislation
since the 1930s.
• Failure in 2001 of Enron, accounting standards
allowed latitude that was subsequently criticised
as being too broad.
• Concerns about the emphasis placed on detailed
rules. The detailed standards and guidance within
US GAAP laid down the rules-based approach.
• SoX asked the SEC to study the adoption by the
US financial reporting system of a principles-
based accounting system.
•  
Principles versus rules
Shortcomings of rules:
• contain numerous tests (‘bright lines’) that may
be misused to comply with the letter but not the
spirit of standards;
• contain numerous exceptions resulting in
inconsistencies of accounting treatment of
transactions
• rules-based standards create a need for detailed
and complex implementation guidance.
Principles versus rules, response
• SEC reported to the House of Representatives in
2003, as required by SoX. Concluded that neither
US GAAP nor IFRS Standards, as they existed at
that time, were representative of the optimum
type of principles-based standard.
• SEC defined an optimal standard as making a
concise statement of accounting principle where
the accounting objective has been specified as an
integral part of the standard.
• No further progress apparent.
Private companies
• Private companies (non-listed) companies are
only required to comply with state law.
• Details vary from state to state, but for almost all
companies there will be no requirement to file
annual financial information with the state
authorities.
• Effectively allows companies total secrecy (except
in respect of tax affairs). No requirement to make
information for shareholders available in public.
This is in contrast to the position of private
companies in many other countries.
FASB codification and due process
Accounting Standard Codification
• Leases is a Topic, numbered 840.
• Subtopics for Operating Leases (840-20) and
Capital Leases (840-30).
• Within the Subtopics there are Sections for
Disclosure of Operating Leases (840-20-50) and
Disclosure of Capital Leases (840-30-50).
US GAAP are more detailed than IFRS Standards
because they also provide industry standards.
FASB due process
Substantial secretariat working on standards.
Due process involves:
• appointing a task force of experts to advise on
the project;
• sponsoring research studies and reviewing
existing literature on the subject;
• publishing a discussion of issues and potential
solutions;
• holding a public hearing; and
• issuing an exposure draft for public comment.
Fair presentation
• European accounting ‘true and fair view’
• US equivalent of the is wording ‘present fairly… in
conformity with US GAAP’. It is different because
of the specific emphasis placed on GAAP.
• European interpretation of ‘true and fair’ is not
uniform, but the UK view is that ‘true and fair’
stands above any specific set of rules.
• US approach seen as legalistic, more judgemental
approach in the UK. Another way of expressing
the ‘principles versus rules’ debate.
Annual reporting (see also ch 12)
Basic information package on Form 10-K
comprises:
• market price of, and dividends on, common
equity, and related security matters;
• selected financial data;
• management’s discussion and analysis (MD&A);
• audited financial statements and supplementary
data;
• other information
Proxy statement contains further detail
Management discussion and
analysis (see also ch 12)
• Specific information about the company’s liquidity, capital
resources and results of operations;
• The impact of inflation and changing prices on net sales and
revenues and on income from continuing operations;
• Material changes in line items of the consolidated financial
statements compared with the prior-period amount;
• Known material events and uncertainties that may make historical
financial information not indicative of future operations or future
conditions; and
• Any other information the company believes necessary for an
understanding of its financial condition, changes in financial
condition, and results of operations.
Differential reporting
• 2012 the Federal JOBS Act introduced a
relaxation of SEC filing requirement for
companies coming to the market. Aim was to
encourage the growth of small businesses by
making it easier for them to go public as an
Emerging Growth Company (EGC).
• EGC company for 5 years from IPO receives
concessions on disclosures to the SEC,
particularly executive pay and governance
matters.
Speed of filing
Companies are defined as either ‘large accelerated
filers’, or ‘accelerated filers’ or ‘non- accelerated filers’. A
company’s filing speed status is identified on its form
10-K.

The due dates for filing the 10-K are:

• large accelerated filers, 60 days after the fiscal year
end;
• accelerated filers, 75 days after the fiscal year-end;
• non-accelerated filers 90 days after the fiscal year-
end.
Safe harbor protection (see also ch
12)
• Private Securities Litigation Reform Act of 1995
allows the SEC to clarify what is called a ‘safe
harbor’ of protection against legal action in
respect of forward-looking statements, provided
these are made outside the financial statements
and notes.
• To obtain the protection, companies must state in
Form 10-K the factors that could affect the
financial performance or cause actual results to
differ from any estimates made in forward-
looking statements.
Foreign private issuers, shares
listed on a US exchange
Definition: 50% or less of securities held by US
residents.
Conditions, if listed on US exchange:
Report to SEC on Form 20-F.
May choose US GAAP or IFRS Standards as issued
by IASB.
(Indicates willingness to enable access to US
markets)
Any other accounting standards, must give
reconciliation to US GAAP.
Foreign private issuers, ADR
American Depositary Receipts (ADRs) allow US
investors to invest in non-US companies.
Shares held by intermediary, issues ADR as a
negotiable certificate (can be bought and sold).
• Level 1 ADR, trading presence, over-the-counter
markets only.
• Level 2 ADR, trading presence on a national
securities exchange, may not raise capital.
• Level 3 ADR, trading presence plus allowed to
raise capital.
ADRs and accounting requirements
• Level 1 ADR, Not required to issue quarterly or
annual reports in US GAAP but must have a
security listed in a foreign jurisdiction, with an
annual report published in English.
• Level 1 ADRs in OTC markets are used by some
major international companies.

• Level 2 and Level 3 ADRs must report annually to

SEC on Form 20-F. Provide useful basis of
comparative information for researchers.
Auditing (see also ch 10)
• Sarbanes-Oxley Act established Public Company
Accounting Oversight Board (PCAOB) to regulate
the auditing profession, previously self-regulated.
• SoX requires the Chief Executive Officer (CEO)
and Chief Financial Officer (CFO) to sign approval
of the financial statements.
• Audit committees must have members that are
independent and disclose whether or not at least
one is a financial expert, or give reasons why no
such expert is on the audit committee.
Corporate governance
• Dodd-Frank Act, enacted 2010 after global
financial crisis, was intended to significantly
restructure the regulatory framework for the US
financial system. It extended federal regulation of
corporate governance for all public companies.
• Corporate governance in the US is mainly
statutory but there are also guidelines issued by
the investor community and the business
community.
Proxy statement
• A ‘proxy’ is someone who votes on behalf of an investor, applying
the decisions of the investor.
• Proxy statement accompanies the notice to shareholders
convening the annual general meeting and is a useful source of
information about the governance of a company.
• Proxy statement is intended to help the investor make an
informed decision and is required by SEC regulation. It includes:
 details of the board members;
 their compensation package (rewards as directors);
 report of the audit committee;
 fees paid to the auditor;
 information on related-party transactions; and
 the distribution of major shareholdings.
Research examples

Reconciliation to US GAAP
• Before 2007, reconciliations published in Form
20-F indicate magnitudes of differences.
• After 2007, looking for effect of removing the
requirement where IFRS Standards used.
SEC documentation in public domain
• Comment letters from SEC staff
• Enforcement notices issued by SEC
Classification studies
• Identifying Anglo-American influence