Reducing the burden of US GAAP reconciliations by foreign companies listed in the United States: the key question of materiality

Abstract

The European Commission has long been concerned over the extensive disclosures required by the Securities and Exchange Commission (SEC) in form 20-F. As the IASC moves towards completing its core standards programme to the satisfaction of IOSCO, the debate has centred around the likelihood of its acceptance by the SEC. This paper examines aspects of the reconciliations to US GAAP, provided by UK registrant companies, and proposes an approach of selective disclosure focusing on material items. We find that goodwill was the dominant adjustment prior to the implementation of FRS 10. When goodwill is excluded there were on average 4.9 adjustments to net income and 5.8 adjustments to shareholders' equity per company reporting. Defining materiality as 10% or more of the reported US net income or shareholders' equity and disregarding immaterial items reduces these to an average of only 1.6 adjustments to the income statement and 0.6 adjustments to shareholders' equity per company. We find that the majority of adjusting items in the reconciliations are not material, adding weight to arguments opposed to the reconciliation requirements. We consider the possibility of a more focused disclosure requirement for foreign companies reporting to the SEC.