Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP, 37962-37989 [E7-13163]
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Federal Register / Vol. 72, No. 132 / Wednesday, July 11, 2007 / Proposed Rules
Paper Comments
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 210, 230, 239 and 249
[Release Nos. 33–8818; 34–55998;
International Series Release No. 1302; File
No. S7–13–07]
RIN 3235–AJ90
Acceptance From Foreign Private
Issuers of Financial Statements
Prepared in Accordance With
International Financial Reporting
Standards Without Reconciliation to
U.S. GAAP
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
SUMMARY: The Commission is proposing
to accept from foreign private issuers
their financial statements prepared in
accordance with International Financial
Reporting Standards (‘‘IFRS’’) as
published by the International
Accounting Standards Board (‘‘IASB’’)
without reconciliation to generally
accepted accounting principles
(‘‘GAAP’’) as used in the United States.
To implement this, we propose
amendments to Form 20–F and
conforming changes to Regulation S–X
to accept financial statements prepared
in accordance with the English language
version of IFRS as published by the
IASB without reconciliation to U.S.
GAAP when contained in the filings of
foreign private issuers with the
Commission.
We also are proposing conforming
amendments to other regulations, forms
and rules under the Securities Act and
the Exchange Act. Current requirements
regarding the reconciliation to U.S.
GAAP will not change for a foreign
private issuer that uses a basis of
accounting other than the English
language version of IFRS as published
by the IASB.
DATES: Comments should be received on
or before September 24, 2007.
ADDRESSES: Comments may be
submitted by any of the following
methods:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–13–07 on the subject line;
or
• Use the Federal Rulemaking ePortal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
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• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–13–07. The file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/proposed/
shtml). Comments also are available for
public inspection and copying in the
Commission’s Public Reference Room,
100 F Street, NE., Washington, DC
20549, on official business days
between the hours of 10 a.m. and 3 p.m.
All comments received will be posted
without change; we do not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT:
Questions about this release should be
directed to Michael D. Coco, Special
Counsel, Office of International
Corporate Finance, Division of
Corporation Finance, at (202) 551–3450,
or to Katrina A. Kimpel, Professional
Accounting Fellow, Office of the Chief
Accountant, at (202) 551–5300, U.S.
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–3628.
The
Commission is publishing for comment
proposed amendments to Form 20–F 1
under the Securities Exchange Act of
1934 (the ‘‘Exchange Act’’),2 Rules 3–10
and 4–01 of Regulation S–X,3 Forms F–
SUPPLEMENTARY INFORMATION:
CFR 249.220f.
U.S.C. 78a et seq. Form 20–F is the combined
registration statement and annual report form for
foreign private issuers under the Exchange Act. It
also sets forth disclosure requirements for
registration statements filed by foreign private
issuers under the Securities Act of 1933 (the
‘‘Securities Act’’). 15 U.S.C. 77a et seq.
The term ‘‘foreign private issuer’’ is defined in
Exchange Act Rule 3b–4(c) [17 CFR 240.3b–4(c)]. A
foreign private issuer means any foreign issuer
other than a foreign government except an issuer
that meets the following conditions: (1) More than
50 percent of the issuer’s outstanding voting
securities are directly or indirectly held of record
by residents of the United States; and (2) any of the
following: (i) The majority of the executive officers
or directors are United States citizens or residents;
(ii) more than 50 percent of the assets of the issuer
are located in the United States; or (iii) the business
of the issuer is administered principally in the
United States.
3 17 CFR 210.3–10 and 17 CFR 210.4–01.
Regulation S–X sets forth the form and content of
requirements for financial statements.
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2 15
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4 and S–4 under the Securities Act,4 and
Rule 701 under the Securities Act.5
Table of Contents
I. Overview and History
A. History of the U.S. GAAP Reconciliation
Requirement
B. The International Accounting Standards
Board and IFRS
C. The Financial Accounting Standards
Board
D. The Commission’s Past Consideration of
a Single Set of Globally Accepted
Accounting Standards and Facilitation of
the Use of IFRS by Registrants
E. FASB and IASB Efforts To Develop a
Work Plan To Achieve High Quality,
Compatible Accounting Standards
II. Acceptance of IFRS Financial Statements
From Foreign Private Issuers Without a
U.S. GAAP Reconciliation as a Step
Towards a Single Set of Globally
Accepted Accounting Standards
A. A Robust Process for Convergence
B. Consistent and Faithful Application of
IFRS
1. Staff Review of IFRS Financial
Statements Filed in 2006
2. Market Participants’ Views Regarding
IFRS Application in Practice
3. Processes and Infrastructure To Promote
Consistent and Faithful Application of
IFRS
C. The IASB as Standard Setter
D. Summary
III. Discussion of the Proposed Amendments
To Allow the Use of IFRS Financial
Statements Without Reconciliation To
U.S. GAAP
A. Eligibility Requirements
B. U.S. GAAP Reconciliation
1. General
2. Interim Period Financial Statements
a. Financial Information in Securities Act
Registration Statements and
Prospectuses and Initial Exchange Act
Registration Statements Used Less Than
Nine Months After the Financial Year
End
b. Financial Statements in Securities Act
Registration Statements and
Prospectuses and Initial Exchange Act
Registration Statements Used More Than
Nine Months After the Financial Year
End
3. IFRS Treatment of Certain Areas
a. Accounting for Insurance Contracts and
Extractive Activities
b. Accounting Treatment for Common
Control Mergers, Recapitalization
Transactions, Reorganizations,
Acquisitions of Minority Shares Not
Resulting in a Change of Control, and
Similar Transactions
c. Income Statements and Per Share
Amounts
C. Accounting and Disclosure Issues
1. Selected Financial Data
2. Other Form 20–F Disclosure
a. Reference to U.S. GAAP
Pronouncements in Form 20–F
b. Disclosure From Oil and Gas Companies
Under FAS 69
4 17
5 17
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CFR 230.701.
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c. Market Risk Disclosure and the Safe
Harbor Provisions
3. Other Considerations Relating to IFRS
and U.S. GAAP Guidance
4. First Time Adopters of IFRS
5. Check Boxes on the Cover Page of Form
20–F
D. Regulation S–X
1. Application of the Proposed
Amendments to Rules 3–05, 3–09, and 3–
16
a. Significance Testing
b. Separate Historical Financial Statements
of Another Entity Provided Under Rules
3–05 or 3–09
2. Pro Forma Financial Statements
Provided Under Article 11
3. Financial Statements Provided Under
Rule 3–10
4. Conforming Amendment to Rule 4–01
E. Application of the Proposed
Amendments to Other Forms, Rules and
Schedules
1. Conforming Amendments to Securities
Act Forms F–4 and S–4
2. Conforming Amendment to Rule 701
3. Small Business Issuers
4. Schedule TO and Schedule 13E–3
F. Quality Control Issues
G. Application to Filings Under the
Multijurisdictional Disclosure System
IV. General Request for Comments
V. Paperwork Reduction Act
A. Background
B. Burden and Cost Estimates Related to
the Proposed Accommodation
1. Form 20–F
2. Form F–1
3. Form F–4
4. Form S–4
5. Rule 701
C. Request for Comment
VI. Cost-Benefit Analysis
A. Expected Benefits
B. Expected Costs
VII. Regulatory Flexibility Act Certification
VIII. Consideration of Impact on the
Economy, Burden on Competition and
Promotion of Efficiency, Competition
and Capital Formation Analysis
IX. Statutory Basis and Text of Proposed
Amendments
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I. Overview and History
Foreign private issuers that register
securities with the SEC, and that report
on a periodic basis thereafter under
Section 13(a) or 15(d) of the Exchange
Act,6 are currently required to present
audited statements of income, financial
position, changes in shareholders’
6 15 U.S.C. 78m(a) or 78o(d). Section 13(a) of the
Exchange Act requires every issuer of a security
registered pursuant to Section 12 of the Exchange
Act [15 U.S.C. 781] to file with the Commission
such annual reports and such other reports as the
Commission may prescribe. Section 15(d) of the
Exchange Act requires each issuer that has filed a
registration statement that has become effective
pursuant to the Securities Act to file such
supplementary and periodic information,
documents and reports as may be required pursuant
to Section 13 in respect of a security registered
pursuant to Section 12, unless the duty to file under
Section 15(d) has been suspended for any financial
year.
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equity and cash flows for each of the
past three financial years,7 prepared on
a consistent basis of accounting.8 All
foreign private issuers are currently
required to reconcile to U.S. GAAP the
financial statements that they file with
the Commission if the financial
statements are prepared using any basis
of accounting other than U.S. GAAP.9
The Commission is proposing for
comment revisions to Form 20–F and
Regulation S–X under which it would
accept financial statements of foreign
private issuers that are prepared on the
basis of the English language version of
IFRS as published by the IASB without
a reconciliation to U.S. GAAP.10 The
revisions would allow a foreign private
issuer to file financial statements
prepared in accordance with IFRS as
published by the IASB without
reconciliation to U.S. GAAP. We are not
proposing to change existing
reconciliation requirements for foreign
private issuers that file their financial
statements under other sets of
accounting standards, or that are not in
full compliance with IFRS as published
by the IASB.
A. History of the U.S. GAAP
Reconciliation Requirement
In a reconciliation, a foreign private
issuer that files its financial statements
prepared in accordance with a basis of
accounting other than U.S. GAAP must
identify and quantify the material
differences from the requirements of
U.S. GAAP and Regulation S–X. The
reconciliation to U.S. GAAP may be
presented pursuant to either Item 17 or
Item 18 of Form 20–F. Under Item 17,
an issuer is required to provide a
narrative description of differences and
a quantitative reconciliation of specific
financial statement line items from non7 Consistent with Form 20–F, IFRS and general
usage outside the United States, we use the term
‘‘financial year’’ to refer to a fiscal year. See
Instruction 2 to Item 3 of Form 20–F. Foreign
private issuers that are first-time adopters of IFRS
published by the IASB are permitted to provide
financial statements for the most recent two
financial years. See General Instruction G for Form
20–F.
8 See Item 8.A.2 of Form 20–F. Instructions to this
item permit a foreign private issuer to omit a
balance sheet for the earliest of the three years if
that balance sheet is not required by a foreign
jurisdiction.
9 See Items 17 and 18 of Form 20–F; see also
Article 4 of Regulation S–X.
10 All references in this release to IFRS as
published by the IASB refer to the English language
version of IFRS. The IASB approves the English
language text of any IFRS standard, although the
International Accounting Standards Committee
Foundation (‘‘IASC Foundation’’) may issue
translations into other languages. See ‘‘International
Financial Reporting Standards (IFRSs), including
International Accounting Standards (IASs) and
Interpretations as at 1 January 2005,’’ International
Accounting Standards Board Preface to IFRS, at 27.
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U.S. GAAP to U.S. GAAP, but without
all U.S. GAAP and Regulation S–X
disclosures. An issuer may use Item 17
when filing its financial statements in
an Exchange Act registration statement
or annual report filed on Form 20–F, or
as part of a Securities Act registration
statement for investment grade, nonconvertible securities or certain rights
offerings. Under Item 18, an issuer is
required to provide the reconciling
information specified in Item 17 as well
as all disclosures required by Regulation
S–X and U.S. GAAP. An issuer must
comply with Item 18 when filing
financial statements in a Securities Act
registration statement for offerings of
equity, convertible and other securities.
The Commission first addressed
discrepancies in financial information
provided under a foreign basis of
accounting and U.S. GAAP through
amendments to Forms 20 and 20–K
adopted in 1967.11 Although a
reconciliation to U.S. GAAP was not
explicitly required, the amended
instructions to Form 20 required that
‘‘every issuer registering securities on
this form shall file as a part of its
registration statement the financial
statements, schedules and accountants’
certificates which would be required to
be filed if the registration statement
were filed on Form 10.12 Any material
variation in accounting principles or
practices from the form and content of
financial statements prescribed in
Regulation S–X shall be disclosed and,
to the extent practicable, the effect of
each such variation given.’’ 13 The
financial statement instructions for the
annual report on Form 20–K contained
a similar requirement.14
In 1979, the Commission adopted
significant amendments to the
disclosure requirements applicable to
foreign private issuers.15 These
amendments were based on the
Commission’s belief that ‘‘providing
more meaningful disclosure to investors
11 See Securities Exchange Act Release Nos. 8067
and 8068 (April 28, 1967). Form 20 was the
registration statement under Section 12 of the
Securities Act and Form 20–K was the annual
report form for foreign private issuers.
12 Form 10 is the registration statement under
Section 12 of the Exchange Act for domestic issuers.
13 Although the Commission adopted Regulation
S–X in 1940 as an instruction booklet to be
followed in the preparation of financial statements
to be included in filings, application of the
Regulation did not extend to foreign private issuers.
14 Prior to 1967, foreign private issuers were
required only to present financial statements
consisting of a balance sheet as of the close of the
most recent fiscal year and a profit and loss
statement for the fiscal year preceding the date of
the balance sheet. The financial statements were not
required to be certified.
15 Securities Exchange Act Release No. 34–16371
(November 29, 1979).
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in foreign securities not only would
promote the protection of investors but
may encourage the free flow of capital
between nations and tend to reduce any
competitive disadvantage with which
United States issuers must contend visa-vis foreign issuers of securities.’’ 16
The Commission adopted the current
reconciliation requirements in 1982
when adopting new Securities Act
registration statements for foreign
private issuers as part of its
comprehensive efforts to develop an
integrated disclosure system.17 Prior to
1982, offering documents of foreign
private issuers contained a full
reconciliation, while annual reports
required only a narrative description of
differences between a foreign basis of
accounting and U.S. GAAP.18
The Commission’s approach has
developed in the context of integrated
disclosure. In designing the integrated
disclosure regime for foreign private
issuers, the Commission endeavored to
‘‘design a system that parallels the
system for domestic issuers but also
takes into account the different
circumstances of foreign registrants.’’ 19
Given the dual considerations of
investor protection and evenhandedness towards foreign private
issuers, the Commission has framed its
consideration of the reconciliation
requirement as a balancing of two policy
concerns: Investors’ need for the same
type of basic information when making
an investment decision regardless of
whether the issuer is foreign or
domestic, and the public interest served
by an opportunity to invest in a variety
of securities, including foreign
securities.20 Investors’ need for the same
type of basic information implies that
foreign and domestic registrants should
be subject to the same disclosure
requirements. However, the burden on
foreign issuers of meeting the identical
disclosure standards as domestic issuers
might discourage them from offering
their securities on the U.S. market. If
foreign issuers chose not to offer their
16 Securities Exchange Act Release No. 34–14128
(November 2, 1977).
17 Securities Act Release No. 33–6437 (November
19, 1982).
18 Until 1980 the only guidance with respect to
accounting principles and financial statements of
foreign issuers were form-based requirements and
the continued applicability of Accounting Series
Release 4, which, since 1935, required only that the
accounting principles used by foreign private
issuers have authoritative support. In 1980, the
Commission amended Regulation S–X adding
language to Rule 4–01 to require foreign issuers’
financial statements prepared in accordance with a
comprehensive basis of accounting other than U.S.
GAAP to be reconciled to U.S. GAAP.
19 Securities Act Release No. 33–6360 (November
20, 1981) (the ‘‘1981 Proposing Release’’).
20 Id.
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securities in the United States, it would
deprive U.S. investors of investment
opportunities and potentially compel
them to purchase foreign securities on
foreign markets, where disclosure may
be less than that required in filings with
the Commission.21
B. The International Accounting
Standards Board and IFRS
The IASB is a stand-alone, privately
funded accounting standard-setting
body established to develop global
standards for financial reporting.22 It is
the successor to the International
Accounting Standards Committee
(‘‘IASC’’), which was created in 1973 to
develop International Accounting
Standards (‘‘IAS’’). Based in London,
the IASB assumed accounting standardsetting responsibilities from the IASC in
2001.23 Since that time, the standards
that the IASB develops and approves
have been known as IFRS.24
The IASB is overseen by the IASC
Foundation, a stand-alone organization
responsible for, among other things, the
activities of the IASB.25 The 22 trustees
of the IASC Foundation appoint IASB
members, oversee its activities, and
raise necessary funding for the IASB,
21Id.
22 For more information on the structure and
operation of the IASB, see https://www.iasb.org/
Home.htm.
23 This was the culmination of a reorganization in
2000 based on the recommendations to the IASC
Board contained in a 1999 report by the IASC’s
Strategic Working Party entitled
‘‘Recommendations on Shaping the IASC for the
Future.’’ (Full text available at https://
www.iasplus.com/restruct/1999swpfinal.pdf). From
1973 until that restructuring, the entity for setting
International Accounting Standards had been
known as the IASC. The IASC issued 41 standards
on major topical areas through December 2000,
which are entitled International Accounting
Standards. The predecessor standard-setting board
was known as the IASC Board.
24 The IASB continues to recognize the IAS issued
by the IASC, as modified or superseded by the
IASB. Those IAS now form part of the body of IFRS.
See IAS 1, paragraph 11. Standards that are newly
developed by the IASB or are extensive revisions
of earlier IAS are entitled International Financial
Reporting Standards.
In general usage, and in this release, the term
IFRS will be used to encompass both IAS and IFRS.
The term IFRS is used to refer both to the body of
IASB pronouncements generally and to individual
standards and interpretations applicable in specific
circumstances. For purposes of this release,
financial statements ‘‘prepared in accordance with
IFRS’’ refer to financial statements that an issuer
can unreservedly and explicitly state are in
compliance with IFRS as published by the IASB
and that are not subject to any qualification relating
to the application of IFRS as published by the IASB.
25 The IASC Foundation is comprised of twentytwo individuals each serving a term of three years
subject to one re-appointment. Its staff works
directly with the IASB and project resource groups,
conducts research, participates in roundtable
meetings, analyzes public comments, and prepares
recommendations and drafts for consideration by
the IASB.
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the IASC Foundation, the International
Financial Reporting Interpretations
Committee (‘‘IFRIC’’), and the Standards
Advisory Council (‘‘SAC’’).26
The IASC Foundation Trustees select
members of the IASB to comprise
‘‘within that group, the best available
combination of technical skills and
background experience of relevant
international business and market
conditions in order to contribute to the
development of high-quality, global
accounting standards.’’ 27 The fourteen
members of the IASB, twelve full-time
and two part-time, serve a five-year term
subject to one re-appointment. They are
required to sever all employment
relationships and positions that may
give rise to economic incentives which
might compromise a member’s
independent judgment in setting
accounting standards. The current IASB
members come from nine countries and
have a variety of backgrounds. In
selecting IASB members, the IASC
Foundation Trustees ensure that the
IASB is not dominated by any particular
constituency. Member selection is not
based on geographic representation.
To date, the IASC Foundation has
financed IASB operations largely
through voluntary contributions from
companies, accounting firms,
international organizations and central
banks. Original commitments were
made for the period 2001–2005 and
have been extended for an additional
two years through 2007. In June 2006,
the IASC Foundation Trustees agreed on
four elements that should govern the
establishment of a funding approach
that would enable the IASC Foundation
to remain a stand-alone, private sector
organization with the necessary
resources to conduct its work in a
timely fashion.28 The Trustees continue
26 IFRIC interprets IFRS and reviews accounting
issues that are likely to receive divergent or
unacceptable treatment in the absence of
authoritative guidance, with a view to reaching
consensus on the appropriate accounting treatment.
The IFRIC is comprised of twelve voting members,
appointed by the IASC Foundation Trustees for
renewable terms of three years. IFRIC
Interpretations are ratified by the IASB prior to
becoming effective.
The SAC supports the IASB and provides a forum
where the IASB consults individuals and
representatives of organizations affected by its work
that are committed to the development of highquality IFRS. The Commission is an observer of the
SAC.
27 IASC Foundation Constitution, Paragraph 20;
see https://www.iasb.org/About+Us/About+IASB/
About+IASB.htm.
28 The Trustees determined that ‘‘characteristics
of the new scheme for 2008 would be:
• Broad-based: Fewer than 200 companies and
organizations participate in the current financing
system. A sustainable long-term financing system
must expand the base of support to include major
participants in the world’s capital markets,
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to make progress in obtaining stable
funding that satisfies those elements.
The IASB has stated that it is
committed to ‘‘developing, in the public
interest, a single set of high-quality,
understandable and enforceable global
accounting standards that require
transparent and comparable information
in general purpose financial
statements.’’ 29 In addition, the IASC
Foundation has committed to the
continued development of IFRS to
achieve high-quality solutions through
the convergence of national accounting
standards.
The use of IFRS is increasingly
widespread throughout the world.
Almost 100 countries now require or
allow the use of IFRS, and many other
countries are replacing their national
standards with IFRS. The European
Union (‘‘EU’’), for example, has, under
a regulation adopted in 2002, required
companies incorporated in one of its
Member States and whose securities are
listed on an EU regulated market to
report their consolidated financial
statements using endorsed IFRS
beginning with the 2005 financial
year.30 It has been estimated that these
requirements affect approximately 7,000
companies in the EU.31 In addition to
issuers in the 27 EU Member States,
these IFRS requirements also apply in
the three European Economic Area
countries of Iceland, Lichtenstein and
including official institutions, in order to ensure
diversification of sources.
• Compelling: Any system must carry with it
enough pressure to make free riding very difficult.
This could be accomplished through a variety of
means, including official support from the relevant
regulatory authorities and formal approval by the
collecting organizations.
• Open-ended: The financial commitments
should be open-ended and not contingent on any
particular action that would infringe on the
independence of the IASC Foundation and the
International Accounting Standards Board.
• Country-specific: The funding burden should
be shared by the major economies of the world on
a proportionate basis, using Gross Domestic Product
as the determining factor of measurement. Each
country should meet its designated target in a
manner consistent with the principles above.’’
See https://www.iasb.org/About+Us/
About+the+Foundation/Future+Funding.htm.
29 See www.iasb.org/About+Us/About+IASB/
About+IASB.htm. See also the IASCF Foundation
Constitution.
30 Regulation (EC) No. 1606/2002 of the European
Parliament and of the Council of 19 July 2002 on
the application of international accounting
standards, Official Journal L. 243, 11/09/2002 P.
0001–0004 (the ‘‘EU Regulation’’). EU regulations
have the force of law within EU Member States
without further implementing legislation at the
national level.
31 Committee of European Securities Regulators
(‘‘CESR’’), ‘‘European Regulation on the Application
of IFRS in 2005: Recommendation for Additional
Guidance Regarding the Transition to IFRS,’’
(December 2003).
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Norway.32 Other countries, including
Australia and New Zealand, have
adopted similar requirements
mandating the use of IFRS by public
companies.33 More countries have plans
to adopt IFRS as their national
accounting standards in the future,
including Canada34 and Israel.35
C. The Financial Accounting Standards
Board
The FASB is the independent,
private-sector body whose
pronouncements establishing and
amending accounting principles the
Commission has, since 1973, recognized
as ‘‘authoritative’’ and ‘‘generally
accepted’’ for purposes of the federal
securities laws, absent any contrary
determination by the Commission.36
The FASB is overseen by the Financial
Accounting Foundation (‘‘FAF’’), which
is responsible for funding the activities
of the FASB and selecting the seven
full-time FASB members.37 The FAF is
an independent, non-profit organization
that is run by a sixteen-member Board
of Trustees. The FASB has oversight of
the Emerging Issues Task Force, which
is the interpretative entity of U.S.
GAAP. The FASB also is supported by
the Financial Accounting Standards
Advisory Council, which is responsible
for consulting with the FASB as to
32 The current EU Member States are: Austria,
Belgium, Bulgaria, Cyprus, Czech Republic,
Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal,
Romania, Slovenia, Slovakia, Spain, Sweden, and
the United Kingdom.
33 Some countries, such as Australia, have
adopted IFRS by incorporating them into their
national standards.
34 See ‘‘Implementation Plan for Incorporating
International Financial Reporting Standards into
Canadian GAAP,’’ available at https://
www.acsbcanada.org/client_asset/document/3/2/7/
3/5/document_8B452E12-FAF5-7113C4CB8F89B38BC6F8.pdf?sfgdata=4.
35 See Israel Accounting Standard No. 29
‘‘Adoption of International Financial Reporting
Standards,’’ stipulating that Israeli public
companies that prepare their primary financial
statements in accordance with Israeli GAAP are
obliged to adopt IFRS unreservedly for years
starting on January 1, 2008. See also https://
www.iasplus.com/country/israel.htm.
36 See ‘‘Statement of Policy on the Establishment
and Improvement of Accounting Principles and
Standards,’’ Accounting Series Release No. 150
(December 20, 1973) (expressing the Commission’s
intent to continue to look to the private sector for
leadership in establishing and improving
accounting principles and standards through the
FASB) and ‘‘Policy Statement: Reaffirming the
Status of the FASB as a Designated Private-Sector
Standard Setter,’’ Release No. 33–8221 (April 25,
2003) (the ‘‘2003 Policy Statement’’). More
information about the FASB is available on their
Web site at https://www.fasb.org.
37 See https://www.fasb.org/facts/
bd_members.shtml.
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37965
technical issues on the FASB’s agenda
and project priorities.
Consistent with the FASB’s objective
to increase international comparability
and the quality of standards used in the
United States, the FASB participates in
international accounting standard setter
activities. This objective is consistent
with the FASB’s obligation to its
domestic constituents, who benefit from
comparability of information across
national borders. The FASB pursues this
objective in cooperation with the IASB,
as discussed in more detail below, and
with national accounting standard
setters.
The Commission oversees the
activities of the FASB as part of its
responsibilities under the securities
laws. While the Commission
consistently has looked to the private
sector to set accounting standards, the
securities laws provide the Commission
with the authority to set accounting
standards for public companies and
other entities that file financial
statements with the Commission.38 As
part of its oversight responsibilities, the
Commission provides views regarding
the selection of FASB members, and, in
certain circumstances, refers issues
relating to accounting standards to the
FASB or one of its affiliated
organizations. The Commission and its
staff do not, however, prohibit the FASB
from addressing topics of its choosing
and do not dictate the outcome of
specific FASB projects, so long as the
FASB’s conclusions are in the interest of
investor protection.39
D. The Commission’s Past
Consideration of a Single Set of Globally
Accepted Accounting Standards and
Facilitation of the Use of IFRS by
Registrants
The Commission has long advocated
reducing disparity between the
accounting and disclosure practices of
the United States and other countries as
a means to facilitate cross-border capital
formation while ensuring adequate
disclosure for the protection of investors
and the promotion of fair, orderly and
efficient markets. The Commission also
has encouraged the efforts of standard
setters and other market participants to
do the same. In a 1981 release proposing
revisions to Form 20–F, the Commission
expressed its support for the work of the
IASC in formulating guidelines and
38 This authority was reaffirmed in the SarbanesOxley Act, Section 108(c) of which states, ‘‘Nothing
in this Act, including this section * * * shall be
construed to impair or limit the authority of the
Commission to establish accounting principles or
standards for purposes of enforcement of the
securities laws.’’
39 See the 2003 Policy Statement.
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international disclosure standards.40 As
part of a 1988 Policy Statement, the
Commission explicitly supported the
establishment of mutually acceptable
international accounting standards as a
critical goal to reduce regulatory
impediments that result from disparate
national accounting standards without
compromising investor protection.41
Accordingly, it urged ‘‘securities
regulators and members of the
accounting profession throughout the
world [to] continue efforts to revise and
adjust international accounting
standards with the aim of increasing
comparability and reducing cost’’ and
reaffirmed its commitment to working
with securities regulators around the
world to achieve the goal of an efficient
international securities market system.42
In encouraging the acceptance of
mutually agreeable global accounting
principles and reducing regulatory
burdens while protecting investors, the
Commission has recognized that
information required by an international
accounting standard may be adequate
for investors even if that information is
not the same as information required
under U.S. GAAP. One example of this
approach is the 1994 amendment to
Form 20–F to accept without
reconciliation to U.S. GAAP a cash flow
statement prepared in accordance with
IAS No. 7, ‘‘Cash Flow Statements,’’
which the IASC amended in 1992. In
proposing that amendment, the
Commission noted that ‘‘while there are
differences between a cash flow
statement prepared in accordance with
IAS 7 and one prepared in accordance
with U.S. GAAP. * * * the Commission
believes statements prepared in
accordance with IAS 7 should provide
an investor with adequate information
regarding cash flows without the need
for additional information or
modification.’’ 43 In adopting this and
other revisions to Item 17 of Form 20–
F, the Commission expressed its belief
that streamlined reconciliation
requirements will facilitate foreign
companies’ entry into the United States
40 See
the 1981 Proposing Release.
Release No. 33–6807 (November 14, 1988)
(the ‘‘1998 Policy Statement’’).
42 Id.
43 The Commission proposed these amendments
in Release No. 33–7029 (November 3, 1993) and
adopted them in Release No. 33–7053 (April 19,
1994) (the ‘‘1994 Adopting Release’’). Other
examples in which the Commission amended its
requirements for financial statements of foreign
issuers to permit the use of certain IASC standards
without reconciliation to U.S. GAAP are described
in the SEC Concept Release ‘‘International
Accounting Standards,’’ Release No. 33–7801
(February 16, 2000) (the ‘‘2000 Concept Release’’).
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41 See
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public securities markets in a manner
consistent with investor protection.44
The Commission more closely
examined efforts to develop highquality, comprehensive global
accounting standards in its 1997 report
undertaken at the direction of
Congress.45 In that study, the
Commission noted that for issuers
wishing to raise capital in more than
one country, compliance with differing
accounting requirements to be used in
the preparation of financial statements
increased compliance costs and created
inefficiencies. As a step towards
addressing these concerns and to
increase the access of U.S. investors to
foreign investments in the U.S. public
capital market, the Commission
encouraged the IASC’s efforts to develop
a core set of accounting standards that
could serve as a framework for financial
reporting in cross-border offerings, and
indicated an intent to remain active in
the development of those standards. In
that report, the Commission indicated
that its evaluation of IASC core
standards would involve an assessment
of whether they constituted a
comprehensive body of transparent,
high-quality standards that could be
rigorously interpreted and applied.46
In February 2000, the Commission
issued a Concept Release on
International Accounting Standards,
seeking public comment on the
elements necessary to encourage
convergence towards a high quality
global financial reporting framework
while upholding the quality of financial
reporting domestically.47 In that release,
the Commission described high-quality
standards as consisting of a
‘‘comprehensive set of neutral
principles that require consistent,
comparable, relevant and reliable
information that is useful for investors,
lenders and creditors, and others who
make capital allocation decisions.’’ 48
The Commission also expressed the
view that high-quality accounting
standards ‘‘must be supported by an
infrastructure that ensures that the
standards are rigorously interpreted and
applied.’’ 49 The release sought
comments as to the conditions under
which the Commission should accept
financial statements of foreign private
the 1994 Adopting Release.
45 Pursuant to Section 509(5) of the National
Securities Markets Improvement Act of 1996,
‘‘Report on Promoting Global Preeminance of
American Securities Markets’’ (October 1997).
46 Id.
47 See Concept Release No. 34–42430
‘‘International Accounting Standards’’ (February 16,
2000).
48 Id.
49 Id.
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issuers that are prepared using IFRS,
and considered the issue of the U.S.
GAAP reconciliation of IFRS financial
statements. The Commission has
continued to monitor international
developments in the subject areas that
are discussed in the release.
In 2003, the Commission staff
prepared a study on the adoption of a
principles-based accounting system, as
mandated by Congress in the SarbanesOxley Act.50 The conclusion of that
study was that an optimal approach to
accounting standard-setting would be
based on a consistently applied
conceptual framework and clearly stated
objectives rather than solely on either
rules or principles, one benefit of which
would be the facilitation of greater
convergence between U.S. GAAP and
international standards. By taking an
objectives-based approach to
convergence, the study noted, standard
setters would be able to arrive at an
agreement on a principle more quickly
than would be possible for a detailed
rule. The staff’s report to Congress
interpreted convergence as a ‘‘process of
continuing discovery and opportunity to
learn by both U.S. and international
standard setters,’’ the benefits of which
include greater comparability and
improved capital formation globally.51
In February 2006, Chairman Cox
reaffirmed his commitment to the
‘‘Roadmap’’ that was first described by
a former Chief Accountant of the
Commission in April 2005.52 The
Roadmap sets forth the goal of achieving
one set of high-quality, globally
accepted accounting standards and
suggested several considerations that
could affect the achievement of that
goal.
The Commission also has taken steps
to facilitate the use of IFRS by
registrants. When the European Union
adopted a regulation in 2002 to require
the use of IFRS by all European issuers
with publicly traded securities
beginning with their 2005 financial
year, the Commission adopted an
accommodation to allow first-time
adopters of IFRS to file two years rather
than three years of financial statements
in their Commission filings.53 In so
doing, the Commission sought to
facilitate the transition to IFRS of the
50 Study Pursuant to Section 108(d) of the
Sarbanes-Oxley Act of 2002 on the Adoption by the
United States Financial Reporting System of a
Principles-Based Accounting System (July 25,
2003).
51 Id.
52 SEC Press Release No. 2006–17, Accounting
Standards: SEC Chairman Cox and EU
Commissioner McCreevy Affirm Commitment to
Elimination of the Need for Reconciliation
Requirements (Feb. 8, 2006).
53 Release No. 33–8567 (April 12, 2005).
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foreign registrants that were using it for
the first time. The Commission
recognized that this accommodation
would reduce costs to foreign issuers
and encourage their continued
participation in the U.S. public capital
market, which would benefit investors
by increasing investment possibilities
and furthering the efficient allocation of
capital. Acknowledging the significant
efforts expended by many foreign
private issuers in their transition to
IFRS, the Commission also extended
compliance dates for management’s
report on internal control over financial
reporting.54
E. FASB and IASB Efforts to Develop a
Work Plan To Achieve High Quality,
Compatible Accounting Standards
In October 2002, the FASB and the
IASB announced the issuance of a
memorandum of understanding, called
the Norwalk Agreement, which marked
a significant step towards formalizing
their commitment to the convergence of
U.S. and international accounting
standards. The two bodies
acknowledged their joint commitment
to the development, ‘‘as soon as
practicable,’’ of high quality, compatible
accounting standards that could be used
for both domestic and cross-border
financial reporting. At that time, the
FASB and the IASB pledged to use their
best efforts to make their existing
financial reporting standards fully
compatible as soon as is practicable and
to co-ordinate their future work
programs to ensure that once achieved,
compatibility is maintained. In a 2006
Memorandum of Understanding, the
FASB and the IASB indicated that a
common set of high quality global
standards remains the long-term
strategic priority of both the FASB and
the IASB and set out a work plan
covering the next two years for
convergence with specific long- and
short-term projects.55
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II. Acceptance of IFRS Financial
Statements From Foreign Private
Issuers Without a U.S. GAAP
Reconciliation as a Step Towards a
Single Set of Globally Accepted
Accounting Standards
The Commission has encouraged
movement towards a single set of highquality globally accepted accounting
standards as an important goal both for
the protection of investors and the
54 Release
No. 33–8545 (March 2, 2005).
Roadmap for Convergence between IFRS
and U.S. GAAP—2006–2008,’’ Memorandum of
Understanding between the FASB and the IASB,
February 27, 2006 (the ‘‘2006 Memorandum of
Understanding’’).
55 ‘‘A
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efficiency of capital markets.56 The
work towards acceptance of financial
statements from foreign private issuers
prepared in accordance with IFRS as
published by the IASB without
reconciliation to U.S. GAAP seeks to
foster the continued movement to a
single set of high-quality, globally
accepted accounting standards. As a
long-term objective, the use of a
common set of high-quality standards
for the preparation of financial
statements will help investors to
understand investment opportunities
more clearly and with greater
comparability than if they had to gain
familiarity with a multiplicity of
national accounting standards.
A. A Robust Process for Convergence
Continued progress towards
convergence between U.S. GAAP and
IFRS as published by the IASB is one
consideration in the elimination of the
U.S. GAAP reconciliation. As noted in
this release, both the IASB and the
FASB have established processes for
selecting board members and
developing standards to support the
development by each board of highquality accounting standards.
Additionally, the FASB and the IASB
have established a work plan that seeks
the convergence of U.S. GAAP and
IFRS. In so doing, both bodies have
pledged to use their best efforts to make
existing standards fully compatible as
soon as practicable, and to coordinate
their future work programs to ensure
that compatibility, once achieved, is
maintained.57 This work is expected to
continue for many years, and both
bodies have expressed a commitment to
it. We fully support continued progress
on convergence towards the optimal
standard, whether that standard may be
based on U.S. GAAP, IFRS, or a jointly
developed new approach.
As part of this commitment, both the
IASB and the FASB are working
together on several major projects, and
have coordinated agendas so that major
projects that one board takes up may
also be taken up by the other board.58
Also, both boards have been working on
‘‘short-term convergence,’’ under which
convergence will occur quickly in
certain areas. This process allows for
incremental improvements and the
opportunity to eliminate differences
without rethinking an issue entirely. If
the IASB and the FASB conclude that
neither of their models in a particular
the 1988 Policy Statement.
the 2006 Memorandum of Understanding.
58 The joint projects of the FASB and IASB
constitute part of the IASB’s broader goal to work
with national standard setters to develop high
quality solutions.
PO 00000
56 See
57 See
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37967
area is sufficient, they consider a
broader standard-setting project.
We do not believe that a particular
degree of convergence should be a
prerequisite for our acceptance of
financial statements prepared under
IFRS as published by the IASB without
reconciliation. Our proposal to do so is
based on, among other considerations,
the robustness of a process that lends
itself to continued progress of the IASB
and the FASB towards convergence over
time through, among other things, the
joint development of future standards.
As noted elsewhere, we recognize that
there remain specific accounting
subjects and other matters in IFRS that
have not been fully addressed. There is
a risk that constituents of the two boards
may not continue to support
convergence if IFRS financial statements
are accepted by the Commission
without reconciliation to U.S. GAAP.
The future work of the IASB and the
FASB may result in standards that are
significantly different or that are not
timely in their development.
Nonetheless, we believe that if robust
processes for the joint development of
high quality standards by the IASB and
the FASB are in place, we need not
delay considering the acceptance of
financial statements that comply with
IFRS as published by the IASB without
reconciliation to U.S. GAAP.
We will continue to consider the
convergence process and the continued
progress of the IASB and the FASB in
their work plan. We also will consider
whether interested parties will continue
to have an incentive to support this
convergence work should the
Commission accept IFRS financial
statements from foreign private issuers
without reconciliation to U.S. GAAP.
Questions
1. Do investors, issuers and other
commenters agree that IFRS are widely
used and have been issued through a
robust process by a stand-alone standard
setter, resulting in high-quality
accounting standards?
2. Should convergence between U.S.
GAAP and IFRS as published by the
IASB be a consideration in our
acceptance in foreign private issuer
filings of financial statements prepared
in accordance with IFRS as published
by the IASB without a U.S. GAAP
reconciliation? If so, has such
convergence been adequate? What are
commenters’ views on the processes of
the IASB and the FASB for
convergence? Are investors and other
market participants comfortable with
the convergence to date, and the
ongoing process for convergence? How
will this global process, and,
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particularly, the work of the IASB and
FASB, be impacted, if at all, if we accept
financial statements prepared in
accordance with IFRS as published by
the IASB without a U.S. GAAP
reconciliation? Should our amended
rules contemplate that the IASB and the
FASB may in the future publish
substantially different final accounting
standards, principles or approaches in
certain areas?
B. Consistent and Faithful Application
of IFRS
The consistent and faithful
application of IFRS as published by the
IASB is an important consideration both
to accepting financial statements
prepared on that basis without a U.S.
GAAP reconciliation and to
demonstrating that IFRS as published by
the IASB represent a single set of highquality accounting standards, and not a
multiplicity of standards under the
same name. Over the years, the
Commission staff has acquired a broad
understanding of the standards
comprising IFRS. For over ten years, a
limited number of foreign private
issuers have included in their filings
under the Securities Act and the
Exchange Act financial statements
prepared in accordance with IAS or
IFRS, and over the past year, many more
companies have done so. These filings
have been subject to the staff’s review
process, through which the staff has
gained experience with the standards.
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1. Staff Review of IFRS Financial
Statements Filed in 2006
Over the course of 2006, many foreign
private issuers filed annual reports on
Form 20–F that contained IFRS
financial statements following their
switch to IFRS for the 2005 financial
year. The Commission staff has
conducted reviews of those IFRS
financial statements as part of its
function of reviewing the periodic
reports of publicly registered
companies, consistent with its normal
practice in reviewing filings from U.S.
companies and from foreign issuers
with financial statements other than
those prepared in accordance with IFRS
reconciled to U.S. GAAP.59 These
ongoing reviews are an important part of
the Commission’s effort to gain
familiarity with IFRS. In conducting its
reviews of IFRS financial statements,
the staff made a number of comments
regarding the application of IFRS, which
have been brought to the attention of
59 Section 408 of the Sarbanes-Oxley Act of 2002
mandates that the Commission shall review
disclosures made by reporting companies on a
regular and systematic basis.
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issuers through the comment process.60
Consistent with practice in the staff
review program, many issuers indicated
that they will address the matters that
the staff has raised in future filings,
most commonly through improved
presentations or enhanced disclosures.
The staff has been, and, following the
issuance of this Proposing Release, will
continue to consider whether issuers
address those matters adequately in
their Forms 20–F for the 2006 financial
year which will help inform the
Commission’s view as to the quality of
the application of IFRS in practice. The
staff will continue its regular review
function with regard to issuer and
auditor practice in applying IFRS.
Information obtained from this work
will assist in our evaluation of the
quality of the application of IFRS in
practice.
At present, in filings with the
Commission, IFRS (either as published
by the IASB or a jurisdictional variation)
is used principally by issuers from
Europe and Australia. The number of
companies from these areas that are
registered under the Exchange Act has
decreased over the last several years.61
Thus, although our staff has reviewed
the annual reports of first-time adopters
of IFRS, its level of experience is not as
great as with U.S. GAAP. In addition,
the staff has not undertaken any review
of financial statements prepared in
accordance with IFRS by foreign
companies that are not registered under
the Exchange Act. Therefore, the staff’s
review of IFRS financial statements is
limited to a small portion of the total
universe of companies that use IFRS.
We recognize the first-year effort
undertaken by preparers, auditors, and
others in changing the basis of
accounting to IFRS. Our staff will
continue to identify the areas for
improvement to IFRS filers in order to
promote increased disclosure and
clearer presentation in subsequent
financial statements filed with the
Commission.
2. Market Participants’ Views Regarding
IFRS Application in Practice
Market participants from whom the
Commission has heard at a March 2007
roundtable held by the Commission staff
60 Staff comment letters are available, 45 days or
longer after completion of the staff review, through
the SEC Web site at https://www.sec.gov. See SEC
Press Release dated June 24, 2004.
61 The number of registered companies from
Europe and Australia has declined from over 400
at the end of 2002 to less than 250 at the end of
2006. Not all companies from these jurisdictions
switched to IFRS for their filings in 2006. The
number of foreign private issuers that filed annual
reports on Form 20–F that contained IFRS financial
statements during 2006 was less than 200.
PO 00000
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have indicated their support for the use
of IFRS by foreign issuers. Although we
have heard from a limited group of
representatives from the investor
community, those participants, which
included representatives of mutual
funds, pension funds, rating agencies
and other institutional investors,
expressed their acceptance of IFRS
financial statements for foreign private
issuers.62
Based on information that we have
gathered through the Roundtable and
from other commenters, we believe that
the auditor community has embraced
IFRS as a workable set of standards that
can generally be applied across
industries and countries. The global
auditing profession has been able to
audit and report on many thousands of
financial statements prepared using
either IFRS as published by the IASB or
a jurisdictional variation of IFRS.
Some foreign regulators have
published reports relating to the
implementation of IFRS in their
country. For example, the U.K.
Financial Reporting Review Panel and
´
´
the Autorite des Marches Financiers
(the ‘‘AMF’’) of France have both
published such reports making
observations on IFRS as applied in their
jurisdictions.63
Although a small number of
companies have prepared IFRS financial
statements for several years, it was not
until the first half of 2006 that a large
number of companies published audited
annual IFRS financial statements for the
first time. Also, as discussed below,
audit firms have not been required to
opine on IFRS as published by the IASB
but have limited their opinions to
jurisdictional variations of IFRS,
consistent with a company’s basis of
presentation. In light of this wide-scale
use of IFRS being less than two years
old, the degree of experience, familiarity
and understanding among companies,
audit firms, investors, analysts, brokers,
regulators, and others is continuing to
develop. As experience with IFRS
continues to grow, the Commission will
monitor for any possible flaws in the
standards and any issues associated
62 Information regarding the Roundtable held on
March 6, 2007, including a transcript, is available
on the SEC Web site at https://www.sec.gov/
spotlight/ifrsroadmap.htm.
63 For the report of the U.K Financial Reporting
Review Panel, see ‘‘Preliminary Report: IFRS
Implementation’’ available at https://www.frc.org.uk/
images/uploaded/ documents/
IFRS%20Implementation%20%20preliminary.pdf. For the report of the AMF, see
‘‘Recommendations on accounting information
reported in financial statements for 2006,’’ dated
December 19, 2006, available at https://www.amffrance.org/documents/general/7565_1.pdf.
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mstockstill on PROD1PC66 with PROPOSALS3
with the faithful and consistent
application of those standards.
3. Processes and Infrastructure To
Promote Consistent and Faithful
Application of IFRS
As discussed in Part I.B. above, the
IASB has stated it is committed to
developing a single set of high-quality,
understandable and enforceable global
accounting standards. In working
towards this goal, both the IASB and
IFRIC have demonstrated their
commitment to resolving significant
accounting issues as expediently as
possible. However, developing highquality standards and issuing highquality interpretations of IFRS may take
some time.
A question arises as to what should be
done, if anything, in circumstances
where neither the IASB nor IFRIC has
addressed a particular accounting issue
that causes significant difficulties in
practice. A securities regulator or its
staff, including the Commission, may
find it necessary as an interim measure
to state a view on such an accounting
issue.64 If it were to do so, the regulator
subsequently could consider referring
the accounting issue to the IASB or the
IFRIC for resolution of the issue for all
constituencies. Any view expressed by
the regulator may be rescinded upon the
IASB or the IFRIC establishing
authoritative literature addressing the
issue. The Commission and the staff
would not expect to issue guidance that
is inconsistent with IFRS as published
by the IASB, the interpretations
provided by IFRIC, or the definitions,
recognition criteria and measurement
concepts in the IASB’s Framework.
Regulators have put in place
infrastructure to identify and address
the inconsistent and inaccurate
application of IFRS globally. This
infrastructure will foster the consistent
and faithful application of IFRS around
the world. The International
Organization of Securities Commissions
(‘‘IOSCO’’), in which the Commission
participates, continues to support the
implementation and consistent
application of IFRS in the global
financial markets. In January 2007,
IOSCO’s database for cataloguing IFRS
interpretations and sharing decisions on
application by regulators around the
world became operational.65
Further, the Commission and the
European Commission (the ‘‘EC’’) have
agreed that regulators should endeavor
64 This
is not new, as securities regulators have
long been involved in resolving issues related to
national accounting standards.
65 See IOSCO’s press release regarding its IFRS
database at https://www.iosco.org/news/pdf/
IOSCONEWS92.pdf.
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to avoid conflicting conclusions
regarding the application and
enforcement of IFRS. To this end, the
Commission and CESR, which the EC
has charged with evaluating the
implementation of IFRS in the EU,
published a work plan in August
2006.66 That work plan covers
information-sharing regarding IFRS
implementation in regular meetings of
the Commission staff and CESR-Fin, the
group within CESR focused on financial
reporting. The SEC–CESR work plan
also contemplates the confidential
exchange of issuer-specific information
between CESR members and the
Commission, with implementing
protocols. In addition, CESR has
established among its members a forum
and a confidential database for
participants to exchange views and
share experiences with IFRS.67
Having noted the areas for
improvement identified in the
Commission staff’s review to date of the
application of IFRS in filings with the
Commission, as well as the potential for
other areas requiring standard-setting
action, we believe that the approach
proposed by the Commission and the
information-sharing infrastructure
which the international regulatory
community is building should
contribute to increasing consistency and
faithfulness in the application of IFRS
across jurisdictions.
Questions
3. Is there sufficient comparability
among companies using IFRS as
published by the IASB to allow
investors and others to use and
understand the financial statements of
foreign private issuers prepared in
accordance with IFRS as published by
the IASB without a U.S. GAAP
reconciliation?
4. Do you agree that the informationsharing infrastructure being built in
which the Commission participates
through both multilateral and bilateral
platforms will lead to an improved
ability to identify and address
inconsistent and inaccurate applications
of IFRS? Why or why not?
5. What are commenters’ views on the
faithful application and consistent
application of IFRS by foreign
companies that are registered under the
Exchange Act and those that are not so
registered?
66 The press release announcing the SEC–CESR
work plan, and the text of the work plan, are
available at https://www.sec.gov/news/press/2006/
2006-130.htm.
67 See CESR Press Release 07–163 (April 2007),
available at https://www.cesr-eu.org/
index.php?page=groups&mac=0&id=13.
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6. Should the timing of our
acceptance of IFRS as published by the
IASB without a U.S. GAAP
reconciliation depend upon foreign
issuers, audit firms and other
constituencies having more experience
with preparing IFRS financial
statements?
7. Should the timing of any adoption
of these proposed rules be affected by
the number of foreign companies
registered under the Exchange Act that
use IFRS?
C. The IASB as Standard Setter
Our consideration of acceptance of
financial statements prepared using
IFRS as published by the IASB is also
premised on the IASB’s sustainability,
governance and continued operation in
a stand-alone manner as a standard
setter, which is a factor in the
development of a set of high-quality
globally accepted accounting standards.
As described in more detail in Part I.B.,
oversight by the IASC Foundation
Trustees through the governance
reforms that have been implemented, as
well as the due process mechanisms
established for the consideration and
adoption of new IFRSs, contribute to the
IASB’s role as a standard setter
dedicated to developing accounting
standards in the public interest. The
IASB is free to choose and conduct
projects necessary to promote
convergence and develop high-quality
standards. The IASB solicits views and
seeks input from the public throughout
the standard-setting process from
selecting items for its agenda to
developing and publishing an exposure
draft and issuing a final standard. The
IASB’s meetings are open to public
observers and summaries of comments
received on discussion papers and
exposure drafts are made public on the
IASB Web site.68 This transparent
process enables the IASB to obtain
relevant views from interested parties,
and at the same time to conclude final
standards based on its own
deliberations, and without undue
external pressure.
Since the late 1980s, the Commission
staff has participated in the
development of IAS and IFRS primarily
through IOSCO, taking an active role in
the standard-setting process undertaken
by the IASC and the IASB. In this
regard, the Commission staff has
reviewed and contributed to comments
on many exposure drafts of standards
published by the IASC and the IASB.
68 See the IASC Foundation Due Process
Handbook for the IASB approved by the Trustees
March 2006. For additional information, see https://
www.iasb.org/NR/rdonlyres/7D97095E-96FD-4F1FB7F2-366527CB4FA7/0/DueProcessHandbook.pdf.
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Additionally, the Commission staff as
an IOSCO representative serves as a
non-voting observer at IFRIC meetings.
The Commission also is an observer of
the IASB Standards Advisory Council.69
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Questions
8. The IASB Framework establishes
channels for the communication of
regulators’ and others’ views in the IFRS
standard-setting and interpretive
processes. How should the Commission
and its staff further support the IFRS
standard-setting and interpretive
processes?
9. How should the Commission
consider the implication of its role with
regard to the IASB, which is different
and less direct than our oversight role
with the FASB?
D. Summary
Fostering the use of a single set of
high-quality, globally accepted
accounting principles, would, in our
view, serve to protect investors and
promote capital formation by enhancing
comparability across companies and
increasing access to foreign issuer
investment opportunities for investors
in the U.S. public capital markets while
reducing regulatory burdens and costs
for issuers. As noted earlier, the
Commission has for over 20 years
sought to promote the development of a
global, high-quality set of accounting
principles. The acceptance of financial
statements prepared in accordance with
IFRS as published by the IASB without
a U.S. GAAP reconciliation will further
promote this goal. By such acceptance,
the Commission will demonstrate its
commitment to both investors and to the
global capital markets.
Achieving a single set of globally
accepted accounting standards will
require the contributions of many
parties, including standard setters,
regulators, auditors, issuers, and
investors themselves. The IASB and the
FASB have established procedures for
their ongoing joint efforts to achieve
convergence. The infrastructure is being
developed to lead to the consistent and
faithful application of IFRS by issuers.
We will continue to evaluate the
progress towards convergence, the
application of IFRS, and the work of the
IASB.
We believe it is an appropriate time
to propose and solicit comment on
acceptance, in the filings of foreign
private issuers, of financial statements
prepared in accordance with IFRS as
published by the IASB without
reconciliation to U.S. GAAP.
69 See
https://www.iasb.org/About+Us/
About+SAC/SAC+Members.htm.
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Questions
10. The Commission has gathered
certain information from representatives
of issuers, investors, underwriters,
exchanges and other market participants
at its public roundtable on IFRS. We are
interested in receiving information from
a broader audience. Is the development
of a single set of high-quality globally
accepted standards important to
investors? To what degree are investors
and other market participants able to
understand and use financial statements
prepared in accordance with IFRS as
published by the IASB without a U.S.
GAAP reconciliation? We also
encourage commenters to discuss ways
in which the Commission may be able
to assist investors and other market
participants in improving their ability to
understand and use financial statements
prepared in accordance with IFRS. How
familiar are investors with financial
statements prepared in accordance with
IFRS as published by the IASB? Will the
ability of an investor to understand and
use financial statements that comply
with IFRS as published by the IASB
vary with the size and nature of the
investor, the value of the investment,
the market capitalization of the issuer,
the industry to which the issuer in
question belongs, the trading volume of
its securities, the foreign markets on
which those securities are traded and
the regulation to which they may be
subjected, or any other factors? If so,
should any removal of the reconciliation
requirement be sensitive to one or more
of these matters, and, if so, how?
III. Discussion of the Proposed
Amendments To Allow the Use of IFRS
Financial Statements Without
Reconciliation to U.S. GAAP
A. Eligibility Requirements
The proposed amendments to allow a
foreign private issuer to file financial
statements without reconciliation to
U.S. GAAP as currently required under
Item 17 or 18 of Form 20–F, as
appropriate, would apply only to a
foreign private issuer that files its
financial statements in full compliance
with the English language version of
IFRS as published by the IASB.70 The
proposed amendments will apply to an
eligible issuer regardless of whether it
complies with IFRS as published by the
IASB voluntarily or in accordance with
any requirements of its home country
regulator or an exchange on which its
securities are listed.
70 These proposed amendments would not
encompass use, if finalized, of the IASB’s proposed
IFRS for Small and Medium-sized Entities.
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Under the proposals, in order to be
eligible to omit the reconciliation, an
issuer would be required, in a
prominent footnote to its financial
statements, to state unreservedly and
explicitly that its financial statements
are in compliance with IFRS as
published by the IASB.71 In addition, in
its report, the independent auditor must
opine similarly on whether those
financial statements comply with IFRS
as published by the IASB.72
The proposed amendments would not
be available to an issuer that files
financial statements that include
deviations from IFRS as published by
the IASB. A foreign private issuer that
does not state unreservedly and
explicitly that its financial statements
are in compliance with IFRS as
published by the IASB, or for which the
auditor’s report contains any
qualification relating to the application
of IFRS as published by the IASB,
would continue to be required to
provide the U.S. GAAP reconciliation
under current rules. Similarly, an issuer
that files its financial statements using
a set of generally accepted accounting
principles of another jurisdiction also
would continue to reconcile to U.S.
GAAP as under current rules when
preparing its financial statements for
inclusion in a registration statement or
annual report.73
The proposed amendments will not
apply to issuers using a jurisdictional or
other variation of IFRS. It would be
acceptable for an issuer to state
compliance with both IFRS as published
by the IASB and a jurisdictional
variation of IFRS, and an audit firm to
opine that financial statements comply
with IFRS as published by the IASB and
a jurisdictional variation of IFRS, so
long as the statement relating to the
former was unreserved and explicit.
In their filings with the SEC, the
majority of foreign private issuers that
have referenced IFRS have stated that
their financial statements are in
compliance with IFRS as published by
the IASB (in addition to stating
compliance with a jurisdictional
variation of IFRS). In contrast, few audit
reports contained an opinion on IFRS as
71 This statement is consistent with the language
requirements of IAS 1 ‘‘Presentation of Financial
Statements,’’ paragraph 14.
72 This language could be provided in addition to
any representation about compliance with
standards required by the home country.
73 An issuer that is eligible to rely on the
proposed rules, if adopted, would be permitted to
continue to reconcile its IFRS financial statements
to U.S. GAAP. An issuer that elects to do so would
follow all current requirements with regard to the
preparation of that U.S. GAAP reconciliation
contained in Item 17 or 18 of Form 20–F, as
applicable.
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published by the IASB (in addition to
opining on a jurisdictional variation of
IFRS).
We believe that the benefits of moving
towards a single set of globally accepted
standards as a long-term objective,
including increased transparency and
comparability of financial statements,
are attainable only if IFRS represents a
single set of high-quality accounting
standards and not a multiplicity of
divergent standards using the same
name. Thus, we believe that it is
appropriate to condition our acceptance
of IFRS without reconciliation on the
financial statements being in full
compliance with IFRS as published by
the IASB.
Our acceptance of a set of financial
statements without reconciliation to
U.S. GAAP would mark a significant
change in our requirements. We are
proposing that the amendments apply if
an issuer follows the approved English
language version of the standards to
assist U.S. investors to understand IFRS,
to assist in achieving comparability and
consistency across jurisdictions, and, as
a practical matter, because the
Commission’s work is conducted in
English.
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Questions
11. Without a reconciliation, will
investors be able to understand and use
financial statements prepared using
IFRS as published by the IASB in their
evaluation of the financial condition
and performance of a foreign private
issuer? How useful is the reconciliation
to U.S. GAAP from IFRS as published
by the IASB as a basis of comparison
between companies using different
bases of accounting? Is there an
alternative way to elicit important
information without a reconciliation?
12. In addition to reconciling certain
specific financial statement line items,
issuers presenting an Item 18
reconciliation provide additional
information in accordance with U.S.
GAAP. What uses do investors and
other market participants make of these
additional disclosures?
13. Should we put any limitations on
the eligibility of a foreign private issuer
that uses IFRS as published by the IASB
to file financial statements without a
U.S. GAAP reconciliation? If so, what
type of limitations? For example, should
the option of allowing IFRS financial
statements without reconciliation be
phased in? If so, what should be the
criteria for the phase-in? Should only
foreign private issuers that are wellknown seasoned issuers, or large
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accelerated filers, or accelerated filers,74
and that file IFRS financial statements
be permitted to omit the U.S. GAAP
reconciliation?
14. At the March 2007 Roundtable on
IFRS, some investor representatives
commented that IFRS financial
statements would be more useful if
issuers filed their Form 20–F annual
reports earlier than the existing sixmonth deadline. We are considering
shortening the deadline for annual
reports on Form 20–F. Should the filing
deadline for annual reports on Form 20–
F be accelerated to five, four or three
months, or another date, after the end of
the financial year? Should the deadline
for Form 20–F be the same as the
deadline for an issuer’s annual report in
its home market? Should we adopt the
same deadlines as for annual reports on
Form 10–K? Why or why not? Would
the appropriateness of a shorter
deadline for a Form 20–F annual report
depend on whether U.S. GAAP
information is included? If a shorter
deadline is appropriate for foreign
private issuers that would not provide a
U.S. GAAP reconciliation under the
proposed amendments, should other
foreign private issuers also have a
shorter deadline? Should it depend on
the public float of the issuer?
15. Although reconciliation to U.S.
GAAP of interim periods is not
ordinarily required under the Exchange
Act, foreign private issuers that conduct
continuous offerings on a shelf
registration statement under the
Securities Act may face black-out
periods that prevent them from
accessing the U.S. public capital market
at various times during the year if their
interim financial information is not
reconciled. Even if commenters believe
we should continue the U.S. GAAP
reconciliation requirement for annual
reports that include IFRS financial
statements, to address this issue should
we at least eliminate the need for the
U.S. GAAP reconciliation requirement
with respect to required interim period
financial statements prepared using
IFRS as published by the IASB for use
in continuous offerings? 75 Should we
extend this approach to all required
interim financial statements?
16. Is there any reason why an issuer
should not be able to unreservedly and
explicitly state its compliance with IFRS
as published by the IASB? Is there any
reason why an audit firm should not be
able to unreservedly and explicitly
opine that the financial statements
comply with IFRS as published by the
IASB? What factors may have resulted
in issuers and, in particular, auditors
refraining from expressing compliance
with IFRS as published by the IASB?
17. If the proposed amendments are
adopted, should eligible issuers be able
to file financial statements prepared
using IFRS as published by the IASB
without a U.S. GAAP reconciliation for
their first filing containing audited
annual financial statements? If the
amendments are adopted, what factors
should we consider in deciding when
issuers can use them? For example,
should we consider factors such as the
issuer’s public float (either in the United
States or worldwide), whether the issuer
has issued only public debt, or the
nature of the filing to which the
amendments would be applied? Will
investors be prepared to analyze and
interpret IFRS financial statements
without the reconciliation by 2009? If
not, what further steps, including
investor education, may be necessary?
B. U.S. GAAP Reconciliation
1. General
The basic requirements for financial
statements filed by foreign private
issuers are described in Items 17 and 18
of Form 20–F. Under Item 17(c), a
foreign private issuer currently has two
options: Either to prepare its financial
statements and schedules according to
U.S. GAAP; or, alternatively, to prepare
them under the generally accepted
accounting principles of another
jurisdiction with a reconciliation of
specific line items to U.S. GAAP as
enumerated under Item 17(c)(2). This
reconciliation includes a narrative
discussion of reconciling differences,76
a reconciliation of net income for each
year and any interim periods
presented,77 a reconciliation of major
balance sheet captions for each year and
any interim periods,78 and a
reconciliation of cash flows for each
year and any interim periods.79 We are
proposing to revise Item 17(c)(2) so that
reconciliation will no longer be required
from issuers using IFRS as published by
the IASB.80
76 See
Item 17(c)(1) of Form 20–F.
Item 17(c)(2)(i) of Form 20–F.
78 See Item 17(c)(2)(ii) of Form 20–F.
79 See Item 17(c)(2)(iii) of Form 20–F, containing
the exception relating to IAS 7 ‘‘Cash Flow
Statements.’’
80 We are not proposing to amend Item 17(b),
which we do not read as imposing U.S. GAAP
requirements on financial statements prepared
using IFRS as published by the IASB.
77 See
74 The terms ‘‘accelerated filer’’ and ‘‘large
accelerated filer’’ are defined in Rule 12b–2 under
the Exchange Act [17 CFR 240.12b–2]. ‘‘Wellknown seasoned issuer’’ is defined in Rule 405
under the Securities Act [17 CFR 230.405].
75 See Item 8.A.4 of Form 20–F, which requires
interim period financial statements in certain
circumstances.
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As discussed in Section III.D.,
portions of Regulation S–X that do not
relate to the form and content of an
issuer’s financial statements, including,
for example, auditor qualification and
report requirements and financial
statement requirements for entities other
than the issuer, would still continue to
apply to foreign private issuers that
prepare their financial statements using
IFRS as published by the IASB without
a U.S. GAAP reconciliation.
Several sub-paragraphs of Item
17(c)(2) relate to reconciling disclosure
required of issuers that rely on certain
IAS. The partial accommodations
contained in these sub-paragraphs were
available to issuers using home country
GAAP or IFRS. They are rarely relied
upon in practice and appear no longer
needed by issuers that use IFRS as
published by the IASB.81 We are
therefore proposing to eliminate these
sub-paragraphs for purposes of all
foreign private issuer filings.
Specifically, we are proposing to delete
Items 17(c)(2)(iv)(B) and (C), which
relate to reconciling disclosures to be
provided by issuers that rely on IAS 21
‘‘The Effects of Changes in Foreign
Exchange Rates.’’ We also are proposing
to delete Item 17(c)(2)(viii) relating to
reconciling disclosures to be provided
by issuers using IAS 22 ‘‘Business
Combinations,’’ with respect to the
period of amortization of goodwill and
negative goodwill, as IAS 22 has been
superseded by IFRS 3 ‘‘Business
Combinations’’ and may no longer be
used by an issuer preparing financial
statements under IFRS. For this reason,
we also are proposing to eliminate the
related Instruction 6 to Item 17.
However, we are retaining the IAS 7
‘‘Cash Flow Statements’’
accommodation contained in Item
17(c)(2)(iii).
Item 17(c)(2)(vii) relates to disclosures
that issuers using proportionate
consolidation may omit from their U.S.
GAAP reconciliation. We are not
proposing any revision to this
paragraph, which continues to apply to
issuers using home country GAAP (if
permitted by that GAAP). An issuer
using IFRS as published by the IASB
would satisfy the requirements of this
paragraph by providing IAS 31
‘‘Interests in Joint Ventures’’
disclosures.
81 As
noted above, the IASB has incorporated IAS
developed by the IASC into IFRS. In addition, the
sub-paragraphs were added at a time when IFRS
was undergoing substantial development and it was
appropriate to permit compliance with selected
international standards. Such partial compliance
with IFRS is not consistent with these proposals,
which are based on full compliance with IFRS as
published by the IASB.
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A U.S. GAAP reconciliation under
Item 18 builds on the information
content of Item 17. In addition to
providing reconciling information for
the line items specified in Item 17(c),
Item 18(b) requires that an issuer also
provide in its financial statements all
information required by U.S. GAAP and
Regulation S–X.82 The proposed
elimination of the reconciliation
requirement for IFRS financial
statements also applies in situations in
which the issuer currently would be
required to prepare a reconciliation
under Item 18. Accordingly, we propose
revising Item 18(b) to indicate that
disclosures required by U.S. GAAP and
Regulation S–X would not be required
if a registrant files its financial
statements using IFRS as published by
the IASB.
Questions
18. Do we need to make any other
changes to Items 17 or 18 or elsewhere
to implement fully the proposed
elimination of the reconciliation
requirement for issuers using IFRS as
published by the IASB?
19. Is any revision necessary to clarify
that the provisions relating to issuers
that use proportionate consolidation
contained in Item 17(c)(2)(vii) would
not apply to IFRS financial statements
that are not reconciled to U.S. GAAP
under the proposed amendments? If so,
what changes would be appropriate?
20. Is the IAS 21 accommodation still
useful for non-IFRS issuers? Is it clear
that an issuer using IFRS would not
need to provide disclosure under Item
17(c)(2)(iv)? If not, what changes would
be necessary to make it clear?
2. Interim Period Financial Statements
Under the proposal, foreign private
issuers that are eligible to omit the U.S.
GAAP reconciliation in their audited
annual financial statements would
likewise be able to omit a reconciliation
from their unaudited interim period
financial statements. To the extent a
foreign private issuer is required to
provide interim period financial
statements, the financial statements
would have to be prepared in
accordance with IFRS as published by
the IASB.83
82 U.S. GAAP and Regulation S–X information
need not be provided for a period in which net
income has not been reconciled to U.S. GAAP, or
for financial statements for an entity or subsidiary
covered by Rules 3–05 or 3–09 of Regulation S–X.
83 The discussion in this section relates solely to
registration statements and prospectuses under the
Securities Act and initial registration statements
under the Exchange Act. There are currently no
requirements under our rules relating to the form
or content requirements of a foreign private issuer’s
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Questions
21. Would issuers have any difficulty
in preparing interim period financial
statements that are in accordance with
IFRS as published by the IASB?
22. Do foreign private issuers that
have changed to IFRS generally prepare
interim financial statements that are in
accordance with IFRS, and do they
make express statements to that effect?
a. Financial Information in Securities
Act Registration Statements and
Prospectuses and Initial Exchange Act
Registration Statements Used Less Than
Nine Months After the Financial Year
End
In registration statements and
prospectuses under the Securities Act
and initial registration statements under
the Exchange Act, if the document is
dated less than nine months after the
end of the last audited financial year,
foreign private issuers are not required
to include interim period financial
information. However, if a foreign
private issuer has published interim
period financial information, Item 8.A.5
of Form 20–F requires these registration
statements and prospectuses to include
that information.84 The intent of this
requirement is to make information
available in U.S. offering documents as
current as information that is available
elsewhere.
The instructions to Item 8.A.5 require
that an issuer providing interim
financial information describe any
material variations between the
accounting principles, practices and
methods used and U.S. GAAP, and
quantify any material variations that are
not already quantified in the financial
statements. We are adding an
instruction to Item 8.A.5 of Form 20–F
with regard to interim period financial
information that is made public by a
foreign private issuer to clarify that
interim period information does not
need to be reconciled to U.S. GAAP
when the interim information is
prepared in accordance with IFRS as
published by the IASB.
reports on Form 6–K under the Exchange Act. See
Form 6–K [17 CFR 249.306].
84 Under Item 512(a)(4) of Regulation S–K [17
CFR 22.512(a)(4)], a foreign private issuer that
registers securities on a shelf registration statement
basis is required to undertake to include any
financial statements required by Item 8.A of Form
20–F at the start of any delayed offering or
throughout a continuous offering.
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b. Financial Statements in Securities
Act Registration Statements and
Prospectuses and Initial Exchange Act
Registration Statements Used More
Than Nine Months after the Financial
Year End
In registration statements and
prospectuses under the Securities Act
and initial registration statements under
the Exchange Act, if the document is
dated more than nine months after the
end of the last audited financial year,
foreign private issuers must provide
consolidated interim period financial
statements covering at least the first six
months of the financial year and the
comparative period for the prior
financial year.85 These unaudited
interim period financial statements
must be prepared using the same basis
of accounting as the audited financial
statements contained or incorporated by
reference in the document and include
or incorporate by reference a
reconciliation to U.S. GAAP.86 The
instruction that we are proposing to add
to Item 8.A.5 would clarify that an
issuer does not need to provide that
reconciliation if it prepares its interim
financial statements using IFRS as
published by the IASB.
Under the proposed rules, although
an eligible issuer may provide IFRS
financial statements for an interim
period without reconciliation, that
issuer would continue to be required to
comply with Article 10 of Regulation S–
X with regard to financial statements for
interim periods, when that information
is required under Item 8.A.5 of Form
20–F. There are several differences
between IAS 34 ‘‘Interim Financial
Reporting,’’ which prescribes the
minimum content of an interim
financial report and the principles for
recognition and measurement in
financial statements presented for an
interim period, and Article 10 of
Regulation S–X. First, because IAS 34
permits more condensed balance sheet,
income statement and cash flow
information detail than does Article 10,
financial statements prepared under IAS
34 can be limited to major headings and
subtotals. Second, unlike IAS 34, Article
10 contains an explicit statement that
interim disclosures must be sufficient to
make interim period information
presented not misleading. Third, Article
10 requires contingent liability
disclosures even if no change has
occurred since the year end, whereas
IAS 34 requires disclosure of any
changes in contingent liabilities since
the year end. Fourth, Article 10 requires
footnote disclosure of summarized data
for equity investees that is not required
under IAS 34.
Questions
23. How significant are the differences
between IAS 34 and Article 10? Is the
information required by IAS 34
adequate for investors? If not, what
would be the best approach to bridge
any discrepancy between IAS 34 and
Article 10? Should issuers be required
to comply with Article 10 if their
interim period financial statements
comply with IAS 34? Should we
consider any revision to existing rules
as they apply to an issuer that would
not be required to provide a U.S. GAAP
reconciliation under the proposed rules?
3. IFRS Treatment of Certain Areas
As noted, IFRS as published by the
IASB constitute a comprehensive basis
of accounting that may be used by
foreign private issuers in the
preparation of their financial statements
that are contained in Commission
filings. There are certain limited areas in
which the IASB has yet to develop
standards or in which IFRS permits
disparate options. These areas are not
new, and existed at the time the IASB
and the FASB were developing their
2006–2008 work plan.87 However, based
on our staff’s review of IFRS filings with
the Commission to date, we have a
number of observations regarding the
application in practice in these areas, in
which we also ask for public feedback.
a. Accounting for Insurance Contracts
and Extractive Activities
There are two industry areas that have
been identified by the IASB as lacking
standards: Insurance contracts and
extractive activities.
IFRS 4 ‘‘Insurance Contracts’’
provides limited guidance on the
accounting to be followed by companies
that issue insurance contracts or hold
reinsurance contracts. Except in some
areas, IFRS 4 permits a company to
continue to apply its pre-existing home
country accounting principles for
insurance contracts. Insurance company
accounting and practices vary greatly
throughout the world in areas such as
revenue recognition, claim expense
recognition, policy benefit recognition,
and policy acquisition costs, resulting in
substantial variation in reporting
practices.
The IASB has noted that it is in the
process of developing a standard for
insurance contracts because ‘‘there was
87 See
85 See Item 8.A.5 of Form 20–F and Item 512(a)(4)
of Regulation S–K.
86 See Items 17(c) and 18 of Form 20–F.
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‘‘SEC Welcomes Plans of U.S.,
International Standard Setters for Convergence of
Accounting Systems,’’ SEC Press Release dated
February 27, 2007.
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no IFRS on insurance contracts, and
insurance contracts were excluded from
the scope of existing IFRSs that would
have been relevant (e.g., IFRSs on
provisions, financial instruments,
intangible assets); and accounting
practices for insurance contracts were
diverse, and also often differed from
practices in other sectors.’’ 88
IFRS 6 ‘‘Exploration for and
Evaluation of Mineral Resources’’
provides limited guidance with respect
to the accounting for exploration and
evaluation activities undertaken by oil
and gas and mining companies. Except
in certain areas, companies are
permitted to look to other sources for
guidance. Items not addressed by IFRS
6 include, for example, thresholds for
capitalizing or expensing a variety of
costs, and the manner in which
capitalized costs are subsequently
depreciated or amortized.
The IASB adopted IFRS 6 in
December 2004 as a first step in light of
the need to develop a standard in time
for it to be applied by companies that
were adopting IFRS in 2005.89 The IASB
acknowledged that its complete
consultation in this area could not be
completed in that time frame, and that
developing a global consensus on a
rigorous and comprehensive approach
would require extensive consultation.
On both of these projects, the IASB
continues to make progress towards
developing standards under IFRS.
Nonetheless, we do not believe that the
lack of comprehensive standards in
IFRS in these areas alone should delay
our consideration of fully accepting
IFRS as published by the IASB without
a U.S. GAAP reconciliation.
b. Accounting Treatment for Common
Control Mergers, Recapitalization
Transactions, Reorganizations,
Acquisitions of Minority Shares Not
Resulting in a Change of Control, and
Similar Transactions
There are certain areas, for example,
accounting treatment for common
control mergers, recapitalizations,
reorganizations, acquisitions of minority
interests, and similar transactions, for
which IFRS does not have a specific
standard or interpretation. When a
standard or interpretation of IFRS does
not address a matter, IAS 8 ‘‘Accounting
Policies, Changes in Accounting
Estimates and Errors,’’ provides
guidance, including looking to the most
recent pronouncements of other
standard-setting bodies. With a lack of
88 Excerpt from the IASB Web site at https://
www.iasb.org/Current+Projects/IASB+Projects/
Insurance+Contracts/Insurance+Contracts.htm.
89 See IASB Press Release dated December 9,
2004.
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specific guidance, companies can look
to various (and differing) recognition,
measurement and presentation
practices, including their home country
accounting principles, in establishing
their accounting policies.90 IFRS,
however, does not require the disclosure
of the impact if an alternative
accounting treatment had been used.
The IASB and the FASB have a joint
project underway entitled ‘‘Business
Combinations: Applying the Acquisition
Method.’’ 91 This project is the second
phase of an overall project on business
combinations. In this phase of the
business combinations project, the IASB
and the FASB are reconsidering their
existing guidance for applying the
purchase method of accounting for
business combinations (now called the
acquisition method). This project will
converge numerous areas of application
and reduce alternative treatments but
will not address all of the transactions
discussed above. Final standards by the
IASB and the FASB are expected to be
issued in the third quarter of 2007.
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c. Income Statements and Per Share
Amounts
IFRS does not provide specific
conventions as to the format or content
of the income statement.92 In addition,
IFRS permits a company to present on
the face of its income statement or
elsewhere in its financial statements any
measure on a per share basis so long as
the figure is reconciled to a line item on
the income statement.93 Companies
preparing IFRS financial statements are
thus permitted to use numerous
different income statement formats and
to characterize subtotals and amounts
using multiple and varied caption
headings. In addition, companies using
IFRS are permitted to present on the
income statement and in footnotes
measures that would be otherwise
considered non-GAAP measures that
would not be permitted under our
rules.94
The IASB and FASB have a joint
project underway entitled ‘‘Financial
Statement Presentation’’ to establish a
90 IAS 1 requires an entity to disclose the
measurement basis used in preparing financial
statements and the other accounting policies used
that are relevant to an understanding of the
financial statements.
91 For more information on this joint project, see
https://www.fasb.org/project/
bc_acquisition_method.shtml and https://
www.iasb.org/Current+Projects/IASB+Projects/
Business+Combinations/
Business+Combinations+II.htm.
92 IAS 1 provides guidance regarding minimum
required line items and provides examples to which
issuers may refer.
93 See IAS 33 ‘‘Earnings per Share.’’
94 See Item 10(e) of Regulation S–K [17 C.F.R.
229.20(E)].
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common, high-quality standard for the
presentation of information in the
financial statements, including the
classification and display of line items
and the aggregation of line items into
subtotals and totals. A discussion paper
which addresses the more fundamental
issues related to the presentation of
information on the face of the financial
statements is expected to be published
in the fourth quarter of 2007.
Questions
24. Are there accounting subject
matter areas that should be addressed by
the IASB before we should accept IFRS
financial statements without a U.S.
GAAP reconciliation?
25. Can investors understand and use
financial statements prepared using
IFRS as published by the IASB in those
specific areas or other areas that IFRS
does not address? If IFRS do not require
comparability between companies in
these areas, how should we address
those areas, if at all? Would it be
appropriate for the Commission to
require other disclosures in these areas
not inconsistent with IFRS published by
the IASB?
C. Accounting and Disclosure Issues
1. Selected Financial Data
Under Item 3.A of Form 20–F, issuers
must provide five years of selected
financial data. As part of this proposal
to accept financial statements prepared
using IFRS as published by the IASB
without reconciliation to U.S. GAAP,
we are proposing to revise the
instruction to Item 3.A to clarify that
selected financial data based on the U.S.
GAAP reconciliation is required only if
the issuer prepares its primary financial
statements using a basis of accounting
other than IFRS as published by the
IASB.
Question
26. Should issuers that are permitted
to omit a U.S. GAAP reconciliation for
their current financial year or current
interim period be required to disclose in
their selected financial data previously
published information based on the U.S.
GAAP reconciliation with respect to
previous financial years or interim
periods?
2. Other Form 20–F Disclosure
a. Reference to U.S. GAAP
Pronouncements in Form 20–F
Several non-financial statement
disclosure items of Form 20–F make
reference to specific U.S. GAAP
pronouncements, including Financial
Accounting Standards (‘‘FASs’’) and
interpretations of the FASB. For
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example, issuers are required to provide
disclosure of off-balance sheet
arrangements under Item 5 (‘‘Operating
and Financial Review and Prospects’’),
which expressly refers to FASB
Interpretations No. 45 ‘‘Guarantor’s
Accounting and Disclosure
Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of
Others,’’ and No. 46 ‘‘Consolidation of
Variable Interest Entities.’’ 95 Also, Item
11 of Form 20–F (‘‘Quantitative and
Qualitative Disclosures About Market
Risk’’) sets out the requirements for
certain summary disclosures about
market risk which refer to FAS 52
‘‘Foreign Currency Translation,’’ FAS 5
‘‘Accounting for Contingencies,’’ as well
as to other FASs.
An IFRS filer that would not be
required to provide a U.S. GAAP
reconciliation under the proposed
amendments would continue to be
required to respond to those items of
Form 20–F that make reference to FASs,
FASB interpretations, or other specific
pronouncements of U.S. GAAP for
definitional purposes. In providing that
disclosure, however, the issuer should
apply the corresponding IFRS notion of
the principles embodied in the
referenced U.S. GAAP pronouncement.
In order to convey this view, we are
proposing to add an instruction to Item
5 and Item 11 indicating that issuers
preparing their financial statements in
accordance with IFRS as published by
the IASB should, in responding to
paragraphs of those items that refer to
specific pronouncements of U.S. GAAP,
look to the appropriate corresponding
standards and interpretations of IFRS
that contain similar definitions. If
information called for by the nonfinancial statement requirements of
Form 20–F duplicates information that
is contained in the IFRS financial
statements, an issuer need not repeat
such information but may crossreference to the appropriate footnote in
the audited financial statements.
b. Disclosure From Oil and Gas
Companies Under FAS 69
Pursuant to either earlier Commission
rules or more recent FASB standards,
public companies with significant oil
and gas activities have been required to
disclose reserve and other information
relating to those activities. In November
1982, the FASB adopted FAS 69
‘‘Disclosures about Oil and Gas
Producing Activities,’’ which
establishes a comprehensive set of
disclosures for oil and gas producing
activities. Under this standard, public
companies with such significant
95 See
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activities are required to disclose
unaudited supplementary information
relating to proved oil and gas reserves,
and capitalized costs relating to oil and
gas producing activities. As a result of
the FASB’s adoption of FAS 69, the
Commission at first suspended the
effectiveness of a rule under Regulation
S–X calling for substantially similar
information,96 and then deleted the rule
altogether.97 The Commission noted
that, in light of the FASB standard, its
own earlier rule requiring this
disclosure was no longer necessary.
We are proposing to amend Item 18 of
Form 20–F to expressly require that any
company that provides disclosure under
FAS 69 continue to provide the
information called for under that
statement even though the company is
preparing financial statements in
accordance with IFRS as published by
the IASB without a reconciliation to
U.S. GAAP. The nature of the
information provided under FAS 69 is
not in the nature of a U.S. GAAP
reconciliation but rather is
supplementary information included as
an unaudited footnote to the audited
financial statements. We believe that
FAS 69 requires the disclosure of
important information that is useful to
investors and that would not otherwise
be required to be disclosed under IFRS.
c. Market Risk Disclosure and the Safe
Harbor Provisions
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Pursuant to Item 11 of Form 20–F,
foreign private issuers are required to
provide disclosure of qualitative and
quantitative information about market
risk inherent in derivative financial
instruments, other financial
instruments, and derivative commodity
instruments. This information, which is
not included as part of the financial
statements in a filing, is expressly
subject to the safe harbor provided
under Section 27A of the Securities
Act 98 and Section 21E of the Exchange
Act 99 to the extent it constitutes
‘‘forward looking statements.’’ 100
IFRS 7 ‘‘Financial Instruments:
Disclosure’’ as recently amended,
requires market risk disclosure that is
similar to that required under Item
96 The requirement was found in former Rule
4–10(k) of Regulation S–X. The application of this
rule was suspended in Release 33–6444 (December
15, 1982).
97 Release 33–6818 (February 17, 1989) proposed
the deletion which was adopted in Release 33–6959
(September 17, 1992).
98 15 U.S.C. 77z–2.
99 15 U.S.C. 78u–5.
100 See Release 33–7386 (Jan. 31, 1997) for the
release adopting the derivatives disclosure
requirement and the related express safe harbor.
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11.101 In this respect, the sensitivity
analysis provided under IFRS will be
based on forward-looking information.
This information will appear in the
footnotes to audited IFRS financial
statements.
Section 27A of the Securities Act and
Section 21E of the Exchange Act
expressly exclude from the safe harbor
any information ‘‘included in a financial
statement prepared in accordance with
generally accepted accounting
principles.’’ 102 The safe harbor may not
be available to the forward looking
information included in IFRS financial
statements. When we adopted the
market risk disclosure requirements, the
Commission considered whether the
market risk disclosure could be
included in a registrant’s financial
statements and, if so, whether the safe
harbor should apply to that disclosure.
The Commission decided to require that
the information required under Item 11
be disclosed outside the financial
statements.103
The apparent non-availability of the
safe harbor provisions to information
included in financial statements,
including information called for by IFRS
7, is separate and distinct from our
proposed acceptance of IFRS as
published by the IASB without a U.S.
GAAP reconciliation. Regardless of
whether we eliminate the U.S. GAAP
reconciliation for IFRS filers, the
financial statements filed by a registrant
must comply fully with a
comprehensive body of accounting
principles, which includes IFRS 7 for
those companies that use IFRS.
Questions
27. With regard to references to U.S.
GAAP in non-financial statement
disclosure requirements, should we
amend the references to U.S. GAAP
pronouncements that are made in Form
20–F to also reference appropriate IFRS
guidance, and, if so, what should the
references refer to? Would issuers be
able to apply the proposed broad
approach to U.S. GAAP
pronouncements and would this
approach elicit appropriate information
for investors? Should we retain the U.S.
GAAP references for definitional
purposes?
28. Should foreign private issuers that
prepare financial statements in
accordance with IFRS as published by
the IASB be required to continue to
101 IFRS 7 will require this information beginning
with the 2007 financial year.
102 See Securities Act Section 27A(b)(2)(A) and
Exchange Act Section 21E(b)(2)(A).
103 U.S. companies are subject to the same
disclosure requirement. See Item 305 of Regulation
S–K [17 CFR 229.3–05].
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37975
comply with the disclosure
requirements of FAS 69? What
alternatives may be available to elicit
the same or substantially the same
disclosure?
29. Should the Commission address
the implications of forward-looking
disclosure contained in a footnote to the
financial statements in accordance with
IFRS 7? For example, would some kind
of safe harbor provision or other relief
or statement be appropriate?
3. Other Considerations Relating to IFRS
and U.S. GAAP Guidance
The Commission recognizes that an
issuer that would not be required to
reconcile its IFRS financial statements
to U.S. GAAP may nevertheless
pursuant to the application of IAS 8
look for guidance from Commission
sources other than rules and regulations,
including Accounting Series Releases
(‘‘ASRs’’) and Financial Reporting
Releases (‘‘FRRs’’).104 In addition, such
an issuer may look to the guidance that
the Commission staff provides in Staff
Accounting Bulletins (‘‘SABs’’), and, if
the company is engaged in certain lines
of business, various Industry Guides.105
No changes to such guidance are
planned. We believe that a company
that would no longer be required to
reconcile its IFRS financial statements
to U.S. GAAP under the proposed
amendments, and its auditor, would
continue to be required to follow any
Commission guidance that relates to
auditing issues.106 An issuer using IFRS
as published by the IASB, although not
required to follow U.S. GAAP guidance,
104 FRRs contain the Commission’s views and
interpretations relating to financial reporting. Prior
to 1982, the Commission published its views and
interpretations relating to financial reporting in
Accounting Series Releases (ASRs). In FRR 1,
Adoption of the Financial Reporting Release Series
and Codification of Currently Relevant ASRs, the
Commission codified certain previously issued
ASRs on financial reporting matters.
105 Staff Accounting Bulletins reflect the
Commission staff’s views regarding accountingrelated disclosure practices. They represent
interpretations and policies followed by the
Division of Corporation Finance and the Office of
the Chief Accountant in administering the
disclosure requirements of the federal securities
laws. Industry Guides serve as expressions of the
policies and practices of the Division of Corporation
Finance. They are of assistance to issuers, their
counsel and others preparing registration
statements and reports, as well as to the
Commission’s staff. SABs and Industry Guides are
not rules, regulations, or statements of the
Commission. They have not been issued pursuant
to notice and comment rulemaking, and the
Commission has neither approved nor disapproved
these interpretations.
106 In addition, foreign private issuers are
required to have audits conducted in accordance
with the Standards of the PCAOB (U.S.)/U.S.
Generally Accepted Audit Standards regardless of
the comprehensive basis of accounting they use to
prepare their financial statements.
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may find reference to FRRs, ASRs,
SABs, and Industry Guides and other
forms of U.S. GAAP guidance useful in
the application of IAS 8.107
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Questions
30. Are there issues on which further
guidance for IFRS users that do not
reconcile to U.S. GAAP would be
necessary and appropriate? Should
issuers and auditors consider guidance
related to materiality and quantification
of financial misstatements?
4. First Time Adopters of IFRS
In 2005 the Commission adopted
amendments to Form 20–F to permit
foreign private issuers, for their first
year of reporting under IFRS as adopted
by the IASB, to file two years rather
than three years of statements of
income, changes in shareholders’ equity
and cash flows prepared in accordance
with IFRS, with appropriate related
disclosure.108 These amendments are
contained in General Instruction G to
Form 20–F. The proposed amendments
do not affect the applicability of General
Instruction G to issuers that are firsttime adopters of IFRS. If adopted,
however, the proposed amendments to
eliminate the U.S. GAAP reconciliation
will apply to eligible issuers that also
may be eligible to rely on General
Instruction G, which currently contains
a number of references to a
reconciliation to U.S. GAAP from IFRS.
We therefore are proposing to amend
General Instruction G to ensure
consistency with the proposed
elimination of the U.S. GAAP
reconciliation requirement for users of
IFRS as published by the IASB.
Paragraph (d) of General Instruction
G, ‘‘Information on the Company,’’
currently refers to the basis of
accounting that an issuer uses to
prepare ‘‘the U.S. GAAP reconciliation.’’
As the U.S. GAAP reconciliation would
no longer be required of an issuer to
which General Instruction G applies, we
propose to change to reference to ‘‘a
U.S. GAAP reconciliation.’’ This change
is intended to eliminate any potential
inference that the U.S. GAAP
reconciliation would still be required,
and to clarify that the body of
accounting principles referenced in the
paragraph does not refer to a basis that
the issuer used to prepare financial
statements for which a U.S. GAAP
reconciliation was required. Paragraph
107 Under IAS 8, in the absence of an IFRS
standard or interpretation that specifically applies
to a transaction or event, management should use
its judgment in developing and applying a relevant
and reliable accounting policy and look to other
pronouncements in applying that judgment.
108 See the 2005 Adopting Release.
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(e) of General Instruction G directs an
issuer to refer to the U.S. GAAP
reconciliation for the years for which
financial statements were prepared in
accordance with IFRS and to discuss
any differences between IFRS and U.S.
GAAP not otherwise discussed in the
reconciliation that the issuer believes
are necessary for an understanding of
the financial statements. Because an
issuer would no longer be required to
prepare a reconciliation to U.S. GAAP
under the proposed rules, we are
proposing to eliminate the reference to
the reconciliation in this instruction.
Paragraph (f) of General Instruction G
stipulates the financial information that
a first-time IFRS user must provide in a
registration statement filed during the
year in which it makes the change,
including interim information. Subparagraphs (f)(2)(B)(i), (ii) and (iii) set
forth three options by which the
requirements of Item 8.A.5 for interim
financial statements may be satisfied.109
The first option allows for three years of
financial statements prepared in
accordance with Previous GAAP (as
defined in Form 20–F) and reconciled to
U.S. GAAP. As the proposed
amendments would continue to require
a reconciliation to U.S. GAAP from
financial statements prepared using any
basis of accounting other than IFRS as
published by the IASB, we are not
proposing to amend this requirement.
The second option allows for two
financial years of audited financial
statements and interim financial
statements prepared in accordance with
IFRS as published by the IASB and
reconciled to U.S. GAAP as required by
Item 17(c) or 18. Consistent with the
proposed amendments to Items 17 and
18, we also are proposing to eliminate
the reconciliation requirement from this
option. Under the third option, a firsttime IFRS adopter may provide three
years of audited financial statements
prepared in accordance with the issuer’s
Previous GAAP, reconciled to U.S.
GAAP, and two years of interim
financial statements prepared in
accordance with IFRS and reconciled to
U.S. GAAP. We are not proposing to
amend this option, which was provided
as a bridge between an issuer’s Previous
GAAP and IFRS. Because an issuer
eligible to rely on that option would not
yet have provided audited IFRS
financial statements in a filing with the
Commission, we believe it is
appropriate to continue to require the
U.S. GAAP reconciliation of the interim
109 Item 8.A.5 of Form 20–F describes the
financial information for interim periods to be
included in a registration statement.
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financial statements prepared under
IFRS.
Paragraph (h) of General Instruction G
currently requires that financial
statements prepared in accordance with
IFRS for the most recent two financial
years be reconciled to U.S. GAAP under
Item 17 or 18. Because first-time filers
of financial statements using IFRS as
published by the IASB are a subset of
the IFRS filers that would be subject to
the amendments we are proposing in
this release, we also propose to
eliminate that requirement from General
Instruction G(h) in a manner consistent
with the other proposed revisions to
Form 20–F. As a conforming
amendment we also are proposing to
revise Instruction 2.b of General
Instruction G(h) to specify that
disclosure on operating and financial
review and prospects provided in
response to Item 5 of Form 20–F need
not refer to a reconciliation to U.S.
GAAP. That revision is intended to
eliminate ambiguity as to whether the
disclosure should refer to any U.S.
GAAP reconciling information prepared
for previous years.
Currently, the accommodation to firsttime adopters of IFRS contained in
General Instruction G expires after the
first financial year starting on or after
January 1, 2007. That timing was
intended to comport with the
requirements of the EU Regulation
relating to the transition to IFRS of
European companies, although the
accommodation is available to an
eligible first-time adopter of IFRS issuer
from any jurisdiction. The Commission
is aware that several countries will be
changing their national accounting
standards to IFRS, and is therefore
proposing to extend the accommodation
contained in General Instruction G to
Form 20–F for five years, to cover
financial statements for the 2012
financial year or earlier that are
included in annual reports or
registration statements.
Paragraph (i) of General Instruction G
contains a special instruction that
requires European issuers that prepare
their financial statements using IFRS as
adopted by the EU to reconcile their
financial statements to IFRS as
published by the IASB. A U.S. GAAP
reconciliation also is required. This
paragraph presently applies only to
issuers incorporated in an EU Member
State, and would cease to be applicable
after the 2007 financial year, at which
time the mandatory switch to IFRS
under the EU Regulation will be
complete. Because the provisions would
no longer be applicable after that time,
we are considering whether or not to
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delete General Instruction G(i) as part of
this rulemaking.
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Questions
31. If a first-time IFRS adopter
provides, in a registration statement
filed during the year in which it changes
to IFRS, three years of annual financial
statements under a Previous GAAP and
two years of interim financial
statements prepared under IFRS as
published by the IASB, should we
continue to require that the interim
financial statements be reconciled to
U.S. GAAP?
32. Would a U.S. GAAP reconciliation
be a useful bridge from Previous GAAP
financial statements to annual financial
statements prepared under IFRS as
published by the IASB that are not
reconciled to U.S. GAAP?
33. Should the Commission extend
the duration of the accommodation
contained in General Instruction G for a
period longer or shorter than the
proposed five years? Would seven years,
ten years or an indefinite period be
appropriate? If so, why?
34. Should any extension of the
accommodation to first-time adopters be
tied in any way to U.S. GAAP
reconciliation? If so, how?
5. Check Boxes on the Cover Page of
Form 20–F
Currently, an issuer filing a
registration statement or annual report
on Form 20–F is required to identify, on
the cover page of its filing, whether it
prepares its financial statements in
accordance with Item 17 or 18. The
purpose of this information is to allow
the reader to identify at a glance the
type of U.S. GAAP reconciliation that
the filing contains. If the proposed
amendments are adopted, the
reconciliation requirements contained
in Items 17 and 18 will not apply to a
Form 20–F filer that files its financial
statements using IFRS as published by
the IASB. To eliminate possible
confusion as to the information that an
issuer would provide on the cover page
of Form 20–F in response to the current
check box, we are proposing to add a
check box in which a Form 20–F filer
would indicate whether the financial
statements included in the filing have
been prepared using U.S. GAAP, IFRS
as published by the IASB, or another
basis of accounting. If, in response to
this check box, an issuer has indicated
that it uses a basis of accounting other
than U.S. GAAP or IFRS as published by
the IASB, the issuer would then indicate
in response to a subsequent check box
whether it follows Item 17 or 18.
It is often difficult for the staff to
communicate with foreign private
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issuers or their counsel, who may be
located overseas. As a means of
facilitating communication with foreign
private issuers by the Commission staff,
we also are proposing to revise the cover
page of Form 20–F to require that
issuers provide contact information for
a person to whom enquiries may be
directed.110 This information would
include the name of an individual at the
company or its legal counsel and the
telephone, e-mail, and/or facsimile
number, or other means by which that
person can be contacted. Information
provided on the Form 20–F in response
to the proposed check boxes and the
company contact information will
constitute required disclosure that is
subject to all applicable federal
securities laws.
D. Regulation S–X
Regulation S–X contains, among other
things, the form and content
requirements for financial statements
included in filings made with the
Commission. It also includes many
provisions that do not relate to U.S.
GAAP, for example, requirements for
auditor qualifications and reports. If the
proposed rules are adopted, Regulation
S–X, other than its form and content
requirements, will continue to apply to
the filings of all foreign private issuers,
including those who file financial
statements prepared using IFRS as
published by the IASB without
reconciliation to U.S. GAAP.
1. Application of the Proposed
Amendments to Rules 3–05, 3–09, and
3–16
Under Rules 3–05, 3–09 and 3–16 of
Regulation S–X, an issuer, in certain
circumstances, must include the
financial statements of another entity in
its filings.111 Although we are not
proposing any specific amendments to
those sections as part of this rulemaking
initiative, the amendments that we are
proposing in this release will apply
110 An example of this enquiry would be a staff
comment letter. Identifying the person on the cover
page would not make that person an agent for
service of process.
111 Rule 3–05 specifies the requirements for
financial statements of businesses acquired or to be
acquired. Rule 3–09 specifies the requirements for
financial statements of unconsolidated majorityowned subsidiaries and 50 percent or less owned
investments accounted for by the equity method.
Both Rule 3–05 and 3–09 require financial
statements when the applicable entity is significant
to the issuer.
Rule 3–16 specifies the requirement for financial
statements of affiliates whose securities
collateralize an issue registered or being registered.
The requirement to provide separate financial
statements under Rule 3–16 is based upon whether
or not the securities are a substantial portion (as
defined) of the collateral for the class of securities
registered or being registered.
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equally in the application of Rules 3–05,
3–09 and 3–16.
a. Significance Testing
Under Rules 3–05, 3–09 and 3–16, an
issuer is required to include the
financial statements of another entity if
the entity meets certain significance
tests.112 Requirements for significance
testing are governed by the financial
statements of the issuer. Generally, if a
foreign private issuer prepares its own
financial statements using IFRS as
published by the IASB, that issuer
would perform the significance tests
under Rules 3–05, 3–09 and 3–16 using
IFRS as published by the IASB,
regardless of the basis of accounting
used by the other entity. If the
significance thresholds under Rule 3–
05, 3–09 or 3–16 are met, then the issuer
must provide on a separate basis
audited annual financial statements of
the subject entity.
b. Separate Historical Financial
Statements of Another Entity Provided
Under Rules 3–05 or 3–09
Generally, the historical financial
statement requirements for a foreign
acquired business or investee under
Rules 3–05 or 3–09 are governed by the
status of that entity, and the burden of
reconciling the financial statements of a
non-issuer entity would be no higher
than if it were the issuer. In applying the
proposed amendments, if the entity’s
audited financial statements are in
accordance with IFRS as published by
the IASB, those financial statements
would not be required to be reconciled
to U.S. GAAP. For example, under Rule
3–05 both foreign private issuers and
U.S. companies that acquire a
‘‘significant’’ foreign business would be
permitted, under the proposed rules, to
include the acquiree’s financial
statements prepared in accordance with
IFRS as published by the IASB without
reconciliation, U.S. GAAP, or another
comprehensive basis of accounting
reconciled to U.S. GAAP. The same
would be true for the financial
statements of a ‘‘significant’’ foreign
investee under Rule 3–09.
An issuer that includes financial
statements for a foreign entity under
Rule 3–05 or Rule 3–09 currently is
permitted to omit the reconciliation to
U.S. GAAP for that entity, regardless of
the comprehensive basis of accounting
in which that entity’s financial
statements are presented, if the
112 An entity is significant to the issuer if the
issuer’s investment in the entity exceeds 20% of the
issuer’s total assets, the entity’s income (as defined)
exceeds 20% of the issuer’s corresponding income,
or (for Rule 3–05 only) the entity’s total assets
exceed 20% of the issuer’s total assets.
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significance of that entity, as defined in
Rule 1–02(w) of Regulation S–X, does
not exceed 30 percent of the
registrant.113 Although we are not
proposing to amend Rules 3–05 or 3–09,
we are proposing to revise Items
17(c)(2)(v) and (vi) of Form 20–F to
clarify, respectively, that an issuer that
uses IFRS as published by the IASB to
prepare the financial statements of the
foreign entity under Rule 3–05 or 3–09
may omit the reconciling information
specified under Item 17(c)(2)(i)–(iii)
regardless of the significance of the
entity.
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2. Pro Forma Financial Statements
Provided Under Article 11
Under Article 11 of Regulation S–X,
issuers are required to prepare
unaudited pro forma financial
information that is intended to give
effect as if a particular transaction, such
as a significant recent or probable
business combination, had occurred at
the beginning of the financial period.
Requirements for pro forma financial
information under Article 11 continue
to be governed by the financial
statements of the issuer rather than of
the acquiree or other entity, as the pro
forma results must be presented using
the same basis of accounting as the
issuer. Similarly, these rules do not
impose a higher presentation burden on
pro forma financial information than
would be imposed on the historical
financial statements of the issuer. We
are not proposing to amend Article 11,
but the proposed amendments will
apply in the application of Article 11.
Accordingly, if the proposed
amendments are adopted, a foreign
private issuer using IFRS as published
by the IASB as its basis of accounting
would not be required to reconcile to
U.S. GAAP its pro forma financial
information. Therefore, an issuer using
IFRS as published by the IASB would
prepare the pro forma financial
information by presenting its IFRS
results and converting the financial
statements of the business acquired (or
to be acquired) into IFRS as published
by the IASB.
3. Financial Statements Provided under
Rule 3–10
Rule 3–10 of Regulation S–X specifies
financial statement requirements for
issuers of guaranteed securities and
guarantors.114 Generally, under this rule
both the issuer of the guaranteed
security and the guarantor must follow
113 See
Item 17(c)(2)(v) and (vi) of Form 20–F.
guarantee of a registered security is itself a
security, so a guarantor of a registered security is
itself considered an issuer of a security. See
Securities Act Section 2(a)(1).
114 A
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the financial statement requirements of
a registrant. If both entities are reporting
foreign private issuers filing on Form
20–F, we would accept the financial
statements prepared in accordance with
IFRS as published by the IASB without
reconciliation from each one under the
proposed rules.115
However, Rule 3–10 permits modified
reporting by subsidiary issuers of
guaranteed securities and subsidiary
guarantors. Separate financial
statements need not be filed for
subsidiaries meeting the applicable
conditions contained in Rules 3–10(b)
through 3–10(f). Instead, condensed
consolidating financial information is
presented in the parent company’s
reports in an additional audited footnote
to the financial statements. In applying
modified reporting under Rule 3–10,
however, the reconciliation requirement
would be based on the consolidated
financial statements of the parent
company, as under current rules. A
parent issuer or guarantor that presents
consolidated financial statements under
IFRS as published by the IASB would
present the condensed consolidating
financial information on the basis of
IFRS as published by the IASB, without
reconciliation to U.S. GAAP. We do not
believe that any substantive revision to
Rule 3–10 is necessary to implement the
acceptance of financial statements
prepared using IFRS as published by the
IASB without reconciliation as
proposed.
The instructions for preparation of
condensed consolidating financial
information required by certain
paragraphs of Rule 3–10 contain a
reference to a reconciliation of the
condensed consolidating financial
information to U.S. GAAP. As a
conforming amendment, we are
proposing to revise this reference to
clarify that we would accept the
condensed consolidating financial
information without a U.S. GAAP
reconciliation if it is prepared using
IFRS as published by the IASB.
4. Conforming Amendment to Rule 4–01
Rule 4–01 of Regulation S–X sets out
the general requirements for financial
statements included in Commission
filings and requires that foreign private
issuers include an Item 18
reconciliation if they use a basis of
accounting other than U.S. GAAP,
except as otherwise stated in the
115 In this situation, when an issuer of a
guaranteed security and a guarantor each file
complete audited financial statements, the separate
financial statements of each entity also may be on
a different basis of accounting and, if not prepared
under U.S. GAAP or IFRS as published by the IASB,
must be reconciled to U.S. GAAP.
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applicable form.116 In order to
implement fully the proposed
acceptance of financial statements
prepared using IFRS as published by the
IASB and to avoid ambiguity for issuers,
we propose to revise Rule 4–01 to
clarify that financial statements of
foreign private issuers may be prepared
using IFRS as published by the IASB
without reconciliation to U.S. GAAP.
Questions
35. Are the proposed changes to Rules
3–10 and 4–01 sufficient to avoid any
ambiguity about our acceptance of IFRS
financial statements without
reconciliation? If not, what other
revisions would be necessary?
36. Are there other rules in Regulation
S–X that should be specifically
amended to permit the filing of financial
statements prepared in accordance with
IFRS as published by the IASB without
a reconciliation to U.S. GAAP? If so,
how would the application of those
rules be unclear if there were no
changes to those rules, and what
changes would be suggested in order to
make them clear?
37. Is the application of the proposed
rules to the preparation of financial
statements provided under Rules 3–05,
3–09, 3–10 and 3–16 sufficiently clear?
If not, what areas need to be clarified?
Are any further changes needed for
issuers that prepare their financial
statements using IFRS as published by
the IASB?
E. Application of the Proposed
Amendments to Other Forms, Rules and
Schedules
1. Conforming Amendments to
Securities Act Forms F–4 and S–4
In addition to being the combined
registration statement and annual report
for foreign private issuers under the
Exchange Act, Form 20–F also sets forth
the disclosure requirements for
registration statements filed by foreign
private issuers under the Securities Act.
Because the Securities Act registration
statements applicable to foreign private
issuers reference the disclosure and
financial statement item requirements of
Form 20–F, the proposed amendments
to Form 20–F to eliminate the U.S.
GAAP reconciliation requirement for
IFRS issuers also will serve to eliminate
the reconciliation requirement from
most Securities Act forms without direct
revision of those forms. In order to
implement fully our acceptance of
financial statements prepared in
accordance with IFRS as published by
the IASB and to eliminate potential
116 As noted above, Item 17 reconciliation is
permitted in various circumstances.
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ambiguity, we are proposing to make
conforming amendments to references
to the U.S. GAAP reconciliation
contained in Securities Act Forms F–4
and S–4.
Form F–4, the registration statement
for securities of foreign private issuers
issued in certain business combinations,
contains specific references to the U.S.
GAAP reconciliation.117 We are
proposing to revise these references to
the U.S. GAAP reconciliation contained
in Items 10, 12 and 17 of this form to
make them consistent with the proposed
revisions to Item 17(c) and 18(b) of
Form 20–F to indicate that the
referenced U.S. GAAP reconciliation
would apply only to financial
statements prepared using a basis of
accounting other than U.S. GAAP or
IFRS as published by the IASB. Form S–
4, the registration statement for
securities of domestic issuers issued in
business combination transactions, also
contains reference to the U.S. GAAP
reconciliation in the instruction to Item
17 which we propose to revise in the
same manner.
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2. Conforming Amendment to Rule 701
Rule 701 under the Securities Act
provides an exemption from registration
for offers and sales made under certain
compensatory benefit plans. The rule is
generally not available to an issuer that
has a reporting obligation under the
Exchange Act. An issuer that offers
securities in reliance on Rule 701 does
not file any information with the
Commission, but is required to deliver
to investors certain information,
including financial statements, if more
than $5 million in securities are sold
over a 12-month period. For foreign
private issuers relying on Rule 701,
these financial statements must include
a reconciliation under Item 17 of Form
20–F if they are not prepared in
accordance with U.S. GAAP.
To implement the proposed rules
fully, we believe that a foreign private
issuer that conducts an offering under
Rule 701 and that uses in its financial
statements IFRS as published by the
IASB should not be required to present
a U.S. GAAP reconciliation. We propose
to amend Rule 701 to clarify that a U.S.
GAAP reconciliation will not be
required in that circumstance.
3. Small Business Issuers
A Canadian foreign private issuer that
qualifies as a small business issuer
under Regulation S–B may elect to
provide disclosure in its registration
statements and annual reports, in
compliance with forms based on
117 See
Form F–4, Items 10(c), 12(b) and 17(b).
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Regulation S–B rather than on Form 20–
F.118 Regulation S–B describes the
financial statement requirements for a
small business issuer, which must be
prepared in accordance with U.S. GAAP
or, if filed by a foreign private issuer
that also is a small business issuer,
reconciled to U.S. GAAP in accordance
with the requirements of Items 17 or 18
of Form 20–F, as appropriate.119 At a
recent meeting,120 the Commission
approved a proposal to integrate most of
the substantive provisions of Regulation
S–B into Regulation S–K and to
eliminate current Regulation S–B as a
separate disclosure system for smaller
companies. If we do not adopt those
proposals, we would consider making
conforming changes to Regulation S–B
and to small business forms to
implement fully the amendments we are
proposing in this release.
If the new small business rules are
adopted as proposed, a foreign private
issuer that also is eligible to rely on
those rules would have a choice as to
the accounting standards used to
prepare its financial statements. If we
adopt the proposed amendments, a
small business issuer that files annual
reports on Form 20–F or a Securities Act
registration statement based on Form
20–F would be able to file financial
statements prepared using U.S. GAAP,
IFRS as published by the IASB without
a U.S. GAAP reconciliation, or another
comprehensive basis of accounting with
a U.S. GAAP reconciliation. If that
issuer chose to file annual reports on
Form 10–K or a Securities Act form
based on Regulation S–K, financial
statements prepared using U.S. GAAP
would be required.
Questions
38. Are the proposed changes in
Forms F–4 and S–4, and in Rule 701,
sufficient to avoid any ambiguity about
our acceptance of IFRS financial
statements without reconciliation? If
not, how should we revise those forms
or rule?
118 17 CFR 228. A ‘‘small business issuer’’ is
defined in Item 10 of Regulation S–B (17 CFR
228.10) as a company that (i) has revenues of less
than $25,000,000, (ii) is a U.S. or Canadian issuer;
and (iii) is not an investment company and is not
an asset-backed issuer; and (iv) if a majority owned
subsidiary, the parent corporation is also a small
business issuer. An entity that meets all of these
criteria is not a small business issuer if it has a
public float (defined as the aggregate market value
of the issuer’s outstanding voting and non-voting
common equity held by non-affiliates) of
$25,000,000 or greater.
119 See Notes 1 and 2 to Item 310 of Regulation
S–B.
120 The proposal that the Commission made in its
meeting held May 23, 2007 is described at https://
www.sec.gov/news/press/2007/2007–102.htm.
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39. Under Part F/S of Form 1–A
relating to offerings conducted under
Regulation A, Canadian issuers may use
unaudited financial statements that are
reconciled to U.S. GAAP. Should we
amend Form 1–A to permit the use by
Canadian companies of financial
statements prepared in accordance with
IFRS as published by the IASB without
a reconciliation? Does the fact that
financial statements under Form 1–A
are not required to be audited militate
in favor of retaining a U.S. GAAP
reconciliation whenever a Canadian
issuer uses a GAAP other than U.S.
GAAP?
40. Are there other rules or forms
under the Securities Act that should be
specifically amended to permit the
filing of financial statements prepared
in accordance with IFRS as published
by the IASB without a reconciliation to
U.S. GAAP? If so, how would the rules
or forms be unclear if there were no
changes to those forms, and what
changes would be suggested in order to
make them clear?
4. Schedule TO and Schedule 13E–3
Instruction 8 to Item 10 of Schedule
TO, the tender offer statement under the
Exchange Act,121 contains a reference to
reconciliation to U.S. GAAP in
accordance with Item 17 of Form 20–F.
Instruction 2 to Item 13 of Schedule
13E–3,122 the transaction statement
under Section 13(e) of the Exchange
Act, also contains a reference to U.S.
GAAP reconciliation under Item 17.
Because reconciliation requirements for
Schedule TO and Schedule 13E–3 are
provided in Item 17 of 20–F, which we
are proposing to amend, we do not
believe any amendment to Schedule TO
or Schedule 13E–3 is necessary to fully
implement our proposed acceptance of
financial statements prepared in
accordance with IFRS as published by
the IASB when contained without
reconciliation to U.S. GAAP.
Question
41. Should Schedule TO and
Schedule 13E–3 be specifically
amended to permit the filing of financial
statements prepared in accordance with
IFRS as published by the IASB without
a reconciliation to U.S. GAAP? If so,
how would the rules or forms be unclear
if there were no changes to those
Schedules, and what changes would be
suggested in order to make them clear?
F. Quality Control Issues
On April 16, 2003, the PCAOB
adopted certain pre-existing standards
121 17
122 17
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Federal Register / Vol. 72, No. 132 / Wednesday, July 11, 2007 / Proposed Rules
of the American Institute of Certified
Public Accountants (‘‘AICPA’’) as
interim standards to be used on an
initial transition basis.123 Among these
interim standards was PCAOB Rule
3400T, Interim Quality Control
Standards, which consist of the AICPA’s
Auditing Standard Board’s Statements
on Quality Control Standards and the
AICPA SEC Practice Section’s
membership requirements, in each case
as in existence on April 16, 2003 and to
the extent not superseded or amended
by the PCAOB.
One of these membership
requirements related to compliance with
Appendix K, which was applicable to
member firms that were members of,
correspondents with, or similarly
associated with international firms or
international associations of firms.
Appendix K provides that member firms
seek adoption of policies and
procedures by their international
organizations or individual foreign
associated firms that address the review
of SEC filings by persons knowledgeable
in accounting, auditing and
independence standards generally
accepted in the United States. This
requirement seeks to enhance the
quality of SEC filings by SEC registrants
whose financial statements are audited
by foreign associated audit firms.124
We are not proposing amendments to
our rules that relate to the continued
need for compliance with PCAOB
Auditing Standards, including
Appendix K. However, we believe that
commenters may wish to address this
area in light of our proposed acceptance
of IFRS as published by the IASB
without a reconciliation to U.S. GAAP.
Multijurisdictional Disclosure System
(‘‘MJDS’’), which permits eligible
Canadian companies to use their
disclosure documents prepared in
accordance with Canadian requirements
in filings with the Commission. Certain
filings under the MJDS are not required
to contain a reconciliation to U.S.
GAAP.125 However, a U.S. GAAP
reconciliation is required in registration
statements and annual reports on Form
40–F,126 and registration statements on
Form F–10,127 each when used for
common equity securities, securities
convertible into common equity
securities and other securities not rated
investment grade.
At present, Canadian companies filing
under the MJDS generally use either
Canadian GAAP (with a U.S. GAAP
reconciliation when called for) or U.S.
GAAP in filings with the Commission.
As discussed above, officials in Canada
are considering permitting the use of
IFRS as published by the IASB as the
basis of accounting for all Canadian
public companies. To implement the
proposed rules fully, we believe that a
Canadian company that uses the MJDS
forms and that changes its basis of
accounting to IFRS as published by the
IASB should not be required to present
a U.S. GAAP reconciliation. However,
we do not believe any amendments to
Forms 40–F and F–10 are necessary to
accomplish this. Forms 40–F and F–10
already contain a cross-reference to the
U.S. GAAP reconciliation requirement
under Items 17 and 18 of Form 20–F,
which will be amended as described
above to allow the filing of IFRS
financial statements without a U.S.
GAAP reconciliation.
Questions
42. Without the reconciliation to U.S.
GAAP, should we be concerned about
member firm requirements to have
persons knowledgeable in accounting,
auditing and independence standards
generally accepted in the United States
review IFRS financial statements filed
with the Commission? Are there
alternative ways in which concerns may
be addressed?
Questions
43. Should Form 40–F or F–10 be
specifically amended to permit the
filing of financial statements prepared
in accordance with IFRS as published
by the IASB without a reconciliation to
U.S. GAAP? If so, how would the forms
be unclear if there were no changes to
those forms, and what changes would be
suggested in order to make them clear?
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G. Application to Filings Under the
Multijurisdictional Disclosure System
Certain Canadian foreign private
issuers file registration statements and
annual reports under the
123 See ‘‘Interim Standards’’ at https://
www.pcaobus.org/Standards/Interim_Standards/
index.aspx.
124 See Appendix K at https://www.pcaob.org/
Standards/Interim_Standards/
Quality_Control_Standards/
SECPS_1000.08_Appendicies_bookmarks.
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IV. General Request for Comments
We request and encourage any
interested persons to submit comments
regarding:
125 A U.S. GAAP reconciliation is not required
under Form F–7 relating to rights offers, Forms F–
8 and F–80 for exchange offers and business
combinations, Form F–9 relating to investment
grade securities, and Form 40–F when used as an
annual report relating to an issuer’s Section 15(d)
reporting obligations for any of the these offerings
or a Section 13(a) reporting obligation relating to
investment grade securities.
126 17 CFR 249.240f.
127 17 CFR 239.40.
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• The proposed changes that are the
subject of this release,
• Additional or different changes, or
• Other matters that may have an
effect on the proposals contained in this
release.
In addition to providing comments on
these matters, we encourage interested
parties to provide comment on broader
matters related to the development of a
single set of globally accepted
accounting standards, for example:
44. If progress does not continue
towards implementing a single set of
high-quality globally accepted
accounting standards, will investors and
issuers be served by the absence of a
U.S. GAAP reconciliation for financial
statements prepared using IFRS as
published by the IASB?
45. Where will the incentives for
continued convergence lie for standard
setters, issuers, investors and other
users of financial statements if the
reconciliation to U.S. GAAP is
eliminated for issuers whose financial
statements are prepared using IFRS as
published by the IASB?
46. Are there additional interim
measures, beyond the proposed
elimination of the U.S. GAAP
reconciliation from IFRS financial
statements, that would advance the
adoption of a single set of high-quality
globally accepted accounting standards?
If so, what are they? Who should
undertake them?
We request comment from the point
of view of registrants, investors,
accountants, accounting standard
setters, users of financial statements and
other market participants. With regard
to any comments, we note that such
comments are of greatest assistance to
our rulemaking initiative if
accompanied by supporting data and
analysis of the issues addressed in those
comments.
V. Paperwork Reduction Act
A. Background
The proposed amendments contain
‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’).128 We are submitting the
proposed amendments to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with the PRA.129
The titles for the affected collections of
information are:
(1) ‘‘Form 20–F’’ (OMB Control No.
3235–0288);
(2) ‘‘Form F–1’’ (OMB Control No.
3235–0258);
128 44
129 44
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U.S.C. 3507(d) and 5 CFR 1320.11.
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(3) ‘‘Form F–4’’ (OMB Control No.
3235–0325);
(4) ‘‘Form S–4’’ (OMB Control No.
3235–0324); and
(5) ‘‘Rule 701’’ (OMB Control No.
3235–0522).
These forms were adopted pursuant to
the Exchange Act and the Securities Act
and set forth the disclosure
requirements for annual reports and
registration statements filed by foreign
private issuers. The hours and costs
associated with preparing, filing and
sending these forms constitute reporting
and cost burdens imposed by each
collection of information. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid OMB control
number.
The proposed amendments, if
adopted, would allow a foreign private
issuer that prepares its consolidated
financial statements in accordance with
IFRS as published by the IASB, and
meets the other eligibility requirements,
to file those financial statements in its
registration statements and periodic
reports filed with the Commission
without reconciliation to U.S. GAAP.
These amendments would be
collections of information for purposes
of the Paperwork Reduction Act. For
purposes of this Paperwork Reduction
Analysis, these proposed amendments,
if adopted, would result in a decrease in
the hour and cost burden calculations.
We believe this proposed amendment
would eliminate potential burdens and
costs for foreign issuers that use IFRS.
The disclosure will be mandatory. There
would be no mandatory retention period
for the information disclosed, and
responses to the disclosure
requirements would not be kept
confidential.
For purposes of the Paperwork
Reduction Act, we estimate that the
incremental decrease in the paperwork
burden for all foreign private issuers
that use IFRS and issuers that acquire
foreign private issuers that use IFRS
would be approximately 3,861 hours of
company time and approximately
$4,600,720 for the services of outside
professionals. We estimated the average
number of hours each entity spends
completing the forms and the average
hourly rate for outside professionals.
That estimate includes the time and the
cost of in-house preparers, reviews by
executive officers, in-house counsel,
outside counsel, independent auditors
and members of the audit committee.130
130 In connection with other recent rulemakings,
we have had discussions with several private law
firms to estimate an hourly rate of $400 as the cost
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Our estimates of the number of
impacted foreign private issuers are
based on the number of recent filings
received from issuers that we believe
may be immediately eligible to rely on
the proposals, if adopted.
B. Burden and Cost Estimates Related to
the Proposed Accommodation
1. Form 20–F
We estimate that currently foreign
private issuers file 942 Form 20–Fs each
year. We assume that 25% of the burden
required to produce the Form 20–Fs is
borne internally by foreign private
issuers, resulting in 619,601 annual
burden hours borne by foreign private
issuers out of a total of 2,478,404 annual
burden hours. Thus, we estimate that
2,631 total burden hours per response
are currently required to prepare the
Form 20–F. We further assume that 75%
of the burden to produce the Form 20–
Fs is carried by outside professionals
retained by foreign private issuers at an
average cost of $400 per hour, for a total
cost of $743,520,600.
We estimate that approximately 110
companies that file Form 20–F will be
currently impacted by the proposal.131
We expect that, if adopted, the proposed
amendment would cause those foreign
private issuers to have fewer burden
hours. We estimate that for each of the
companies affected by the proposal,
there would occur a decrease of 5%
(131.55 hours) in the number of burden
hours required to prepare their Form
20–F, for a total decrease of 14,471
hours. We expect that 25% of these
decreased burden hours (3,618 hours)
will be saved by foreign private issuers.
We further expect that 75% of these
decreased burden hours (10,853 hours)
will be saved by outside firms, at an
average cost of $400 per hour, for a total
of $4,341,120 in decreased costs to the
respondents of the information
collection.
Thus, we estimate that the proposed
amendment to Form 20–F would
decrease the annual burden borne by
foreign private issuers in the
preparation of Form 20–F from 619,601
hours to 615,983 hours. We further
estimate that the proposed amendment
would decrease the total annual burden
to companies for the services of outside
professionals retained to assist in the preparation of
these disclosures. For Securities Act registration
statements, we also consider additional reviews of
the disclosure by underwriter’s counsel and
underwriters.
131 We are using this figure for purposes of the
Paperwork Reduction Analysis based on the
number of Form 20–Fs that were filed with IFRS
financial statements during the 2006 calendar year.
As additional jurisdictions adopt IFRS as their basis
of accounting in the future, the number of issuers
that use IFRS is expected to increase.
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37981
associated with Form 20–F preparation
to 2,463,932 burden hours, which
would decrease the average number of
burden hours per response to 2,616. We
further estimate that the proposed
amendment would decrease the total
annual costs attributed to the
preparation of Form 20–F by outside
firms to $739,179,600.
2. Form F–1
We estimate that currently foreign
private issuers file 42 registration
statements on Form F–1 each year. We
assume that 25% of the burden required
to produce a Form F–1 is borne by
foreign private issuers, resulting in
18,999 annual burden hours incurred by
foreign private issuers out of a total of
75,996 annual burden hours. Thus, we
estimate that 1,809 total burden hours
per response are currently required to
prepare a registration statement on Form
F–1. We further assume that 75% of the
burden to produce a Form F–1 is carried
by outside professionals retained by
foreign private issuers at an average cost
of $400 per hour, for a total cost of
$22,798,800.
We estimate that currently
approximately five companies that file
registration statements on Form F–1 will
be impacted by the proposal.132 We
expect that, if adopted, the proposed
amendment would cause those foreign
private issuers to have fewer burden
hours. We estimate that each company
affected by the proposal would have a
5% decrease (90.45 hours) in the
number of burden hours required to
prepare their registration statements on
Form F–1, for a total decrease of 452
hours. We expect that 25% of these
decreased burden hours (113 hours) will
be saved by foreign private issuers. We
further expect that 75% of the decreased
burden hours (339 hours) will be saved
by outside firms, at an average cost of
$400 per hour, for a total of $135,600 in
decreased costs to the respondents of
the information collection.
Thus, we estimate that the proposed
amendment to Form 20–F would
decrease the annual burden incurred by
foreign private issuers in the
preparation of Form F–1 from 18,999
hours to 18,886 hours. We further
estimate that the proposed amendment
would decrease the total annual burden
associated with Form F–1 preparation to
75,544 burden hours, which would
decrease the average number of burden
hours per response to 1,799. We further
estimate that the proposed amendment
would decrease the total annual costs
132 This figure is based on our estimate of the
number of Form F–1s that were filed with IFRS
financial statements during the 2006 calendar year.
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attributed to the preparation of Form F–
1 by outside firms to $22,663,200.
3. Form F–4
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We estimate that currently foreign
private issuers file 68 registration
statements on Form F–4 each year. We
assume that 25% of the burden required
to produce a Form F–4 is borne
internally by foreign private issuers,
resulting in 24,503 annual burden hours
incurred by foreign private issuers out
of a total of 98,012 annual burden hours.
Thus, we estimate that 1,441 total
burden hours per response are currently
required to prepare a registration
statement on Form F–4. We further
assume that 75% of the burden to
produce a Form F–4 is carried by
outside professionals retained by foreign
private issuers at an average cost of $400
per hour, for a total cost of $29,403,600.
We estimate that currently
approximately 5 companies that file
registration statements on Form F–4 will
be impacted by the proposal.133 We
expect that, if adopted, the proposed
amendment would cause those foreign
private issuers to have fewer burden
hours. We estimate that each of the
affected companies would have a
decrease of 5% (72 hours) in the number
of burden hours required to prepare
their registration statements on Form F–
4, for a total decrease of 360 hours. We
expect that 25% of these decreased
burden hours (90 hours) will be saved
by foreign private issuers. We further
expect that 75% of the decreased
burden hours (270 hours) would be
saved by outside firms at an average cost
of $400 per hour, for a total of $108,000
in decreased costs to the respondents of
the information collection.
Thus, we estimate that the proposed
amendment to Form 20–F would
decrease the annual burden incurred by
foreign private issuers in the
preparation of Form F–4 from 24,503
hours to 24,413 hours. We further
estimate that the proposed amendment
would decrease the total annual burden
associated with Form F–4 preparation to
97,652 burden hours, which would
decrease the average number of burden
hours per response to 1,436. We further
estimate that the proposed amendment
would decrease the total annual costs
attributed to the preparation of Form F–
4 by outside firms to $29,295,600.
4. Form S–4
When a domestic issuer files a
registration statement on Form S–4 for
the acquisition of a foreign private
133 This figure is based on our estimate of the
number of Form F–4s that were filed with IFRS
financial statements during the 2006 calendar year.
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issuer, the domestic issuer must include
the financial statements of the acquired
company in the Form S–4. If those
financial statements are prepared using
a basis of accounting other than U.S.
GAAP, the domestic issuer must
provide a reconciliation to U.S. GAAP,
unless a reconciliation is unavailable or
not obtainable without unreasonable
cost or expense.
We estimate that issuers file 619
registration statements on Form S–4
each year. We estimate that 1,355 total
burden hours per response are currently
required to prepare a registration
statement on Form S–4. We assume that
75% of the burden required to produce
a Form S–4 is borne by the domestic
issuer, resulting in 629,059 annual
burden hours incurred by issuers out of
a total of 838,745 annual burden hours.
We further assume that 25% of the
burden to produce a Form S–4 is carried
by outside professionals retained by the
issuer at an average cost of $400 per
hour for a total cost of $83,874,500.
We estimate that currently
approximately 6 registration statements
filed on Form S–4 will contain the
financial statements of a foreign target
that will be impacted by the
proposal.134 We expect that, if adopted,
the proposed amendment would cause
the domestic issuers that file the Form
S–4 registration statements to have
fewer burden hours. We estimate that
for each of these domestic registrants,
there would be a decrease of 2% (27
hours) in the number of burden hours
required to prepare their registration
statements on Form S–4, for a total
decrease of 162 hours.135 We expect that
75% of these decreased burden hours
(122 hours) would be saved by issuers.
We further expect that 75% of the
decreased burden hours (40 hours)
would be saved by outside professionals
at an average cost of $400 per hour for
a total of $16,000 in decreased costs to
the respondents of the information
collection.
Thus, we estimate that the proposed
amendment would decrease the annual
burden incurred by issuers in the
preparation of Form S–4 from 629,059
hours to 628,937 hours. We further
estimate that the proposed amendment
134 This figure is based on our estimate of the
number of Form S–4s that were filed during the
2006 calendar year that contained IFRS financial
statements.
135 We estimate the burden decrease for purposes
of this Paperwork Reduction Analysis would be less
for Form S–4 than for other forms described in this
section because, in the case of Form S–4, the
registrant is obtaining the U.S. GAAP reconciliation
from the foreign private issuer. Further, the
registrant is not required to provide the
reconciliation if it is unavailable or unobtainable
without unreasonable cost or expense.
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would decrease the total annual burden
associated with Form S–4 preparation to
838,584 burden hours, which would
decrease the average number of burden
hours per response to 1,354.7. We
further estimate that the proposed
amendment would decrease the total
annual costs attributed to the
preparation of Form S–4 by outside
firms to $83,858,500.
5. Rule 701
Rule 701 provides an exemption from
registration for offers and sales of
securities pursuant to certain
compensatory benefit plans and
contracts relating to compensation.
Issuers conducting employee benefit
plan offerings in excess of $5 million in
reliance on Rule 701 are required to
provide employees covered by the plan
with certain disclosures, including
financial statement disclosures. This
disclosure is a collection of information.
We estimate that currently 300 issuers
provide information under Rule 701,
and that the estimated number of
burden hours per respondent is two.
Therefore, we estimate an aggregate of
600 burden hours per year. We believe
that the reduction in burden hours
caused by the proposed rules will be
insignificant. Therefore, we do not
believe the proposed rules will alter
current burden estimates associated
with Rule 701.
C. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B),
we request comment in order to:
• Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
functions of the Commission, including
whether the information will have
practical utility;
• Evaluate the accuracy of our
estimates of the burden of the proposed
collections of information;
• Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected;
• Evaluate whether there are ways to
minimize the burden of the collections
of information on those who respond,
including through the use of automated
collection techniques or other forms of
information technology; and
• Evaluate whether the proposed
amendments will have any effects on
any other collections of information not
previously identified in this section.
Any member of the public may direct
to us any comments concerning the
accuracy of these burden estimates and
any suggestions for reducing the
burdens. Persons who desire to submit
comments on the collection of
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information requirements should direct
their comments to the OMB, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and send a copy
of the comments to Nancy M. Morris,
Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090, with
reference to File No. S7–13–07.
Requests for materials submitted to the
OMB by us with regard to these
collections of information should be in
writing, refer to File No. S7–13–07 and
be submitted to the Securities and
Exchange Commission, Records
Management, Office of Filings and
Information Services, 100 F Street, NE.,
Washington DC 20549. Because the
OMB is required to make a decision
concerning the collections of
information between 30 and 60 days
after publication, your comments are
best assured of having their full effect if
the OMB receives them within 30 days
of publication.
VI. Cost-Benefit Analysis
We are proposing amendments to
existing rules and forms to accept
financial statements from foreign private
issuers prepared using IFRS as
published by the IASB without
reconciliation to U.S. GAAP. Currently,
financial statements that foreign private
issuers file with the Commission must
be prepared either in accordance with
U.S. GAAP, or in accordance with
another GAAP with a reconciliation to
U.S. GAAP. The amendments, if
adopted, would therefore provide
foreign private issuers with a third
method of preparing financial
statements filed with the Commission.
We are not proposing to amend the
current reconciliation requirements for
foreign private issuers that prepare their
financial statements using a basis of
accounting other than IFRS as published
by the IASB.
The amendments would apply to a
registrant’s financial statements
contained in annual reports and
registration statements on Form 20–F as
well as to financial statements included
in the Securities Act registration
statements filed by foreign private
issuers or, when applicable, included in
a registration statement or reported
pursuant to Rules 3–05, 3–09 or 3–16 of
Regulation S–X. We also are proposing
a conforming amendment to Rule 701,
which provides an exemption from
Securities Act registration for securities
offered in certain employee benefit
plans, to clarify that a foreign private
issuer conducting an offering in excess
of $5 million in reliance on that rule
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may furnish investors with financial
statements prepared using IFRS as
published by the IASB without
reconciliation.
Currently, there are between 1,000
and 1,200 foreign private issuers
registered with the Commission. The
proposed amendments would be
available to any of those foreign private
issuers that comply with IFRS as
published by the IASB, whether
voluntarily or pursuant to a
requirement. Some foreign companies
that are registered under the Exchange
Act already include in their filings with
the Commission financial statements
that comply with IFRS as published by
the IASB. We estimate that there are
approximately 110 foreign private
issuers that represent in the footnotes to
their financial statements that the
financial statements comply with IFRS
as published by the IASB. This
representation may be in addition to a
representation that the financial
statements comply with a jurisdictional
variation of IFRS. If a registrant’s
auditors are able to opine that those
financial statements are in compliance
with IFRS as published by the IASB,
then those registrants would be in a
position to immediately file their
existing financial statements under the
proposed approach. Another
approximately 70 foreign private issuers
already include in their filings financial
statements that they state are prepared
in accordance with solely a
jurisdictional variation of IFRS. If these
companies are also able to state (and
their auditors are able to opine) that
their financial statements comply with
IFRS as published by the IASB, the
companies would be in a similar
position. Lastly, approximately 50
additional foreign private issuers that
are incorporated in jurisdictions that
have moved to IFRS include in their
filings with the Commission financial
statements prepared using U.S. GAAP.
Some of these issuers also may be in a
position to file financial statements
under the proposed approach.136
We recognize that other registered
foreign companies include financial
statements in accordance with a home
country GAAP. We believe that there
would be different incentives for these
companies to change their basis of
accounting to IFRS as published by the
IASB and thus be able to omit the U.S.
GAAP reconciliation under the
proposed approach. Some foreign
companies are required under home
country law or stock exchange rule to
use a home country GAAP and are not
136 The figures contained in this paragraph are per
staff estimates based on the jurisdiction of the filers.
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permitted for home country purposes to
use IFRS. At present, these companies
generally include in their SEC filings
financial statements prepared under
home country GAAP with a U.S. GAAP
reconciliation. These companies would
be able to take advantage of the
proposed amendments by preparing for
the purpose of Commission filings (but
not for home country purposes)
financial statements in accordance with
IFRS as published by the IASB. While
these companies would incur the costs
of preparing a separate set of financial
statements, companies may elect to do
so in light of benefits they may derive
from preparing a set of IFRS financial
statements as well as the costs of
preparing the U.S. GAAP reconciliation.
Lastly, in coming years, as more
countries adopt IFRS as their basis of
accounting or permit companies to use
IFRS as their basis of accounting, we
believe that the number of foreign
private issuers that would be eligible to
rely on the proposed amendments will
increase, although it is difficult to
quantify that increase at this point in
time.
In summary, while all foreign private
issuers would receive a potential benefit
from the third option for preparing
financial statements described in this
proposal, this option will not be
immediately equally attractive to all
such issuers. We recognize that the
proposed acceptance of financial
statements prepared using IFRS as
published by the IASB without
reconciliation does not confer an equal
benefit on all foreign private issuers, as
there are some issuers that will continue
to find it more attractive to reconcile
their financial statements to U.S. GAAP.
For some foreign private issuers the
proposed amendments are immediately
attractive. For other foreign private
issuers the option may become
attractive at a later date when their
situational constraints or opportunities
change. For still other such issuers, the
option may not become attractive or
applicable at any time in the foreseeable
future. The cost of preparing (or not
having to additionally prepare) the
relevant IFRS financial statements is
one factor that may influence whether a
foreign private issuer will use the option
proposed, be it immediately or at some
time in the future. The proposed option
may be most attractive for issuers whose
home jurisdiction or other capital
markets in which the issuer lists
securities allow financial statements
prepared in accordance with IFRS.
Foreign private issuers also may be
concerned about public perception
costs, as they may be perceived as being
the outlier if companies with which
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they compete for capital commonly
report using another basis of accounting.
Such an effect is likely to be smaller if
a critical mass of issuers with whom the
issuer competes for capital (such as
those in its industry sector) also report
in IFRS. In such situations, by reporting
in IFRS, the foreign private issuer has
made it more efficient for investors to
analyze its financial results in
comparison with the results of others
with whom it competes for capital.
A. Expected Benefits
Our proposed acceptance of financial
statements prepared using IFRS as
published by the IASB is expected to
help foster the preparation of financial
statements in accordance with IFRS as
a way of moving to a single set of
globally accepted accounting standards,
which we believe will have positive
effects on investors and also issuers.
Financial statements prepared using a
common set of accounting standards
help investors better understand
investment opportunities as compared
to financial statements prepared under
differing sets of national accounting
standards. Without a common standard
and without a required reconciliation,
global investors must incur the time and
effort to understand financial statements
reported using different bases of
accounting so that they can compare
opportunities.
The proposals are expected to
increase the likelihood of realizing the
net benefits of a single set of globally
accepted accounting standards. This
benefit is due to potential network
effects of the proposed amendments:
The more issuers that use IFRS as
published by the IASB and file without
a U.S. GAAP reconciliation, the more
benefits there may be for other issuers
to do so since the utility for investors of
a set of accounting standards increases
as the number of issuers using it
increases.
The resulting reduction of the
multiplicity of accounting standards
that presently exist is expected to
benefit investors by allowing them to
spend less time and allocate fewer
resources to learning, or keeping up
with developments in, myriad GAAPs of
varying quality in favor of a single, highquality set of globally accepted
standards. In addition to these benefits
of moving away from a multiplicity of
accounting standards towards a single
set of standards, investors will further
benefit from better information if the
single set of standards that issuers use
results in higher disclosure quality.
We believe that issuers would be
affected by the proposal in a number of
ways, including needing fewer
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resources to prepare U.S. filings.137 To
the extent that an issuer relying on the
proposed amendments can reallocate its
cost savings from not preparing a
reconciliation to U.S. GAAP or possibly
a second set of financial statements in
U.S. GAAP to higher earning
opportunities, and not suffer a relatively
greater increase in the cost of its capital
as a result, then the issuer also will
realize a better rate of return on its
capital which will benefit investors.
Issuers also may enjoy greater timing
flexibility in accessing the U.S. market
if they can prepare IFRS financial
statements more quickly without
reconciliation, particularly with regard
to the use of automatic shelf registration
statements.
The proposed amendments are
expected to benefit investors and issuers
alike to the extent that they facilitate
capital formation by foreign companies
in the United States capital markets.
Our proposed amendments to accept
IFRS financial statements without
reconciliation would reduce regulatory
burdens for foreign private issuers that
rely on them, thereby lowering the
information disclosure preparation cost
of raising capital in the United States for
those issuers. We believe that foreign
private issuers may therefore be more
likely to enter the U.S. capital markets.
If they do, investors would, in turn,
benefit from having more investment
opportunities in the United States and
generally would incur lower transaction
costs when trading a foreign company’s
securities in the United States relative to
a foreign market. To the extent our
acceptance of IFRS financial statements
without reconciliation encourages
foreign private issuers to enter or remain
in the U.S. capital market, investors also
will benefit from the protections of the
U.S. regulatory and disclosure system
relative to the protections they may
receive if purchasing those securities
overseas. Investors also are expected to
benefit from the potential reduction in
the cost of capital to issuers, as
discussed above.
137 For purposes of the Paperwork Reduction
Analysis, as described above, we have estimated
that the incremental decrease in the paperwork
burden for all foreign private issuers that use IFRS
and issuers that acquire foreign private issuers that
use IFRS would be approximately 3,861 hours of
company time and approximately $4,600,720 for
the services of outside professionals. For purposes
of these calculations, we estimated the average
number of hours each entity spends completing the
forms and the average hourly rate for outside
professionals, including the time and the cost of inhouse preparers, reviews by executive officers, inhouse counsel, outside counsel, independent
auditors and members of the audit committee. The
impact on an individual issuer may vary, based on
its specific circumstances.
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B. Expected Costs
This proposal has no cost upon either
a foreign private issuer or its investors
until the issuer uses the proposed IFRS
option. In so doing, the minimum
required financial information the
investors in the U.S. capital markets
receive from any such issuer would
differ from what it was previously. The
extent to which this yields a different
required information set will depend
upon how the foreign issuer previously
reported its financial statements. For
instance, if the foreign issuer currently
files its financial statements using U.S.
GAAP and transitions to reporting in
IFRS, then this may or may not
represent a loss of required information
in absolute terms. Whether there is an
absolute loss of information would
depend upon whether IFRS financial
statements yielded more or less
information about a particular issuer
than do U.S. GAAP financial statements.
On the other hand, if the foreign private
issuer currently prepares its statements
in IFRS and reconciles to U.S. GAAP,
then a loss of information would result
as U.S. GAAP information is omitted.
The proposed amendments may lead
to some costs to both investors and to
issuers. If the investor community
prefers the information communicated
by a U.S. GAAP reconciliation, a foreign
private issuer that uses IFRS as
published by the IASB without a
reconciliation may face a reduced
following in the marketplace. Investors
may prefer a U.S. GAAP reconciliation,
if investors are not sufficiently familiar
with IFRS accounting standards. In
addition, unfamiliarity with IFRS as
published by the IASB may have an
adverse effect on investors’ confidence
in what they would be investing in and
thus lead them to insist on a risk
premium for an investment in the
company.
The proposed amendments also
would entail some costs to investors. If
an issuer provides IFRS financial
statements without reconciliation as
permitted under the proposed
amendments, investors would not have
the benefit of the reconciling
information that previously would have
been available to them as they evaluate
the financial performance of that issuer.
The usefulness of this information may
depend on the nature of the investor
and other considerations, as discussed
below. Also, to the extent that an
investor is not accustomed to working
with IFRS financial statements, that
investor also may be required to
dedicate more time and resources to
gaining familiarity with IFRS and
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financial statements prepared using
them.
Based in part on comments we
received from participants at the
Commission’s IFRS roundtable held in
March 2007, however, we believe that
some investors are familiar with IFRS as
a basis of accounting and therefore may
make limited use of the reconciliation
from IFRS to U.S. GAAP. However,
because various investors may be
differently situated in the market and
have varying levels of familiarity with
IFRS—for example, institutional
investors may be more familiar with
IFRS than retail investors—they may not
all bear the cost from the proposed
amendments equally. We are aware that
investor familiarity with IFRS and the
use that a particular investor may make
of the reconciliation will depend on
many factors. We believe that these
factors may include, among other
things, the size and nature of the
investor, the size of the investment, the
size of the issuer, the industry to which
the issuer in question belongs. We also
believe that the costs to investors of
working without the reconciliation
would be reduced over time as the use
of IFRS as published by the IASB
becomes even more widespread and
investors gain increasing familiarity in
working with IFRS financial statements.
Given these considerations, in this
proposal we are soliciting comment on
how familiar investors are with IFRS,
the use they make of the U.S. GAAP
reconciliation of IFRS financial
statements, and how their ability to
assess and compare investment
opportunities would be impacted by the
proposed amendment to permit the
filing of financial statements prepared
using IFRS as published by the IASB
without reconciliation to U.S. GAAP.
Questions
47. Do you agree with our assessment
of the costs and benefits as discussed in
this section? Are there costs or benefits
that we have not considered? Are you
aware of data and/or estimation
techniques for attempting to quantify
these costs and/or benefits? If so, what
are they and how might the information
be obtained?
48. Which foreign private issuers
would have the incentive to avail
themselves of the proposed
amendments, if adopted? Are there any
reasons for which an issuer that is
eligible to file IFRS financial statements
without reconciliation under the
proposed amendments would elect to
file a reconciliation? If so, what are
they?
49. Are there particular industry
sectors for which a critical mass of the
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issuers who raise capital globally
already report in IFRS? If so, which
industries are they and why?
VII. Regulatory Flexibility Act
Certification
The Commission hereby certifies
pursuant to 5 U.S.C. 605(b), that the
amendments to Form 20–F under the
Exchange Act, Forms F–4 and S–4 and
Rule 701 under the Securities Act and
Regulation S–X contained in this
release, if adopted, would not have a
significant economic impact on a
substantial number of small entities.
The proposal would amend Form 20–F,
Form F–4, Form S–4, Rule 701 and
Regulation S–X to allow foreign private
issuers that use as their basis of
accounting IFRS as published by the
IASB to file their financial statements
without reconciliation to U.S. GAAP as
described under Items 17 and 18 of
Form 20–F. Based on an analysis of the
language and legislative history of the
Act, Congress does not appear to have
intended the Regulatory Flexibility Act
to apply to foreign issuers. For this
reason, the proposed amendment
should not have a significant economic
impact on a substantial number of small
entities.
We solicit written comments
regarding this certification. We request
that commenters describe the nature of
any impact on small entities and
provide empirical data to support the
extent of the impact.
VIII. Consideration of Impact on the
Economy, Burden on Competition and
Promotion of Efficiency, Competition
and Capital Formation Analysis
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996 (‘‘SBREFA’’),138 we solicit data to
determine whether the proposals
constitute a ‘‘major’’ rule. Under
SBREFA, a rule is considered ‘‘major’’
where, if adopted, it results or is likely
to result in:
• An annual effect on the economy of
$100 million or more (either in the form
of an increase or a decrease);
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment or innovation.
We request comment on the potential
impact of the proposals on the economy
on an annual basis. Commenters are
requested to provide empirical data and
other factual support for their views if
possible.
138 Pub. L. No. 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
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Section 2(b) of the Securities Act 139
and Section 3(f) of the Exchange Act 140
require us, when engaging in
rulemaking that requires us to consider
or determine whether an action is
necessary or appropriate in the public
interest, to consider whether the action
will promote efficiency, competition,
and capital formation. When adopting
rules under the Exchange Act, Section
23(a)(2) of the Exchange Act 141 requires
us to consider the impact that any new
rule would have on competition. In
addition, Section 23(a)(2) prohibits us
from adopting any rule that would
impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The purpose of the proposed
amendments to Form 20–F under the
Exchange Act, Forms F–4 and S–4 and
Rule 701 under the Securities Act, and
Regulation S–X is to allow foreign
private issuers that use as their basis of
accounting IFRS as published by the
IASB to include those financial
statements in their annual reports and
registration statements filed with the
Commission without reconciliation to
U.S. GAAP. This proposal is designed to
increase efficiency, competition and
capital formation by helping to move
towards a single set of globally accepted
accounting standards, as well as by
alleviating the burden and cost that
eligible companies would face if
required to prepare a U.S. GAAP
reconciliation for inclusion in annual
reports and registration statements filed
with us. Due to the cost to issuers of
preparing the reconciliation to U.S.
GAAP from IFRS, we believe that the
proposed amendment would be likely to
promote efficiency by eliminating
financial disclosure that is costly to
produce. We believe that investors
would have adequate information on
which to base their investment
decisions and that capital may be
allocated on a more efficient basis.
The proposed amendments are
expected to facilitate capital formation
by foreign companies in the U.S. capital
markets by reducing regulatory
compliance burdens for foreign private
issuers that rely on the proposed
amendments. Reduced compliance
burdens are expected to lower the cost
of preparing disclosure for purposes of
raising capital in the United States for
those issuers.
The proposed amendments also may
have other impacts on efficiency and
capital formation, which may not be felt
equally by all market participants. For
139 15
U.S.C. 77b(b).
U.S.C. 78c(f).
141 15 U.S.C. 78w(a)(2).
140 15
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example, the amendments may have a
more favorable competitive impact on
foreign private issuers from jurisdictions
in which the use of IFRS is already
required or permitted. Issuers from such
jurisdictions may be able to benefit from
the amendments more quickly than
issuers from jurisdictions that do not
permit the use of IFRS. Also, some
foreign private issuers may be
concerned about the public perception
costs of not including a U.S. GAAP
reconciliation, particularly if they
compete for capital with other foreign
companies that provide a reconciliation
or that prepare financial statements that
comply with U.S. GAAP.
The proposed amendments also may
have effects on efficiency and capital
formation to the extent that investors
need to increase their familiarity with
IFRS in order to compare investment
opportunities without reference to a
U.S. GAAP reconciliation. If investors
prefer the information provided in a
U.S. GAAP reconciliation, a foreign
private issuer that uses IFRS as
published by the IASB without
reconciliation may face adverse
competitive effects in the capital
markets. For example, investor
unfamiliarity with IFRS may adversely
affect investor confidence in issuers that
prepare IFRS financial statements
without reconciliation to U.S. GAAP.
This may lead investors to insist on a
risk premium in those companies,
which would affect their
competitiveness in the capital markets.
Also, if investors must incur costs in
order to understand IFRS financial
statements without a U.S. GAAP
reconciliation, there may be an
incentive for intermediary parties to
provide U.S. GAAP reconciliation
services.
We solicit comment on whether the
proposed rules would impose a burden
on competition or whether they would
promote efficiency, competition and
capital formation. For example, would
the proposals have an adverse effect on
competition that is neither necessary
nor appropriate in furtherance of the
purposes of the Exchange Act? Would
the proposals create an adverse
competitive effect on U.S. issuers or on
foreign issuers that are not in a position
to rely immediately on the
accommodation? Would the proposed
amendments, if adopted, promote
efficiency, competition and capital
formation? Commenters are requested to
provide empirical data and other factual
support for their views if possible.
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IX. Statutory Basis and Text of
Proposed Amendments
We propose the amendment to
Exchange Act Form 20–F pursuant to
Sections 6, 7, 10, and 19 of the
Securities Act of 1933 as amended, and
Sections 3, 12, 13, 15, 23 and 36 of the
Securities Exchange Act of 1934.
Text of Proposed Amendments
List of Subjects in 17 CFR Parts 210,
230, 239 and 249
Accounting, Reporting and
recordkeeping requirements, Securities.
In accordance with the foregoing, the
Commission proposes to amend Title
17, Chapter II of the Code of Federal
Regulations as follows:
PART 210—FORM AND CONTENT OF
AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF
1933, SECURITIES EXCHANGE ACT
OF 1934, PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, AND
ENERGY POLICY AND
CONSERVATION ACT OF 1975
1. The authority citation for part 210
continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
77z–2, 77z–3, 77aa(25), 77aa(26), 78c, 78j–1,
78l, 78m, 78n, 78o(d), 78q, 78u–5, 78w(a),
78ll, 78mm, 80a–8, 80a–20, 80a–29, 80a–30,
80a–31, 80a–37(a), 80b–3, 80b–11, 7202 and
7262, unless otherwise noted.
2. Section 210.3–10 is amended by:
a. Revising the introductory text of
paragraph (i), and
b. Revising paragraph (i)(12).
The revisions read as follows.
§ 210.3–10 Financial statements of
guarantors and issuers of guaranteed
securities registered or being registered.
*
*
*
*
*
(i) Instructions for preparation of
condensed consolidating financial
information required by paragraphs (c),
(d), (e) and (f) of this section.
*
*
*
*
*
(12) Where the parent company’s
consolidated financial statements are
prepared on a comprehensive basis
other than U.S. Generally Accepted
Accounting Principles or the English
language version of International
Financial Reporting Standards as
published by the International
Accounting Standards Board, reconcile
the information in each column to U.S.
Generally Accepted Accounting
Principles to the extent necessary to
allow investors to evaluate the
sufficiency of the guarantees. The
reconciliation may be limited to the
information specified by Item 17 of
Form 20–F (§ 249.220f of this chapter).
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The reconciling information need not
duplicate information included
elsewhere in the reconciliation of the
consolidated financial statements.
3. Amend § 210.4–01 by revising
paragraph (a)(2) to read as follows:
§ 210.4–01
Form, order and terminology.
(a) * * *
(2) In all filings of foreign private
issuers (see § 230.405 of this chapter),
except as stated otherwise in the
applicable form, the financial
statements may be prepared according
to a comprehensive set of accounting
principles, other than those generally
accepted in the United States or the
English language version of
International Financial Reporting
Standards as published by the
International Accounting Standards
Board, if a reconciliation to United
States generally accepted accounting
principles and the provisions of
Regulation S–X of the type specified in
Item 18 of Form 20–F (§ 249.220f of this
chapter) is also filed as part of the
financial statements. Alternatively, the
financial statements may be prepared
according to United States generally
accepted accounting principles or the
English language version of
International Financial Reporting
Standards as published by the
International Accounting Standards
Board.
*
*
*
*
*
PART 230—GENERAL RULES AND
REGULATIONS, SECURITIES ACT OF
1933
4. The authority citation for Part 230
continues to read as follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f,
77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 78c, 78d,
78j, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d),
78mm, 80a–8, 80a–24, 80a–28, 80a–29, 80a–
30, and 80a–37, unless otherwise noted.
5. Amend § 230.701 by revising the
introductory text of paragraph (e) and
revising paragraph (e)(4) to read as
follows:
§ 230.701 Exemption for offers and sales
of securities pursuant to certain
compensatory benefit plans and contracts
relating to compensation.
*
*
*
*
*
(e) Disclosure that must be provided.
The issuer must deliver to investors a
copy of the compensatory benefit plan
or the contract, as applicable. In
addition, if the aggregate sales price or
amount of securities sold during any
consecutive 12-month period exceeds
$5 million, the issuer must deliver the
following disclosure to investors a
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reasonable period of time before the
date of sale:
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*
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*
(4) Financial statements required to be
furnished by Part F/S of Form 1–A
(Regulation A Offering Statement)
(§ 239.90 of this chapter) under
Regulation A (§§ 230.251—230.263).
Foreign private issuers as defined in
Rule 405 must provide a reconciliation
to generally accepted accounting
principles in the United States (U.S.
GAAP) if their financial statements are
not prepared in accordance with U.S.
GAAP or the English language version
of IFRS as published by the IASB (Item
17 of Form 20–F (§ 249.220f of this
chapter)). The financial statements
required by this section must be as of a
date no more than 180 days before the
sale of securities in reliance on this
exemption.
*
*
*
*
*
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
6. The authority citation for part 239
continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n,
78o(d), 78u–5, 78w, 78ll(d), 78mm, 80a–2(a),
80a–3, 80a–8, 80a–9, 80a–10, 80a–13, 80a–
24, 80a–26, 80a–29, 80a–30, and 80a–37,
unless otherwise noted.
*
*
*
*
*
7. Amend Form S–4 (referenced in
§ 239.25) by revising the instruction to
Item 17 to read as follows:
Note: The text of Form S–4 does not and
this amendment will not appear in the Code
of Federal Regulations.
Form S–4
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*
*
*
*
Item 17. Information with Respect to
Companies other than S–3 Companies.
*
*
*
*
*
Instructions:
1. * * *
2. If the financial statements required
by this paragraph are prepared on the
basis of a comprehensive body of
accounting principles other than U.S.
GAAP or the English language version of
IFRS as published by the IASB, provide
a reconciliation to U.S. GAAP in
accordance with Item 17 of Form 20–F
(§ 249.220f of this chapter) unless a
reconciliation is unavailable or not
obtainable without unreasonable cost or
expense. At a minimum, provide a
narrative description of all material
variations in accounting principles,
practices and methods used in
preparing the non-U.S. GAAP financial
statements from those accepted in the
U.S. when the financial statements are
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prepared on a basis other than U.S.
GAAP.
*
*
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*
*
8. Amend Form F–4 (referenced in
§ 239.34) by:
a. Revising Item 10(c)(2);
b. Revising Item 10(c)(3);
c. Revising Item 12(b)(2)(iii) and (iv);
d. Revising the Instruction to Item
17(b)(5) and (b)(6).
The revisions read as follows.
Note: The text of Form F–4 does not and
this amendment will not appear in the Code
of Federal Regulations.
Form F–4
*
*
*
*
*
Item 10. Information With Respect to
F–3 Companies.
*
*
*
*
*
(c) * * *
(1) * * *
(2) Restated financial statements
prepared in accordance with or, if
prepared using a basis of accounting
other than the English language version
of IFRS as published by the IASB,
reconciled to U.S. GAAP and Regulation
S–X if there has been a change in
accounting principles or a correction of
an error where such change or
correction requires a material retroactive
restatement of financial statements;
(3) Restated financial statements
prepared in accordance with or, if
prepared using a basis of accounting
other than the English language version
of IFRS as published by the IASB,
reconciled to U.S. GAAP and Regulation
S–X where one or more business
combinations accounted for by the
pooling of interest method of accounting
have been consummated subsequent to
the most recent fiscal year and the
acquired businesses, considered in the
aggregate, are significant pursuant to
Rule 11–01(b) of Regulation S–X
(§ 210.11–01(b) of this chapter); or
*
*
*
*
*
Item 12. Information With Respect to
F–3 Registrants.
*
*
*
*
*
(b) * * *
(2) * * *
(iii) Restated financial statements
prepared in accordance with or, if
prepared using a basis of accounting
other than the English language version
of IFRS as published by the IASB,
reconciled to U.S. GAAP and Regulation
S–X if there has been a change in
accounting principles or a correction of
an error where such change or
correction requires a material retroactive
restatement of financial statements;
(iv) Restated financial statements
prepared in accordance with or, if
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prepared using a basis of accounting
other than the English language version
of IFRS as published by the IASB,
reconciled to U.S. GAAP and Regulation
S–X where one or more business
combinations accounted for by the
pooling of interest method of accounting
have been consummated subsequent to
the most recent fiscal year and the
acquired businesses, considered in the
aggregate, are significant pursuant to
Rule 11–01(b) of Regulation S–X; and
*
*
*
*
*
Item 17. Information With Respect to
Foreign Companies Other Than F–3
Companies.
*
*
*
*
*
Instructions to paragraph (b)(5) and
(b)(6): If the financial statements
required by paragraphs (b)(5) and (b)(6)
are prepared on the basis of a
comprehensive body of accounting
principles other than U.S. GAAP or the
English language version of IFRS as
published by the IASB, provide a
reconciliation to U.S. GAAP in
accordance with Item 17 of Form 20–F
(§ 249.220f of this chapter) unless a
reconciliation is unavailable or not
obtainable without unreasonable cost or
expense. At a minimum, provide a
narrative description of all material
variations in accounting principles,
practices and methods used in
preparing the non-U.S. GAAP financial
statements from those accepted in the
U.S. when the financial statements are
prepared on a basis other than U.S.
GAAP.
*
*
*
*
*
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
9. The authority citation for part 249
continues to read, in part, as follows:
Authority: 15 U.S.C. 78a et seq., 7202,
7233, 7241, 7262, 7264, and 7265; and 18
U.S.C. 1350, unless otherwise noted.
*
*
*
*
*
10. Amend Form 20–F (referenced in
§ 249.220f) as follows:
a. Add a check box to the cover page
indicating the basis of accounting used
to prepare the financial statements;
b. Revise the check box on the cover
page indicating whether Item 17 or Item
18 was used;
c. Revise the cover page to require
contact information for the issuer;
d. Revise General Instruction
G(b)(1)(A) and G(b)(2)(A);
e. Revise General Instruction G(d);
f. Revise General Instruction G(e);
g. Revise General Instruction
G(f)(2)(B)(ii);
h. Revise General Instruction
G(f)(2)(B)(iii);
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i. Revise General Instruction G(h)(2);
j. Revise Instruction 2.b to General
Instruction G(h);
k. Revise Item 3.A, Instruction 2;
l. Add an Instruction to Item 5;
m. In Item 8.A.5, add a sentence to the
end of Instruction 3;
n. Add an Instruction to Item 11;
o. Revise Item 17(c);
p. Remove Item 17(c)(2)(iv)(B);
q. Remove Item 17(c)(2)(iv)(C);
r. Add text at the end of Item
17(c)(2)(v);
s. Add text at the end of Item
17(c)(2)(vi);
t. Remove Item 17(c)(2)(viii);
u. Remove Item 17, Instruction 6; and
v. Revise Item 18(b).
The additions and revisions read as
follows:
Note: The text of Form 20–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form 20–F
*
*
*
*
*
(Exact name of Registrant as specified in its
charter)
(Translation of Registrant’s name into
English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
(Name, Telephone and Address of Company
Contact Person)
Large accelerated
filerllllllllAccelerated
filerllllllllNon-accelerated
filerllllllll
Indicate by check which basis of
accounting the registrant has used to
prepare the financial statements
included in this filing:
U.S. GAAPllllllInternational
Financial Reporting Standards as
published by the International
Accounting Standards Board (in
English)llllllOtherllllll
If ‘‘Other’’ has been checked in
response to the previous question,
indicate by check mark which financial
statement item the registrant has elected
to follow.
Item 17lll
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*
Item 18lll
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General Instructions
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G. First-Time Application of
International Financial Reporting
Standards.
*
*
*
*
*
(b) * * *
(1) * * *
(A) the issuer’s most recent audited
financial statements required by Item
8.A.2 are for the 2012 financial year or
an earlier financial year;
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*
*
*
*
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(2) * * *
(A) the annual report relates to the
2012 financial year or an earlier
financial year;
*
*
*
*
*
(d) Information on the Company. The
reference in Item 4.B to the ‘‘body of
accounting principles used in preparing
the financial statements,’’ means IFRS
and not the basis of accounting that was
previously used (‘‘Previous GAAP’’) or
accounting principles used only to
prepare a U.S. GAAP reconciliation.
(e) Operating and Financial Review
and Prospects. The issuer shall present
the information provided pursuant to
Item 5. The discussion should focus on
the financial statements for the two
most recent financial years prepared in
accordance with IFRS. No part of the
discussion should relate to financial
statements prepared in accordance with
Previous GAAP.
(f) Financial Information.
*
*
*
*
*
(2)(B)(i) * * *
(ii) Two financial years of audited
financial statements and interim
financial statements (which may be
unaudited) for the current and
comparable prior year period, prepared
in accordance with IFRS;
(iii) Three financial years of audited
financial statements prepared in
accordance with Previous GAAP and
reconciled to U.S. GAAP as required by
Item 17(c) or 18, as applicable; interim
statements (which may be unaudited)
for the current and comparable prior
year period prepared in accordance with
IFRS; and condensed financial
information prepared in accordance
with U.S. GAAP for the most recent
financial year and the current and
comparable prior year interim period
(the form and content of this financial
information shall be in a level of detail
substantially similar to that required by
Article 10 of Regulation S–X.
*
*
*
*
*
(h) Financial Statements.
*
*
*
*
*
(2) U.S. GAAP Information. The U.S.
GAAP reconciliation referenced in Item
17(c) or 18 shall not be required for
periods presented in accordance with
the English language version of IFRS as
published by the IASB.
Instructions:
*
*
*
*
*
b. Present or incorporate by reference
operating and financial review and
prospects information pursuant to Item
5 that focuses on the financial
statements for the two most recent
financial years prior to the most recent
financial year that were prepared in
accordance with Previous GAAP. The
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discussion should not refer to a
reconciliation to U.S. GAAP. No part of
the discussion should relate to financial
statements prepared in accordance with
IFRS.
*
*
*
*
*
Item 3. Key Information
*
*
*
*
*
Instructions to Item 3.A:
*
*
*
*
*
2. You may present the selected
financial data on the basis of the
accounting principles used in your
primary financial statements. If you use
a basis of accounting other than the
English language version of IFRS as
published by the IASB (‘‘IFRS’’),
however, you also must include in this
summary any reconciliations of the data
to U.S. generally accepted accounting
principles and Regulation S–X,
pursuant to Item 17 or 18 of this Form.
For financial statements prepared using
a basis of accounting other than IFRS,
you only have to provide selected
financial data on a basis reconciled to
U.S. generally accepted accounting
principles for (i) those periods for which
you were required to reconcile the
primary annual financial statements in
a filing under the Securities Act or the
Exchange Act, and (ii) any interim
periods.
*
*
*
*
*
Item 5. Operating and Financial Review
and Prospects
*
*
*
*
*
Instructions to Item 5:
*
*
*
*
*
5. Issuers preparing their financial
statements in accordance with the
English language version of IFRS as
published by the IASB (‘‘IFRS’’) should,
in providing information in response to
paragraphs of this Item 5 that refer to
specific provisions of U.S. GAAP, refer
to appropriate provisions of IFRS that
contain the definitional principles
embodied in the referenced U.S. GAAP
items. In responding to this Item 5,
issuers need not repeat information
contained in financial statements
prepared in accordance with IFRS.
*
*
*
*
*
Item 8. Financial Information
*
*
*
*
*
Instructions to Item 8.A.5:
*
*
*
*
*
3. * * * * *
A registrant using the English
language version of IFRS as published
by the IASB as its basis of accounting
is not required to provide the
information described in paragraphs
E:\FR\FM\11JYP3.SGM
11JYP3
Federal Register / Vol. 72, No. 132 / Wednesday, July 11, 2007 / Proposed Rules
3(a) and (b) to this Instruction to Item
8.A.5.
*
*
*
*
*
Item 11. Quantitative and Qualitative
Disclosures About Market Risk
*
*
*
*
*
Instruction: Issuers preparing their
financial statements in accordance with
the English language version of IFRS as
published by the IASB should, in
providing information in response to
paragraphs of this Item that refer to
specific provisions of U.S. GAAP, follow
the appropriate provisions of IFRS that
contain the principles embodied in the
referenced U.S. GAAP items. In
responding to this Item, issuers need not
repeat information contained in
financial statements prepared in
accordance with the English language
version of IFRS as published by the
IASB.
*
*
*
*
*
Item 17. Financial Statements
*
*
*
*
(c): The financial statements and
schedules required by paragraph (a)
above may be prepared according to
U.S. generally accepted accounting
principles or the English language
version of IFRS as published by the
IASB. If the financial statements comply
with the English language version of
IFRS as published by the IASB, (i) it
must be clearly stated in the notes to the
financial statements and (ii) the
auditor’s report must include an
opinion on whether the financial
statements comply with the English
mstockstill on PROD1PC66 with PROPOSALS3
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language version of IFRS as published
by the IASB. If the notes and auditor’s
report of an issuer do not contain the
information in the preceding sentence,
then the U.S. GAAP reconciliation
information described in paragraphs
(c)(1) and (c)(2) must be provided.
Alternatively, such financial statements
and schedules may be prepared
according to a comprehensive body of
accounting principles other than those
generally accepted in the United States
or the English language version of IFRS
as published by the IASB if the
following are disclosed:
*
*
*
*
*
(c)(2)(v): * * * Issuers that prepare
financial statements using the English
language version of IFRS as published
by the IASB that are furnished pursuant
to § 210.3.05 may omit the disclosures
specified by paragraphs (c)(2)(i),
(c)(2)(ii), and (c)(2)(iii) of this Item
regardless of the size of the business
acquired or to be acquired.
(c)(2)(vi): * * * Issuers that prepare
financial statements using the English
language version of IFRS as published
by the IASB that are furnished pursuant
to § 210.3.09 may omit the disclosures
specified by paragraphs (c)(2)(i),
(c)(2)(ii), and (c)(2)(iii) of this Item
regardless of the size of the investee.
(c)(2)(vii):
*
*
*
*
*
Instructions to Item 17(C)(2):
*
*
*
*
*
37989
(b) If the financial statements are
prepared using a basis of accounting
other than the English language version
of IFRS as published by the IASB, all
other information required by U.S.
generally accepted accounting
principles and Regulation S–X unless
such requirements specifically do not
apply to the registrant as a foreign
issuer. However, information may be
omitted (i) for any period in which net
income has not been presented on a
basis reconciled to United States
generally accepted accounting
principles, or (ii) if the financial
statements are furnished pursuant to
§ 210.3.05 or less-than-majority owned
investee pursuant to § 210.3.09 of this
chapter.
Instructions to Item 18:
1. All of the instructions to Item 17
also apply to this Item, except
Instruction 3 to Item 17, which does not
apply.
2. An issuer that is required to
provide disclosure under FASB,
Statement of Accounting Standards No.
69, ‘‘Disclosures about Oil and Gas
Producing Activities,’’ shall do so
regardless of the basis of accounting on
which it prepares its financial
statements.
*
*
*
*
*
Item 18. Financial Statements
Dated: July 2, 2007.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E7–13163 Filed 7–10–07; 8:45 am]
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]]>Agencies
[Federal Register Volume 72, Number 132 (Wednesday, July 11, 2007)]
[Proposed Rules]
[Pages 37962-37989]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-13163]
[[Page 37961]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 210, 230, 239, and 249
Acceptance From Foreign Private Issuers of Financial Statements
Prepared in Accordance With International Financial Reporting Standards
Without Reconciliation to U.S. GAAP; Proposed Rule
Federal Register / Vol. 72, No. 132 / Wednesday, July 11, 2007 /
Proposed Rules
[[Page 37962]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 230, 239 and 249
[Release Nos. 33-8818; 34-55998; International Series Release No. 1302;
File No. S7-13-07]
RIN 3235-AJ90
Acceptance From Foreign Private Issuers of Financial Statements
Prepared in Accordance With International Financial Reporting Standards
Without Reconciliation to U.S. GAAP
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is proposing to accept from foreign private
issuers their financial statements prepared in accordance with
International Financial Reporting Standards (``IFRS'') as published by
the International Accounting Standards Board (``IASB'') without
reconciliation to generally accepted accounting principles (``GAAP'')
as used in the United States. To implement this, we propose amendments
to Form 20-F and conforming changes to Regulation S-X to accept
financial statements prepared in accordance with the English language
version of IFRS as published by the IASB without reconciliation to U.S.
GAAP when contained in the filings of foreign private issuers with the
Commission.
We also are proposing conforming amendments to other regulations,
forms and rules under the Securities Act and the Exchange Act. Current
requirements regarding the reconciliation to U.S. GAAP will not change
for a foreign private issuer that uses a basis of accounting other than
the English language version of IFRS as published by the IASB.
DATES: Comments should be received on or before September 24, 2007.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-13-07 on the subject line; or
Use the Federal Rulemaking ePortal (https://
www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-13-07. The file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (https://www.sec.gov/rules/proposed/shtml). Comments
also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Questions about this release should be
directed to Michael D. Coco, Special Counsel, Office of International
Corporate Finance, Division of Corporation Finance, at (202) 551-3450,
or to Katrina A. Kimpel, Professional Accounting Fellow, Office of the
Chief Accountant, at (202) 551-5300, U.S. Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: The Commission is publishing for comment
proposed amendments to Form 20-F \1\ under the Securities Exchange Act
of 1934 (the ``Exchange Act''),\2\ Rules 3-10 and 4-01 of Regulation S-
X,\3\ Forms F-4 and S-4 under the Securities Act,\4\ and Rule 701 under
the Securities Act.\5\
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\1\ 17 CFR 249.220f.
\2\ 15 U.S.C. 78a et seq. Form 20-F is the combined registration
statement and annual report form for foreign private issuers under
the Exchange Act. It also sets forth disclosure requirements for
registration statements filed by foreign private issuers under the
Securities Act of 1933 (the ``Securities Act''). 15 U.S.C. 77a et
seq.
The term ``foreign private issuer'' is defined in Exchange Act
Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer means
any foreign issuer other than a foreign government except an issuer
that meets the following conditions: (1) More than 50 percent of the
issuer's outstanding voting securities are directly or indirectly
held of record by residents of the United States; and (2) any of the
following: (i) The majority of the executive officers or directors
are United States citizens or residents; (ii) more than 50 percent
of the assets of the issuer are located in the United States; or
(iii) the business of the issuer is administered principally in the
United States.
\3\ 17 CFR 210.3-10 and 17 CFR 210.4-01. Regulation S-X sets
forth the form and content of requirements for financial statements.
\4\ 17 CFR 239.34 and 17 CFR 239.13.
\5\ 17 CFR 230.701.
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Table of Contents
I. Overview and History
A. History of the U.S. GAAP Reconciliation Requirement
B. The International Accounting Standards Board and IFRS
C. The Financial Accounting Standards Board
D. The Commission's Past Consideration of a Single Set of
Globally Accepted Accounting Standards and Facilitation of the Use
of IFRS by Registrants
E. FASB and IASB Efforts To Develop a Work Plan To Achieve High
Quality, Compatible Accounting Standards
II. Acceptance of IFRS Financial Statements From Foreign Private
Issuers Without a U.S. GAAP Reconciliation as a Step Towards a
Single Set of Globally Accepted Accounting Standards
A. A Robust Process for Convergence
B. Consistent and Faithful Application of IFRS
1. Staff Review of IFRS Financial Statements Filed in 2006
2. Market Participants' Views Regarding IFRS Application in
Practice
3. Processes and Infrastructure To Promote Consistent and
Faithful Application of IFRS
C. The IASB as Standard Setter
D. Summary
III. Discussion of the Proposed Amendments To Allow the Use of IFRS
Financial Statements Without Reconciliation To U.S. GAAP
A. Eligibility Requirements
B. U.S. GAAP Reconciliation
1. General
2. Interim Period Financial Statements
a. Financial Information in Securities Act Registration
Statements and Prospectuses and Initial Exchange Act Registration
Statements Used Less Than Nine Months After the Financial Year End
b. Financial Statements in Securities Act Registration
Statements and Prospectuses and Initial Exchange Act Registration
Statements Used More Than Nine Months After the Financial Year End
3. IFRS Treatment of Certain Areas
a. Accounting for Insurance Contracts and Extractive Activities
b. Accounting Treatment for Common Control Mergers,
Recapitalization Transactions, Reorganizations, Acquisitions of
Minority Shares Not Resulting in a Change of Control, and Similar
Transactions
c. Income Statements and Per Share Amounts
C. Accounting and Disclosure Issues
1. Selected Financial Data
2. Other Form 20-F Disclosure
a. Reference to U.S. GAAP Pronouncements in Form 20-F
b. Disclosure From Oil and Gas Companies Under FAS 69
[[Page 37963]]
c. Market Risk Disclosure and the Safe Harbor Provisions
3. Other Considerations Relating to IFRS and U.S. GAAP Guidance
4. First Time Adopters of IFRS
5. Check Boxes on the Cover Page of Form 20-F
D. Regulation S-X
1. Application of the Proposed Amendments to Rules 3-05, 3-09,
and 3-16
a. Significance Testing
b. Separate Historical Financial Statements of Another Entity
Provided Under Rules 3-05 or 3-09
2. Pro Forma Financial Statements Provided Under Article 11
3. Financial Statements Provided Under Rule 3-10
4. Conforming Amendment to Rule 4-01
E. Application of the Proposed Amendments to Other Forms, Rules
and Schedules
1. Conforming Amendments to Securities Act Forms F-4 and S-4
2. Conforming Amendment to Rule 701
3. Small Business Issuers
4. Schedule TO and Schedule 13E-3
F. Quality Control Issues
G. Application to Filings Under the Multijurisdictional
Disclosure System
IV. General Request for Comments
V. Paperwork Reduction Act
A. Background
B. Burden and Cost Estimates Related to the Proposed
Accommodation
1. Form 20-F
2. Form F-1
3. Form F-4
4. Form S-4
5. Rule 701
C. Request for Comment
VI. Cost-Benefit Analysis
A. Expected Benefits
B. Expected Costs
VII. Regulatory Flexibility Act Certification
VIII. Consideration of Impact on the Economy, Burden on Competition
and Promotion of Efficiency, Competition and Capital Formation
Analysis
IX. Statutory Basis and Text of Proposed Amendments
I. Overview and History
Foreign private issuers that register securities with the SEC, and
that report on a periodic basis thereafter under Section 13(a) or 15(d)
of the Exchange Act,\6\ are currently required to present audited
statements of income, financial position, changes in shareholders'
equity and cash flows for each of the past three financial years,\7\
prepared on a consistent basis of accounting.\8\ All foreign private
issuers are currently required to reconcile to U.S. GAAP the financial
statements that they file with the Commission if the financial
statements are prepared using any basis of accounting other than U.S.
GAAP.\9\
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\6\ 15 U.S.C. 78m(a) or 78o(d). Section 13(a) of the Exchange
Act requires every issuer of a security registered pursuant to
Section 12 of the Exchange Act [15 U.S.C. 781] to file with the
Commission such annual reports and such other reports as the
Commission may prescribe. Section 15(d) of the Exchange Act requires
each issuer that has filed a registration statement that has become
effective pursuant to the Securities Act to file such supplementary
and periodic information, documents and reports as may be required
pursuant to Section 13 in respect of a security registered pursuant
to Section 12, unless the duty to file under Section 15(d) has been
suspended for any financial year.
\7\ Consistent with Form 20-F, IFRS and general usage outside
the United States, we use the term ``financial year'' to refer to a
fiscal year. See Instruction 2 to Item 3 of Form 20-F. Foreign
private issuers that are first-time adopters of IFRS published by
the IASB are permitted to provide financial statements for the most
recent two financial years. See General Instruction G for Form 20-F.
\8\ See Item 8.A.2 of Form 20-F. Instructions to this item
permit a foreign private issuer to omit a balance sheet for the
earliest of the three years if that balance sheet is not required by
a foreign jurisdiction.
\9\ See Items 17 and 18 of Form 20-F; see also Article 4 of
Regulation S-X.
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The Commission is proposing for comment revisions to Form 20-F and
Regulation S-X under which it would accept financial statements of
foreign private issuers that are prepared on the basis of the English
language version of IFRS as published by the IASB without a
reconciliation to U.S. GAAP.\10\ The revisions would allow a foreign
private issuer to file financial statements prepared in accordance with
IFRS as published by the IASB without reconciliation to U.S. GAAP. We
are not proposing to change existing reconciliation requirements for
foreign private issuers that file their financial statements under
other sets of accounting standards, or that are not in full compliance
with IFRS as published by the IASB.
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\10\ All references in this release to IFRS as published by the
IASB refer to the English language version of IFRS. The IASB
approves the English language text of any IFRS standard, although
the International Accounting Standards Committee Foundation (``IASC
Foundation'') may issue translations into other languages. See
``International Financial Reporting Standards (IFRSs), including
International Accounting Standards (IASs) and Interpretations as at
1 January 2005,'' International Accounting Standards Board Preface
to IFRS, at 27.
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A. History of the U.S. GAAP Reconciliation Requirement
In a reconciliation, a foreign private issuer that files its
financial statements prepared in accordance with a basis of accounting
other than U.S. GAAP must identify and quantify the material
differences from the requirements of U.S. GAAP and Regulation S-X. The
reconciliation to U.S. GAAP may be presented pursuant to either Item 17
or Item 18 of Form 20-F. Under Item 17, an issuer is required to
provide a narrative description of differences and a quantitative
reconciliation of specific financial statement line items from non-U.S.
GAAP to U.S. GAAP, but without all U.S. GAAP and Regulation S-X
disclosures. An issuer may use Item 17 when filing its financial
statements in an Exchange Act registration statement or annual report
filed on Form 20-F, or as part of a Securities Act registration
statement for investment grade, non-convertible securities or certain
rights offerings. Under Item 18, an issuer is required to provide the
reconciling information specified in Item 17 as well as all disclosures
required by Regulation S-X and U.S. GAAP. An issuer must comply with
Item 18 when filing financial statements in a Securities Act
registration statement for offerings of equity, convertible and other
securities.
The Commission first addressed discrepancies in financial
information provided under a foreign basis of accounting and U.S. GAAP
through amendments to Forms 20 and 20-K adopted in 1967.\11\ Although a
reconciliation to U.S. GAAP was not explicitly required, the amended
instructions to Form 20 required that ``every issuer registering
securities on this form shall file as a part of its registration
statement the financial statements, schedules and accountants'
certificates which would be required to be filed if the registration
statement were filed on Form 10.\12\ Any material variation in
accounting principles or practices from the form and content of
financial statements prescribed in Regulation S-X shall be disclosed
and, to the extent practicable, the effect of each such variation
given.'' \13\ The financial statement instructions for the annual
report on Form 20-K contained a similar requirement.\14\
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\11\ See Securities Exchange Act Release Nos. 8067 and 8068
(April 28, 1967). Form 20 was the registration statement under
Section 12 of the Securities Act and Form 20-K was the annual report
form for foreign private issuers.
\12\ Form 10 is the registration statement under Section 12 of
the Exchange Act for domestic issuers.
\13\ Although the Commission adopted Regulation S-X in 1940 as
an instruction booklet to be followed in the preparation of
financial statements to be included in filings, application of the
Regulation did not extend to foreign private issuers.
\14\ Prior to 1967, foreign private issuers were required only
to present financial statements consisting of a balance sheet as of
the close of the most recent fiscal year and a profit and loss
statement for the fiscal year preceding the date of the balance
sheet. The financial statements were not required to be certified.
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In 1979, the Commission adopted significant amendments to the
disclosure requirements applicable to foreign private issuers.\15\
These amendments were based on the Commission's belief that ``providing
more meaningful disclosure to investors
[[Page 37964]]
in foreign securities not only would promote the protection of
investors but may encourage the free flow of capital between nations
and tend to reduce any competitive disadvantage with which United
States issuers must contend vis-a-vis foreign issuers of securities.''
\16\
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\15\ Securities Exchange Act Release No. 34-16371 (November 29,
1979).
\16\ Securities Exchange Act Release No. 34-14128 (November 2,
1977).
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The Commission adopted the current reconciliation requirements in
1982 when adopting new Securities Act registration statements for
foreign private issuers as part of its comprehensive efforts to develop
an integrated disclosure system.\17\ Prior to 1982, offering documents
of foreign private issuers contained a full reconciliation, while
annual reports required only a narrative description of differences
between a foreign basis of accounting and U.S. GAAP.\18\
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\17\ Securities Act Release No. 33-6437 (November 19, 1982).
\18\ Until 1980 the only guidance with respect to accounting
principles and financial statements of foreign issuers were form-
based requirements and the continued applicability of Accounting
Series Release 4, which, since 1935, required only that the
accounting principles used by foreign private issuers have
authoritative support. In 1980, the Commission amended Regulation S-
X adding language to Rule 4-01 to require foreign issuers' financial
statements prepared in accordance with a comprehensive basis of
accounting other than U.S. GAAP to be reconciled to U.S. GAAP.
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The Commission's approach has developed in the context of
integrated disclosure. In designing the integrated disclosure regime
for foreign private issuers, the Commission endeavored to ``design a
system that parallels the system for domestic issuers but also takes
into account the different circumstances of foreign registrants.'' \19\
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\19\ Securities Act Release No. 33-6360 (November 20, 1981) (the
``1981 Proposing Release'').
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Given the dual considerations of investor protection and even-
handedness towards foreign private issuers, the Commission has framed
its consideration of the reconciliation requirement as a balancing of
two policy concerns: Investors' need for the same type of basic
information when making an investment decision regardless of whether
the issuer is foreign or domestic, and the public interest served by an
opportunity to invest in a variety of securities, including foreign
securities.\20\ Investors' need for the same type of basic information
implies that foreign and domestic registrants should be subject to the
same disclosure requirements. However, the burden on foreign issuers of
meeting the identical disclosure standards as domestic issuers might
discourage them from offering their securities on the U.S. market. If
foreign issuers chose not to offer their securities in the United
States, it would deprive U.S. investors of investment opportunities and
potentially compel them to purchase foreign securities on foreign
markets, where disclosure may be less than that required in filings
with the Commission.\21\
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\20\ Id.
\21\Id.
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B. The International Accounting Standards Board and IFRS
The IASB is a stand-alone, privately funded accounting standard-
setting body established to develop global standards for financial
reporting.\22\ It is the successor to the International Accounting
Standards Committee (``IASC''), which was created in 1973 to develop
International Accounting Standards (``IAS''). Based in London, the IASB
assumed accounting standard-setting responsibilities from the IASC in
2001.\23\ Since that time, the standards that the IASB develops and
approves have been known as IFRS.\24\
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\22\ For more information on the structure and operation of the
IASB, see https://www.iasb.org/Home.htm.
\23\ This was the culmination of a reorganization in 2000 based
on the recommendations to the IASC Board contained in a 1999 report
by the IASC's Strategic Working Party entitled ``Recommendations on
Shaping the IASC for the Future.'' (Full text available at https://
www.iasplus.com/restruct/1999swpfinal.pdf). From 1973 until that
restructuring, the entity for setting International Accounting
Standards had been known as the IASC. The IASC issued 41 standards
on major topical areas through December 2000, which are entitled
International Accounting Standards. The predecessor standard-setting
board was known as the IASC Board.
\24\ The IASB continues to recognize the IAS issued by the IASC,
as modified or superseded by the IASB. Those IAS now form part of
the body of IFRS. See IAS 1, paragraph 11. Standards that are newly
developed by the IASB or are extensive revisions of earlier IAS are
entitled International Financial Reporting Standards.
In general usage, and in this release, the term IFRS will be
used to encompass both IAS and IFRS. The term IFRS is used to refer
both to the body of IASB pronouncements generally and to individual
standards and interpretations applicable in specific circumstances.
For purposes of this release, financial statements ``prepared in
accordance with IFRS'' refer to financial statements that an issuer
can unreservedly and explicitly state are in compliance with IFRS as
published by the IASB and that are not subject to any qualification
relating to the application of IFRS as published by the IASB.
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The IASB is overseen by the IASC Foundation, a stand-alone
organization responsible for, among other things, the activities of the
IASB.\25\ The 22 trustees of the IASC Foundation appoint IASB members,
oversee its activities, and raise necessary funding for the IASB, the
IASC Foundation, the International Financial Reporting Interpretations
Committee (``IFRIC''), and the Standards Advisory Council
(``SAC'').\26\
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\25\ The IASC Foundation is comprised of twenty-two individuals
each serving a term of three years subject to one re-appointment.
Its staff works directly with the IASB and project resource groups,
conducts research, participates in roundtable meetings, analyzes
public comments, and prepares recommendations and drafts for
consideration by the IASB.
\26\ IFRIC interprets IFRS and reviews accounting issues that
are likely to receive divergent or unacceptable treatment in the
absence of authoritative guidance, with a view to reaching consensus
on the appropriate accounting treatment. The IFRIC is comprised of
twelve voting members, appointed by the IASC Foundation Trustees for
renewable terms of three years. IFRIC Interpretations are ratified
by the IASB prior to becoming effective.
The SAC supports the IASB and provides a forum where the IASB
consults individuals and representatives of organizations affected
by its work that are committed to the development of high-quality
IFRS. The Commission is an observer of the SAC.
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The IASC Foundation Trustees select members of the IASB to comprise
``within that group, the best available combination of technical skills
and background experience of relevant international business and market
conditions in order to contribute to the development of high-quality,
global accounting standards.'' \27\ The fourteen members of the IASB,
twelve full-time and two part-time, serve a five-year term subject to
one re-appointment. They are required to sever all employment
relationships and positions that may give rise to economic incentives
which might compromise a member's independent judgment in setting
accounting standards. The current IASB members come from nine countries
and have a variety of backgrounds. In selecting IASB members, the IASC
Foundation Trustees ensure that the IASB is not dominated by any
particular constituency. Member selection is not based on geographic
representation.
---------------------------------------------------------------------------
\27\ IASC Foundation Constitution, Paragraph 20; see https://
www.iasb.org/About+Us/About+IASB/About+IASB.htm.
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To date, the IASC Foundation has financed IASB operations largely
through voluntary contributions from companies, accounting firms,
international organizations and central banks. Original commitments
were made for the period 2001-2005 and have been extended for an
additional two years through 2007. In June 2006, the IASC Foundation
Trustees agreed on four elements that should govern the establishment
of a funding approach that would enable the IASC Foundation to remain a
stand-alone, private sector organization with the necessary resources
to conduct its work in a timely fashion.\28\ The Trustees continue
[[Page 37965]]
to make progress in obtaining stable funding that satisfies those
elements.
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\28\ The Trustees determined that ``characteristics of the new
scheme for 2008 would be:
Broad-based: Fewer than 200 companies and organizations
participate in the current financing system. A sustainable long-term
financing system must expand the base of support to include major
participants in the world's capital markets, including official
institutions, in order to ensure diversification of sources.
Compelling: Any system must carry with it enough
pressure to make free riding very difficult. This could be
accomplished through a variety of means, including official support
from the relevant regulatory authorities and formal approval by the
collecting organizations.
Open-ended: The financial commitments should be open-
ended and not contingent on any particular action that would
infringe on the independence of the IASC Foundation and the
International Accounting Standards Board.
Country-specific: The funding burden should be shared
by the major economies of the world on a proportionate basis, using
Gross Domestic Product as the determining factor of measurement.
Each country should meet its designated target in a manner
consistent with the principles above.''
See https://www.iasb.org/About+Us/About+the+Foundation/
Future+Funding.htm.
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The IASB has stated that it is committed to ``developing, in the
public interest, a single set of high-quality, understandable and
enforceable global accounting standards that require transparent and
comparable information in general purpose financial statements.'' \29\
In addition, the IASC Foundation has committed to the continued
development of IFRS to achieve high-quality solutions through the
convergence of national accounting standards.
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\29\ See www.iasb.org/About+Us/About+IASB/About+IASB.htm. See
also the IASCF Foundation Constitution.
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The use of IFRS is increasingly widespread throughout the world.
Almost 100 countries now require or allow the use of IFRS, and many
other countries are replacing their national standards with IFRS. The
European Union (``EU''), for example, has, under a regulation adopted
in 2002, required companies incorporated in one of its Member States
and whose securities are listed on an EU regulated market to report
their consolidated financial statements using endorsed IFRS beginning
with the 2005 financial year.\30\ It has been estimated that these
requirements affect approximately 7,000 companies in the EU.\31\ In
addition to issuers in the 27 EU Member States, these IFRS requirements
also apply in the three European Economic Area countries of Iceland,
Lichtenstein and Norway.\32\ Other countries, including Australia and
New Zealand, have adopted similar requirements mandating the use of
IFRS by public companies.\33\ More countries have plans to adopt IFRS
as their national accounting standards in the future, including
Canada\34\ and Israel.\35\
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\30\ Regulation (EC) No. 1606/2002 of the European Parliament
and of the Council of 19 July 2002 on the application of
international accounting standards, Official Journal L. 243, 11/09/
2002 P. 0001-0004 (the ``EU Regulation''). EU regulations have the
force of law within EU Member States without further implementing
legislation at the national level.
\31\ Committee of European Securities Regulators (``CESR''),
``European Regulation on the Application of IFRS in 2005:
Recommendation for Additional Guidance Regarding the Transition to
IFRS,'' (December 2003).
\32\ The current EU Member States are: Austria, Belgium,
Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovenia,
Slovakia, Spain, Sweden, and the United Kingdom.
\33\ Some countries, such as Australia, have adopted IFRS by
incorporating them into their national standards.
\34\ See ``Implementation Plan for Incorporating International
Financial Reporting Standards into Canadian GAAP,'' available at
https://www.acsbcanada.org/client_asset/document/3/2/7/3/5/
document_8B452E12-FAF5-7113-C4CB8F89B38BC6F8.pdf?sfgdata=4.
\35\ See Israel Accounting Standard No. 29 ``Adoption of
International Financial Reporting Standards,'' stipulating that
Israeli public companies that prepare their primary financial
statements in accordance with Israeli GAAP are obliged to adopt IFRS
unreservedly for years starting on January 1, 2008. See also https://
www.iasplus.com/country/israel.htm.
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C. The Financial Accounting Standards Board
The FASB is the independent, private-sector body whose
pronouncements establishing and amending accounting principles the
Commission has, since 1973, recognized as ``authoritative'' and
``generally accepted'' for purposes of the federal securities laws,
absent any contrary determination by the Commission.\36\ The FASB is
overseen by the Financial Accounting Foundation (``FAF''), which is
responsible for funding the activities of the FASB and selecting the
seven full-time FASB members.\37\ The FAF is an independent, non-profit
organization that is run by a sixteen-member Board of Trustees. The
FASB has oversight of the Emerging Issues Task Force, which is the
interpretative entity of U.S. GAAP. The FASB also is supported by the
Financial Accounting Standards Advisory Council, which is responsible
for consulting with the FASB as to technical issues on the FASB's
agenda and project priorities.
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\36\ See ``Statement of Policy on the Establishment and
Improvement of Accounting Principles and Standards,'' Accounting
Series Release No. 150 (December 20, 1973) (expressing the
Commission's intent to continue to look to the private sector for
leadership in establishing and improving accounting principles and
standards through the FASB) and ``Policy Statement: Reaffirming the
Status of the FASB as a Designated Private-Sector Standard Setter,''
Release No. 33-8221 (April 25, 2003) (the ``2003 Policy
Statement''). More information about the FASB is available on their
Web site at https://www.fasb.org.
\37\ See https://www.fasb.org/facts/bd_members.shtml.
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Consistent with the FASB's objective to increase international
comparability and the quality of standards used in the United States,
the FASB participates in international accounting standard setter
activities. This objective is consistent with the FASB's obligation to
its domestic constituents, who benefit from comparability of
information across national borders. The FASB pursues this objective in
cooperation with the IASB, as discussed in more detail below, and with
national accounting standard setters.
The Commission oversees the activities of the FASB as part of its
responsibilities under the securities laws. While the Commission
consistently has looked to the private sector to set accounting
standards, the securities laws provide the Commission with the
authority to set accounting standards for public companies and other
entities that file financial statements with the Commission.\38\ As
part of its oversight responsibilities, the Commission provides views
regarding the selection of FASB members, and, in certain circumstances,
refers issues relating to accounting standards to the FASB or one of
its affiliated organizations. The Commission and its staff do not,
however, prohibit the FASB from addressing topics of its choosing and
do not dictate the outcome of specific FASB projects, so long as the
FASB's conclusions are in the interest of investor protection.\39\
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\38\ This authority was reaffirmed in the Sarbanes-Oxley Act,
Section 108(c) of which states, ``Nothing in this Act, including
this section * * * shall be construed to impair or limit the
authority of the Commission to establish accounting principles or
standards for purposes of enforcement of the securities laws.''
\39\ See the 2003 Policy Statement.
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D. The Commission's Past Consideration of a Single Set of Globally
Accepted Accounting Standards and Facilitation of the Use of IFRS by
Registrants
The Commission has long advocated reducing disparity between the
accounting and disclosure practices of the United States and other
countries as a means to facilitate cross-border capital formation while
ensuring adequate disclosure for the protection of investors and the
promotion of fair, orderly and efficient markets. The Commission also
has encouraged the efforts of standard setters and other market
participants to do the same. In a 1981 release proposing revisions to
Form 20-F, the Commission expressed its support for the work of the
IASC in formulating guidelines and
[[Page 37966]]
international disclosure standards.\40\ As part of a 1988 Policy
Statement, the Commission explicitly supported the establishment of
mutually acceptable international accounting standards as a critical
goal to reduce regulatory impediments that result from disparate
national accounting standards without compromising investor
protection.\41\ Accordingly, it urged ``securities regulators and
members of the accounting profession throughout the world [to] continue
efforts to revise and adjust international accounting standards with
the aim of increasing comparability and reducing cost'' and reaffirmed
its commitment to working with securities regulators around the world
to achieve the goal of an efficient international securities market
system.\42\
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\40\ See the 1981 Proposing Release.
\41\ See Release No. 33-6807 (November 14, 1988) (the ``1998
Policy Statement'').
\42\ Id.42
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In encouraging the acceptance of mutually agreeable global
accounting principles and reducing regulatory burdens while protecting
investors, the Commission has recognized that information required by
an international accounting standard may be adequate for investors even
if that information is not the same as information required under U.S.
GAAP. One example of this approach is the 1994 amendment to Form 20-F
to accept without reconciliation to U.S. GAAP a cash flow statement
prepared in accordance with IAS No. 7, ``Cash Flow Statements,'' which
the IASC amended in 1992. In proposing that amendment, the Commission
noted that ``while there are differences between a cash flow statement
prepared in accordance with IAS 7 and one prepared in accordance with
U.S. GAAP. * * * the Commission believes statements prepared in
accordance with IAS 7 should provide an investor with adequate
information regarding cash flows without the need for additional
information or modification.'' \43\ In adopting this and other
revisions to Item 17 of Form 20-F, the Commission expressed its belief
that streamlined reconciliation requirements will facilitate foreign
companies' entry into the United States public securities markets in a
manner consistent with investor protection.\44\
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\43\ The Commission proposed these amendments in Release No. 33-
7029 (November 3, 1993) and adopted them in Release No. 33-7053
(April 19, 1994) (the ``1994 Adopting Release''). Other examples in
which the Commission amended its requirements for financial
statements of foreign issuers to permit the use of certain IASC
standards without reconciliation to U.S. GAAP are described in the
SEC Concept Release ``International Accounting Standards,'' Release
No. 33-7801 (February 16, 2000) (the ``2000 Concept Release'').
\44\ See the 1994 Adopting Release.
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The Commission more closely examined efforts to develop high-
quality, comprehensive global accounting standards in its 1997 report
undertaken at the direction of Congress.\45\ In that study, the
Commission noted that for issuers wishing to raise capital in more than
one country, compliance with differing accounting requirements to be
used in the preparation of financial statements increased compliance
costs and created inefficiencies. As a step towards addressing these
concerns and to increase the access of U.S. investors to foreign
investments in the U.S. public capital market, the Commission
encouraged the IASC's efforts to develop a core set of accounting
standards that could serve as a framework for financial reporting in
cross-border offerings, and indicated an intent to remain active in the
development of those standards. In that report, the Commission
indicated that its evaluation of IASC core standards would involve an
assessment of whether they constituted a comprehensive body of
transparent, high-quality standards that could be rigorously
interpreted and applied.\46\
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\45\ Pursuant to Section 509(5) of the National Securities
Markets Improvement Act of 1996, ``Report on Promoting Global
Preeminance of American Securities Markets'' (October 1997).
\46\ Id.
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In February 2000, the Commission issued a Concept Release on
International Accounting Standards, seeking public comment on the
elements necessary to encourage convergence towards a high quality
global financial reporting framework while upholding the quality of
financial reporting domestically.\47\ In that release, the Commission
described high-quality standards as consisting of a ``comprehensive set
of neutral principles that require consistent, comparable, relevant and
reliable information that is useful for investors, lenders and
creditors, and others who make capital allocation decisions.'' \48\ The
Commission also expressed the view that high-quality accounting
standards ``must be supported by an infrastructure that ensures that
the standards are rigorously interpreted and applied.'' \49\ The
release sought comments as to the conditions under which the Commission
should accept financial statements of foreign private issuers that are
prepared using IFRS, and considered the issue of the U.S. GAAP
reconciliation of IFRS financial statements. The Commission has
continued to monitor international developments in the subject areas
that are discussed in the release.
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\47\ See Concept Release No. 34-42430 ``International Accounting
Standards'' (February 16, 2000).
\48\ Id.
\49\ Id.
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In 2003, the Commission staff prepared a study on the adoption of a
principles-based accounting system, as mandated by Congress in the
Sarbanes-Oxley Act.\50\ The conclusion of that study was that an
optimal approach to accounting standard-setting would be based on a
consistently applied conceptual framework and clearly stated objectives
rather than solely on either rules or principles, one benefit of which
would be the facilitation of greater convergence between U.S. GAAP and
international standards. By taking an objectives-based approach to
convergence, the study noted, standard setters would be able to arrive
at an agreement on a principle more quickly than would be possible for
a detailed rule. The staff's report to Congress interpreted convergence
as a ``process of continuing discovery and opportunity to learn by both
U.S. and international standard setters,'' the benefits of which
include greater comparability and improved capital formation
globally.\51\
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\50\ Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act
of 2002 on the Adoption by the United States Financial Reporting
System of a Principles-Based Accounting System (July 25, 2003).
\51\ Id.
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In February 2006, Chairman Cox reaffirmed his commitment to the
``Roadmap'' that was first described by a former Chief Accountant of
the Commission in April 2005.\52\ The Roadmap sets forth the goal of
achieving one set of high-quality, globally accepted accounting
standards and suggested several considerations that could affect the
achievement of that goal.
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\52\ SEC Press Release No. 2006-17, Accounting Standards: SEC
Chairman Cox and EU Commissioner McCreevy Affirm Commitment to
Elimination of the Need for Reconciliation Requirements (Feb. 8,
2006).
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The Commission also has taken steps to facilitate the use of IFRS
by registrants. When the European Union adopted a regulation in 2002 to
require the use of IFRS by all European issuers with publicly traded
securities beginning with their 2005 financial year, the Commission
adopted an accommodation to allow first-time adopters of IFRS to file
two years rather than three years of financial statements in their
Commission filings.\53\ In so doing, the Commission sought to
facilitate the transition to IFRS of the
[[Page 37967]]
foreign registrants that were using it for the first time. The
Commission recognized that this accommodation would reduce costs to
foreign issuers and encourage their continued participation in the U.S.
public capital market, which would benefit investors by increasing
investment possibilities and furthering the efficient allocation of
capital. Acknowledging the significant efforts expended by many foreign
private issuers in their transition to IFRS, the Commission also
extended compliance dates for management's report on internal control
over financial reporting.\54\
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\53\ Release No. 33-8567 (April 12, 2005).
\54\ Release No. 33-8545 (March 2, 2005).
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E. FASB and IASB Efforts to Develop a Work Plan To Achieve High
Quality, Compatible Accounting Standards
In October 2002, the FASB and the IASB announced the issuance of a
memorandum of understanding, called the Norwalk Agreement, which marked
a significant step towards formalizing their commitment to the
convergence of U.S. and international accounting standards. The two
bodies acknowledged their joint commitment to the development, ``as
soon as practicable,'' of high quality, compatible accounting standards
that could be used for both domestic and cross-border financial
reporting. At that time, the FASB and the IASB pledged to use their
best efforts to make their existing financial reporting standards fully
compatible as soon as is practicable and to co-ordinate their future
work programs to ensure that once achieved, compatibility is
maintained. In a 2006 Memorandum of Understanding, the FASB and the
IASB indicated that a common set of high quality global standards
remains the long-term strategic priority of both the FASB and the IASB
and set out a work plan covering the next two years for convergence
with specific long- and short-term projects.\55\
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\55\ ``A Roadmap for Convergence between IFRS and U.S. GAAP--
2006-2008,'' Memorandum of Understanding between the FASB and the
IASB, February 27, 2006 (the ``2006 Memorandum of Understanding'').
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II. Acceptance of IFRS Financial Statements From Foreign Private
Issuers Without a U.S. GAAP Reconciliation as a Step Towards a Single
Set of Globally Accepted Accounting Standards
The Commission has encouraged movement towards a single set of
high-quality globally accepted accounting standards as an important
goal both for the protection of investors and the efficiency of capital
markets.\56\ The work towards acceptance of financial statements from
foreign private issuers prepared in accordance with IFRS as published
by the IASB without reconciliation to U.S. GAAP seeks to foster the
continued movement to a single set of high-quality, globally accepted
accounting standards. As a long-term objective, the use of a common set
of high-quality standards for the preparation of financial statements
will help investors to understand investment opportunities more clearly
and with greater comparability than if they had to gain familiarity
with a multiplicity of national accounting standards.
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\56\ See the 1988 Policy Statement.
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A. A Robust Process for Convergence
Continued progress towards convergence between U.S. GAAP and IFRS
as published by the IASB is one consideration in the elimination of the
U.S. GAAP reconciliation. As noted in this release, both the IASB and
the FASB have established processes for selecting board members and
developing standards to support the development by each board of high-
quality accounting standards. Additionally, the FASB and the IASB have
established a work plan that seeks the convergence of U.S. GAAP and
IFRS. In so doing, both bodies have pledged to use their best efforts
to make existing standards fully compatible as soon as practicable, and
to coordinate their future work programs to ensure that compatibility,
once achieved, is maintained.\57\ This work is expected to continue for
many years, and both bodies have expressed a commitment to it. We fully
support continued progress on convergence towards the optimal standard,
whether that standard may be based on U.S. GAAP, IFRS, or a jointly
developed new approach.
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\57\ See the 2006 Memorandum of Understanding.
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As part of this commitment, both the IASB and the FASB are working
together on several major projects, and have coordinated agendas so
that major projects that one board takes up may also be taken up by the
other board.\58\ Also, both boards have been working on ``short-term
convergence,'' under which convergence will occur quickly in certain
areas. This process allows for incremental improvements and the
opportunity to eliminate differences without rethinking an issue
entirely. If the IASB and the FASB conclude that neither of their
models in a particular area is sufficient, they consider a broader
standard-setting project.
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\58\ The joint projects of the FASB and IASB constitute part of
the IASB's broader goal to work with national standard setters to
develop high quality solutions.
---------------------------------------------------------------------------
We do not believe that a particular degree of convergence should be
a prerequisite for our acceptance of financial statements prepared
under IFRS as published by the IASB without reconciliation. Our
proposal to do so is based on, among other considerations, the
robustness of a process that lends itself to continued progress of the
IASB and the FASB towards convergence over time through, among other
things, the joint development of future standards. As noted elsewhere,
we recognize that there remain specific accounting subjects and other
matters in IFRS that have not been fully addressed. There is a risk
that constituents of the two boards may not continue to support
convergence if IFRS financial statements are accepted by the Commission
without reconciliation to U.S. GAAP. The future work of the IASB and
the FASB may result in standards that are significantly different or
that are not timely in their development. Nonetheless, we believe that
if robust processes for the joint development of high quality standards
by the IASB and the FASB are in place, we need not delay considering
the acceptance of financial statements that comply with IFRS as
published by the IASB without reconciliation to U.S. GAAP.
We will continue to consider the convergence process and the
continued progress of the IASB and the FASB in their work plan. We also
will consider whether interested parties will continue to have an
incentive to support this convergence work should the Commission accept
IFRS financial statements from foreign private issuers without
reconciliation to U.S. GAAP.
Questions
1. Do investors, issuers and other commenters agree that IFRS are
widely used and have been issued through a robust process by a stand-
alone standard setter, resulting in high-quality accounting standards?
2. Should convergence between U.S. GAAP and IFRS as published by
the IASB be a consideration in our acceptance in foreign private issuer
filings of financial statements prepared in accordance with IFRS as
published by the IASB without a U.S. GAAP reconciliation? If so, has
such convergence been adequate? What are commenters' views on the
processes of the IASB and the FASB for convergence? Are investors and
other market participants comfortable with the convergence to date, and
the ongoing process for convergence? How will this global process, and,
[[Page 37968]]
particularly, the work of the IASB and FASB, be impacted, if at all, if
we accept financial statements prepared in accordance with IFRS as
published by the IASB without a U.S. GAAP reconciliation? Should our
amended rules contemplate that the IASB and the FASB may in the future
publish substantially different final accounting standards, principles
or approaches in certain areas?
B. Consistent and Faithful Application of IFRS
The consistent and faithful application of IFRS as published by the
IASB is an important consideration both to accepting financial
statements prepared on that basis without a U.S. GAAP reconciliation
and to demonstrating that IFRS as published by the IASB represent a
single set of high-quality accounting standards, and not a multiplicity
of standards under the same name. Over the years, the Commission staff
has acquired a broad understanding of the standards comprising IFRS.
For over ten years, a limited number of foreign private issuers have
included in their filings under the Securities Act and the Exchange Act
financial statements prepared in accordance with IAS or IFRS, and over
the past year, many more companies have done so. These filings have
been subject to the staff's review process, through which the staff has
gained experience with the standards.
1. Staff Review of IFRS Financial Statements Filed in 2006
Over the course of 2006, many foreign private issuers filed annual
reports on Form 20-F that contained IFRS financial statements following
their switch to IFRS for the 2005 financial year. The Commission staff
has conducted reviews of those IFRS financial statements as part of its
function of reviewing the periodic reports of publicly registered
companies, consistent with its normal practice in reviewing filings
from U.S. companies and from foreign issuers with financial statements
other than those prepared in accordance with IFRS reconciled to U.S.
GAAP.\59\ These ongoing reviews are an important part of the
Commission's effort to gain familiarity with IFRS. In conducting its
reviews of IFRS financial statements, the staff made a number of
comments regarding the application of IFRS, which have been brought to
the attention of issuers through the comment process.\60\ Consistent
with practice in the staff review program, many issuers indicated that
they will address the matters that the staff has raised in future
filings, most commonly through improved presentations or enhanced
disclosures. The staff has been, and, following the issuance of this
Proposing Release, will continue to consider whether issuers address
those matters adequately in their Forms 20-F for the 2006 financial
year which will help inform the Commission's view as to the quality of
the application of IFRS in practice. The staff will continue its
regular review function with regard to issuer and auditor practice in
applying IFRS. Information obtained from this work will assist in our
evaluation of the quality of the application of IFRS in practice.
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\59\ Section 408 of the Sarbanes-Oxley Act of 2002 mandates that
the Commission shall review disclosures made by reporting companies
on a regular and systematic basis.
\60\ Staff comment letters are available, 45 days or longer
after completion of the staff review, through the SEC Web site at
https://www.sec.gov. See SEC Press Release dated June 24, 2004.
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At present, in filings with the Commission, IFRS (either as
published by the IASB or a jurisdictional variation) is used
principally by issuers from Europe and Australia. The number of
companies from these areas that are registered under the Exchange Act
has decreased over the last several years.\61\ Thus, although our staff
has reviewed the annual reports of first-time adopters of IFRS, its
level of experience is not as great as with U.S. GAAP. In addition, the
staff has not undertaken any review of financial statements prepared in
accordance with IFRS by foreign companies that are not registered under
the Exchange Act. Therefore, the staff's review of IFRS financial
statements is limited to a small portion of the total universe of
companies that use IFRS.
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\61\ The number of registered companies from Europe and
Australia has declined from over 400 at the end of 2002 to less than
250 at the end of 2006. Not all companies from these jurisdictions
switched to IFRS for their filings in 2006. The number of foreign
private issuers that filed annual reports on Form 20-F that
contained IFRS financial statements during 2006 was less than 200.
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We recognize the first-year effort undertaken by preparers,
auditors, and others in changing the basis of accounting to IFRS. Our
staff will continue to identify the areas for improvement to IFRS
filers in order to promote increased disclosure and clearer
presentation in subsequent financial statements filed with the
Commission.
2. Market Participants' Views Regarding IFRS Application in Practice
Market participants from whom the Commission has heard at a March
2007 roundtable held by the Commission staff have indicated their
support for the use of IFRS by foreign issuers. Although we have heard
from a limited group of representatives from the investor community,
those participants, which included representatives of mutual funds,
pension funds, rating agencies and other institutional investors,
expressed their acceptance of IFRS financial statements for foreign
private issuers.\62\
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\62\ Information regarding the Roundtable held on March 6, 2007,
including a transcript, is available on the SEC Web site at https://
www.sec.gov/spotlight/ifrsroadmap.htm.
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Based on information that we have gathered through the Roundtable
and from other commenters, we believe that the auditor community has
embraced IFRS as a workable set of standards that can generally be
applied across industries and countries. The global auditing profession
has been able to audit and report on many thousands of financial
statements prepared using either IFRS as published by the IASB or a
jurisdictional variation of IFRS.
Some foreign regulators have published reports relating to the
implementation of IFRS in their country. For example, the U.K.
Financial Reporting Review Panel and the Autorit[eacute] des
March[eacute]s Financiers (the ``AMF'') of France have both published
such reports making observations on IFRS as applied in their
jurisdictions.\63\
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\63\ For the report of the U.K Financial Reporting Review Panel,
see ``Preliminary Report: IFRS Implementation'' available at https://
www.frc.org.uk/images/uploaded/documents/IFRS%20Implementation%20-
%20preliminary.pdf. For the report of the AMF, see ``Recommendations
on accounting information reported in financial statements for
2006,'' dated December 19, 2006, available at https://www.amf-
france.org/documents/general/7565--1.pdf.
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Although a small number of companies have prepared IFRS financial
statements for several years, it was not until the first half of 2006
that a large number of companies published audited annual IFRS
financial statements for the first time. Also, as discussed below,
audit firms have not been required to opine on IFRS as published by the
IASB but have limited their opinions to jurisdictional variations of
IFRS, consistent with a company's basis of presentation. In light of
this wide-scale use of IFRS being less than two years old, the degree
of experience, familiarity and understanding among companies, audit
firms, investors, analysts, brokers, regulators, and others is
continuing to develop. As experience with IFRS continues to grow, the
Commission will monitor for any possible flaws in the standards and any
issues associated
[[Page 37969]]
with the faithful and consistent application of those standards.
3. Processes and Infrastructure To Promote Consistent and Faithful
Application of IFRS
As discussed in Part I.B. above, the IASB has stated it is
committed to developing a single set of high-quality, understandable
and enforceable global accounting standards. In working towards this
goal, both the IASB and IFRIC have demonstrated their commitment to
resolving significant accounting issues as expediently as possible.
However, developing high-quality standards and issuing high-quality
interpretations of IFRS may take some time.
A question arises as to what should be done, if anything, in
circumstances where neither the IASB nor IFRIC has addressed a
particular accounting issue that causes significant difficulties in
practice. A securities regulator or its staff, including the
Commission, may find it necessary as an interim measure to state a view
on such an accounting issue.\64\ If it were to do so, the regulator
subsequently could consider referring the accounting issue to the IASB
or the IFRIC for resolution of the issue for all constituencies. Any
view expressed by the regulator may be rescinded upon the IASB or the
IFRIC establishing authoritative literature addressing the issue. The
Commission and the staff would not expect to issue guidance that is
inconsistent with IFRS as published by the IASB, the interpretations
provided by IFRIC, or the definitions, recognition criteria and
measurement concepts in the IASB's Framework.
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\64\ This is not new, as securities regulators have long been
involved in resolving issues related to national accounting
standards.
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Regulators have put in place infrastructure to identify and address
the inconsistent and inaccurate application of IFRS globally. This
infrastructure will foster the consistent and faithful application of
IFRS around the world. The International Organization of Securities
Commissions (``IOSCO''), in which the Commission participates,
continues to support the implementation and consistent application of
IFRS in the global financial markets. In January 2007, IOSCO's database
for cataloguing IFRS interpretations and sharing decisions on
application by regulators around the world became operational.\65\
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\65\ See IOSCO's press release regarding its IFRS database at
https://www.iosco.org/news/pdf
