SEC Proposes: No More IFRS Reconciliation

In a move likely to be cheered by foreign issuers, the Securities and Exchange Commission has forged ahead with plans to accept financial statements prepared in accordance with International Financial Reporting Standards without requiring those issuers to prepare a reconciliation to U.S. Generally Accepted Accounting Principles.

Cox

SEC commissioners voted June 20 to propose amendments to the agency’s rules and forms to accept IFRS filings without a GAAP reconciliation—a move chairman Christopher Cox called “a significant next step on the road to a single set of globally accepted accounting standards.”

The proposal ties in to a broader effort by regulators to move toward one global set of accounting standards. It also aims to further a goal that has been a major focus for the SEC, particularly in recent months: making the U.S. capital markets more attractive to foreign private issuers.

The reconciliation requirement has increasingly been criticized as costly and outdated in an era of globalization, where financial information is often available nearly in real-time. Participants in an SEC roundtable on March 6 overwhelmingly wanted to dump the requirement, which one panelist said costs his company $25 million annually. Eliminating it, proponents say, will lower costs to issuers and therefore to investors, facilitate cross-border capital formation, and enhance the comparability of financial statements for investors and analysts.

The proposal comes as the Financial Accounting Standards Board, which sets U.S. accounting rules, and its overseas counterpart, the International Accounting Standards Board, continue work on a project to converge their standards by 2010. A widely read 2005 SEC roadmap to convergence, endorsed by Cox when he took the helm of the Commission, called for the elimination of the GAAP reconciliation requirement by 2009. Last week’s vote accelerates that schedule.

White

“We’re confident that this is the appropriate time for you to move forward by issuing this proposal,” John White, director of the SEC Division of Corporation Finance, told the commissioners during last week’s meeting.

The proposals will apply only to filings prepared in accordance with IFRS as published by the International Accounting Standards Board, not to any nation-specific interpretations of IFRS. That means FPIs which prepare their annual statements in accordance with a local version of IFRS (such as those in member states of the European Union, for example) will need to include any additional disclosures required by the IASB version of IFRS to be exempt from the reconciliation requirement, White noted.

SPEECH

Below is an excerpt of a speech from Michael Coco, special counsel to the SEC's Office of International Corporate Finance, delivered at the SEC open meeting June 20.

The Division of Corporation Finance and the Office of the Chief Accountant recommend that you publish for public comment a proposal to accept, in the filings of foreign private issuers, financial statements prepared in accordance with the English language version of International Financial Reporting Standards, or IFRS, as published by the International Accounting Standards Board without reconciliation to generally accepted accounting principles as used in the United States. To implement this, we recommend that you propose amendments to Form 20-F under the Exchange Act, with conforming amendments to certain other rules and forms. We are not recommending any amendment to current requirements regarding the reconciliation to U.S. GAAP for foreign private issuers that file financial statements prepared using a basis of accounting other than, or that are not in full compliance with, the English language version of IFRS as published by the IASB.

As the Chairman has noted, the proposed acceptance of financial statements prepared in accordance with IFRS as published by the IASB is intended to foster promotion of IFRS as a single set of globally accepted accounting standards. A common set of accounting standards is expected to benefit investors by helping them to better understand and compare foreign investment opportunities without needing to gain familiarity with a myriad of national accounting standards. To realize these benefits, it is important to demonstrate that IFRS represents, in fact, a single set of global standards. It is for this reason that we recommend that the proposed amendments apply only to financial statements prepared in accordance with IFRS as published by the IASB. Under existing rules, any financial statements contained in filings with the Commission that are prepared using a basis of accounting other than U.S. GAAP must contain a reconciliation of differences to U.S. GAAP. A reconciliation may be presented pursuant to either Item 17 or Item 18 of Form 20-F, which sets forth the disclosure requirements for foreign private issuers under both the Exchange Act and the Securities Act. We are proposing amendments to both Item 17 and Item 18 such that financial statements prepared in accordance with IFRS as published by the IASB could be filed without reconciliation to U.S. GAAP when contained in any foreign private issuer registration statement or annual report.

Regulation S-X contains the form and content requirements for financial statements included in filings with the Commission. A number of rules contained in Regulation S-X require an issuer also to include the financial statements of another entity, such as those of a significant acquiree or investee. The amendments we are recommending would apply equally in the application of those rules, if the financial statements of the other entity are prepared in accordance with IFRS as published by the IASB. Regulation S-X would generally continue to apply to all issuers, including those who, under the proposed amendments, would be permitted to file financial statements without a U.S. GAAP reconciliation.

Because Items 17 and 18 of Form 20-F set forth the requirements for any reconciliation to U.S. GAAP to be included in filings with the Commission, we believe acceptance of IFRS financial statements without reconciliation is largely implemented by the amendments to those items. However, to avoid any ambiguity we also are recommending conforming amendments to the references to U.S. GAAP reconciliation contained in Form F-4, Form S-4, and Securities Act Rule 701.

In addition to posing questions on these proposed amendments, the release solicits comment on a number of other related topics, including whether we should address any areas in which IFRS does not provide guidance, and whether we should shorten the 6-month deadline for annual reports on Form 20-F, whether a U.S. GAAP reconciliation would be included or not.

Source

SEC (June 20, 2007)

The proposed amendments, which haven’t yet been posted to the SEC Web site, would also require outside auditors to give an opinion on the issuers’ compliance with IFRS as promulgated by the IASB. “There must be consistency in the form of the auditors’ opinion,” Cox said, to avoid “a multiplicity of standards” that would undercut the goal of using IFRS as a globally accepted accounting system.

Commissioner Roel Campos dismissed concerns that eliminating the reconciliation requirement would remove the incentive for regulators to continue their work on converging IFRS and GAAP.

“I don’t subscribe to this view,” he said at the meeting. “I believe there are huge benefits for convergence.” Campos added, “It’s fair to expect that U.S. GAAP filers won’t need reconcile to IFRS in Europe or other countries.”

Atkins

Similarly, Commissioner Paul Atkins said a dual set of standards “will maintain pressure on FASB and IASB” to continue their work on convergence.

The European Union, which has required IFRS reporting since 2005, has aligned its timetable with the SEC’s, to permit listings according to GAAP without a reconciliation to IFRS at least until 2009. Roughly 100 other jurisdictions around the world allow or require the use of IFRS.

Life Without Reconciliation

Foreign issuers using IFRS filed their first annual reports with the SEC last year. White said the Corporation Finance staff reviewed 170 IFRS filings for the 2005 annual period during its normal review process. Fiscal 2006 FPI annual reports are due to the SEC by June 30.

A project is underway to make the SEC’s comments to issuers related to their IFRS filings publicly available in a designated spot on the Commission Web site, possibly as early as next month. While such comment letters and related correspondence already are posted to the SEC Web site after the review process is complete, they are “buried among 10,000 other sets of comments,” White noted, since all staff comments letters and correspondence are made available on the site.

The plan is for a page listing the IFRS filers to whom the SEC made comments, along with a link to their Form 20-F filings, EDGAR filings, and correspondence with the staff.

“That will provide a transparent way for anybody to look at what we’ve been doing,” White said. He said it should also help allay what Atkins described as a concern that the SEC will become “the international arbiter of IFRS.”

As part of efforts to ensure that IFRS is interpreted and used consistently, White said the SEC, through its work plan with the Committee of European Securities Regulators, is entering into bilateral arrangements with securities regulators in countries that allow or require IFRS, “so we can work to resolve any issue that comes up.”

“We’re moving cautiously,” White said. “We don’t want to impose our will on the interpretation of IFRS.”

He noted that the proposing release will include a number of questions aimed at getting “a broader set of comments” about the proposals. In particular, the SEC will seek input on whether or not to shorten the six-month deadline FPIs have to file their annual reports with the SEC. The whole purpose of that six months is to give foreign issuers time to prepare their reconciliation statements; many say that once that duty is eliminated, FPIs should have the same 60 to 90 days that U.S. companies get to file their financial statements.

Casey

The SEC will also seek comment on any problems that might arise from requiring auditor opinions on whether the financial statements comply with IFRS as published by the IASB—an issue raised by Commissioner Kathleen Casey.

Meanwhile, Julie Erhardt, deputy chief accountant in the SEC Office of the Chief Accountant, noted that the staff is “working expeditiously” on a previously announced concept release on allowing U.S. issuers the choice to file in IFRS—widely seen as a companion measure to the reconciliation proposal. In response to a query about the timing, she said the release will be published “this summer,” but did not specify when.

Many participants at the March roundtable said giving U.S. companies the same choice as FPIs would be necessary to level the playing field. Former chief accountant Lynn Turner, who authored the roadmap on convergence, went a step further to suggest that the SEC eventually make IFRS mandatory for U.S. issuers.