June 2007
SEC to Propose an End to U.S. GAAP Reconciliation for Foreign
Filers That Use IFRS
By Scott Saks, Joel Simon and Sarah Whittington
The Securities and Exchange Commission (“SEC”) voted unanimously on June 20, 2007 to 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 (“IFRS”), as published by the International Accounting Standards Board (“IASB”), without an accompanying reconciliation to generally accepted accounting principles as used in the United States (“U.S. GAAP”). The move is intended to foster promotion of IFRS as a single set of globally accepted accounting standards. CURRENT REQUIREMENTS AND PROPOSED
AMENDMENTS
Under the current SEC rules, any financial statements contained in filings with the SEC 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended (the “Securities Act”).1 The SEC will propose amendments to both Item 17 and Item 18, such that financial statements prepared in accordance with IFRS as published by the IASB (as opposed to a home‐country version of IFRS) could be filed without reconciliation to U.S. GAAP when contained in any foreign private issuer registration statement or annual report. There will be no 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. The SEC indicated that it will propose conforming amendments to certain Rules under Regulation S‐X, which contains the form and content requirements for financial statements included in filings with the SEC. A number of rules contained in Regulation S‐X require an issuer to also include the financial statements of another entity, such as those of a significant acquiree or investee. According to the SEC, the amendments 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. To avoid any ambiguity, the SEC will also propose conforming amendments to the references to U.S. GAAP reconciliation contained in Form F‐4, Form S‐4, and Rule 701 under the Securities Act. WHY ONLY IFRS AS PUBLISHED BY THE
IASB?
As indicated above, the proposed amendments are to apply only to financial statements prepared in accordance with IFRS as published by the IASB, and not home country versions of IFRS. The reason for this, according to the SEC, is to demonstrate that IFRS as published by the IASB represents a single set of global standards. By emphasizing and promoting the use of this 18 Offices Worldwide | Paul, Hastings, Janofsky & Walker LLP | www.paulhastings.com
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on a number of other related topics, including whether the SEC should address any areas in which IFRS does not provide guidance, and whether it should shorten the six‐month deadline for annual reports on Form 20‐F (regardless of whether a U.S. GAAP reconciliation would be included or not). common accounting standard, the SEC believes that investors will be better able to understand and compare foreign investment opportunities without needing to gain familiarity with a myriad of national accounting standards. OTHER ITEMS IN THE PROPOSAL
The proposal will be open to public comment for a period of 75 days after its publication in the Federal Register. In addition to posing questions on these proposed amendments, the release is expected to solicit comment ™™™
If you have any questions concerning these developing issues, please do not hesitate to contact any of the
following Paul Hastings lawyers:
New York
Paris
Scott R. Saks
+1-212-318-6311
scottsaks@paulhastings.com
Joel M. Simon
+33-1-42-99-04-45
joelsimon@paulhastings.com
H. Sarah Whittington
+33-1-42-99-04-09
sarahwhittington@paulhastings.com
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Both Items require audited balance sheets as of the end of the two most recent fiscal years (and, if required by a jurisdiction outside the U.S., must
include audited balance sheets as of the end of the three most recent fiscal years), audited statements of income, cash flows and shareholders’
equity for each of the three most recent fiscal years and a discussion and quantification of the material variations between home country GAAP and
U.S. GAAP as applicable to the company. The difference between the Items appears in paragraph (b) of Item 18, which requires (as Item 17 does
not) the full disclosure of all other information required by U.S. GAAP and SEC Regulation S-X (e.g., segment information, pension information and
various categories of supplemental information). The SEC’s foreign private issuer forms for a subsequent public offering registered in the U.S. under
the 1933 Act generally require compliance with Item 18.
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