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www.friedfrank.com
August 21, 2007
SEC Proposes Eliminating U.S. GAAP Reconciliations for
Foreign Private Issuers using IFRS
In another step to making the U.S. capital markets more receptive to non-U.S. issuers, the U.S. Securities
and Exchange Commission (the “SEC”) has proposed a new rule that would allow foreign private issuers
to use financial statements prepared in accordance with International Financial Reporting Standards
(“IFRS”) as published by the International Accounting Standards Board (“IASB”) in their filings with the
SEC without the requirement to reconcile those financials statements to generally accepted accounting
principles used in the United States (“U.S. GAAP”).1 This would impact what financial statements are
required in filing annual reports on Form 20-F, Multijurisdictional Disclosure System filings by Canadian
issuers and any registration statement filed by a foreign private issuer.
The SEC has also published a
concept release to examine whether to permit U.S. issuers to use financial statements under IFRS.
The IFRS is overseen by the IASB, an independent, privately funded organization. Almost 100 countries,
including all member states in the European Union (the “EU”), now require or allow the use of IFRS and
many other countries are replacing their national standards with IFRS.
The EU requires that all
companies incorporated in one of its member states whose securities are listed on an EU regulated
market report their consolidated financial statements using endorsed IFRS. These requirements affect
approximately 7,000 companies in the EU.
The SEC, IASB and the Financial Accounting Standards Board, which sets the standards for U.S. GAAP,
have encouraged a process of convergence between U.S. GAAP and IFRS into a single system of global,
compatible accounting standards for many years. Although the convergence process is ongoing, the
SEC has decided that there is strong support in the legal and accounting communities for eliminating the
requirement of reconciling IFRS financial statements to U.S. GAAP.
Currently, the SEC requires U.S. issuers to include with their SEC filings, financial statements prepared in
accordance with U.S. GAAP.
Foreign private issuers in their SEC filings may either file financial
statements that are prepared in accordance with U.S. GAAP or file financial statements which are
prepared in accordance with the issuer’s home country GAAP. If an issuer chooses to file non-U.S.
1
http://www.sec.gov/rules/proposed/2007/33-8818.pdf
Copyright © 2007 Fried, Frank, Harris, Shriver & Jacobson (London) LLP
GAAP prepared statements, the issuer is required to submit a reconciliation of its financial statements to
U.S. GAAP. In a reconciliation, a foreign private issuer must identify and quantify the material differences
between its financial statements and the requirements of U.S. GAAP and SEC rules.
The SEC is
proposing revisions to the rules under which it would accept financial statements of foreign private issuers
prepared in accordance with the English language version of IFRS as published by the IASB without
reconciliation to U.S. GAAP.
Foreign private issuers will be permitted to comply with the revised
requirement whether they are using IFRS voluntarily or as a result of compliance with their domestic rules
or local stock exchange requirements. For foreign private issuers that are not required to provide U.S.
GAAP reconciliations, those issuers that utilize Item 18 under Form 20-F also will not be required to
provide the enhanced footnote disclosure required under Item 18.
Eligibility
Under the proposed rules, a foreign private issuer that prepares its financial statements in accordance
with IFRS as published by the IASB will not have to reconcile them with U.S. GAAP. In order to omit the
reconciliation, the foreign private issuer would be required to state explicitly in a prominent footnote that
its financial statements comply with IFRS as published by the IASB. Additionally, the independent auditor
of the financial statements must state in its report that those financial statements comply with IFRS as
published by the IASB.
The proposed amendments would not be available to an issuer that files financial statements that include
deviations from IFRS as published by the IASB or that files its financial statements using a set of
generally accepted accounting principles of another jurisdiction. 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 a U.S. GAAP reconciliation. Some
commentators have questioned whether many issuers will be able to satisfy the SEC’s standard for IFRS.
Under the proposed rules it would be acceptable for a foreign private issuer to comply with both IFRS as
published by the IASB and generally accepted accounting principles of another jurisdiction or a
jurisdictional or other variation of IFRS– for example, to comply with national regulations which impose
variations in accounting standards – so long as the foreign private issuer states unreserved and explicitly
that the financial statements comply with IFRS as published by the IASB and an audit firm opines that the
financial statements comply with IFRS as published by the IASB. The auditor qualification requirements
under the SEC rules will continue to apply.
Additionally, foreign private issuers may continue to submit financial statements prepared with non-U.S.
GAAP or non-IFRS with U.S. GAAP reconciliation information under the current rules if they so choose.
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Specific Effects of the Proposed Changes
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 in an SEC filing such as a registration statement, the financial statements
would have to be prepared in accordance with IFRS as published by the IASB. The submission of interim
financial statements on a Form 6-K will not be affected by these proposed rule changes since no
reconciliation to U.S GAAP was previously required.
Even though an eligible issuer may provide IFRS financial statements for an interim period without
reconciliation, that issuer would continue to be required to comply with the form and content requirements
of Article 10 of Regulation S-X with regard to financial statements rather than IAS 34. For example, IAS
34 permits more condensed financial statements than Article 10.
Financial Statements of Acquired Companies/Proforma Financial Statements
Where financial statements of an entity acquired or to be acquired is required to be filed by the acquiring
company (whether it is a U.S. issuer or a foreign private issuer) in a SEC filing, those financial statements
may now be filed without a U.S. GAAP reconciliation if the financial statements were prepared under
IFRS as published by IASB. Similarly, under Article 11 of Regulation S-X, these acquirers may be
required to prepare unaudited pro forma financial statements.
Under the proposed amendments, a
foreign private issuer using IFRS as published by the IASB would not be required to reconcile its pro
forma financial statements to U.S. GAAP.
Compensatory Benefit Plans in Non-Reporting Companies
Currently Rule 701 of the U.S. Securities Act of 1933 provides an exemption from registration for offers
and sales made under compensatory benefit plans. However, if more than $5 million in securities are
sold by a company over a 12-month period, the company must reconcile its financial statements with U.S.
GAAP for purposes of the offering. Under the proposed rules, a foreign private issuer that conducts an
offering under Rule 701 and that uses IFRS as published by IASB for its financial statements would not
be required to submit a U.S. GAAP reconciliation, even if it sells over $5 million in securities in that 12month period.
SEC Observations on Areas in which IASB Has Yet to Develop Standards
From the SEC's point of view, there are several areas that are not fully developed under IFRS that will
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need to be particularly addressed in SEC filings. The release does not provide particular guidance on
how to approach these areas and are likely to require further SEC guidance going forward.
•
Accounting for Insurance Contracts and Extractive Activities
•
Accounting
Treatment
for
Common
Control
Mergers,
Recapitalization
Transactions,
Reorganizations, Acquisitions of Minority Shares Not Resulting in a Change of Control, and
Similar Transactions
•
Income Statements and Per Share Amounts**
The proposed rule if adopted will be welcome relief to those foreign private issuers that can produce
financial statements using IFRS as published by IASB. These issuers will be likely have lower audit fees
as well as be able to eliminate the need to have internal accounting staff conversant in U.S. GAAP. We
note that the proposed rules do not change the requirement for foreign private issuers to produce
management assessments of internal controls and related auditor's reports under Sarbanes-Oxley
Section 404 .
The SEC is soliciting comments until September 24, 2007.
*
*
*
Authors and Contributors
London
Timothy Peterson
+44.20.7972.9676
timothy.peterson@friedfrank.com
+852.3760.3691
+852.3760.3660
richard.steinwurtzel@friedfrank.com
joshua.wechsler@friedfrank.com
212.859.8272
stuart.gelfond@friedfrank.com
Hong Kong
Richard Steinwurtzel
Joshua Wechsler
New York
Stuart Gelfond
*
SEC notes that IFRS permits disclosure of per share amounts in a variety of formats and permits use of non GAAP financial
measures on the face of income statement. The release states that such use of these measures would not be permitted under the
proposed rules
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