On July 2, 2007, the Securities and Exchange Commission ("SEC") published for public comment a proposal to accept financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"), as published by the International Accounting Standards Board ("IASB"), from foreign private issuers, without reconciliation to U.S. generally accepted accounting principles ("U.S. GAAP"). In addition, on August 7, 2007, the SEC published a concept release requesting comment on whether the SEC should consider permitting U.S. issuers to use IFRS for financial statements required to be filed with the SEC. This non-U.S. issuer proposal represents a notable movement by the SEC in the direction of eliminating a reporting requirement that historically has been a substantial burden for many non-U.S. issuers. The U.S. issuer concept release presents a dramatic new idea, the implications of which, for U.S. issuers and the U.S. public markets, must be carefully considered.
Foreign Private Issuer IFRS Proposal
The SEC currently requires foreign private issuers either to prepare their financial statements in accordance with U.S. GAAP or reconcile their financial statements prepared in accordance with another comprehensive body of accounting principles to U.S. GAAP. This requirement is intended to ensure that financial statements available to investors are prepared on a comparable basis, thereby easing investors' ability to draw financial comparisons. For many years, foreign private issuers have raised concerns about the cost and inconvenience of the U.S. GAAP reconciliation requirement. In response, the SEC has maintained the reconciliation requirement, but it has encouraged movement toward a single set of high-quality, globally accepted accounting standards that would be adequate for U.S. and non-U.S. markets.
Over the last several years, the IASB and the Financial Accounting Standards Board in the United States ("FASB") have worked together to promote the convergence of U.S. GAAP and IFRS. The SEC's foreign private issuer IFRS proposal may indicate the SEC believes IFRS, as published by the IASB, has progressed sufficiently that it is acceptable for financial reports by non-U.S. companies entering into, or with securities traded in, the U.S. public markets.
Under the SEC's proposed rule, a foreign private issuer would not be required to reconcile its financial statements to U.S. GAAP if the following criteria are met:
- The foreign private issuer files its financial statements in full compliance with the English language version of IFRS as published by the IASB.
- The foreign private issuer, in a prominent footnote to its financial statements, states unreservedly and explicitly that its financial statements are in compliance with IFRS as published by the IASB.
- The foreign private issuer's independent auditor opines unreservedly and explicitly in its report that the financial statements are in compliance with IFRS as published by the IASB.
Any foreign private issuer that files financial statements that include any deviations from IFRS as published by the IASB would be required to provide a U.S. GAAP reconciliation.
If the IFRS proposal is adopted, portions of Regulation S-X that do not relate to the form and content of financial statements, such as provisions dealing with auditor qualifications and reports, would continue to apply to filings of foreign private issuers that file financial statements prepared using IFRS as published by the IASB.
Concept Release Relating to the Use of IFRS by U.S. Issuers
A natural corollary to the acceptance of use of IFRS by non-U.S. issuers is the acceptance of its use by U.S. issuers. Interestingly, on August 7, 2007, the SEC published for public comment a concept release regarding allowing U.S. issuers, including investment companies, to prepare their financial statements using IFRS instead of U.S. GAAP. The concept release requests comments with respect to a number of matters, including the establishment and oversight of IFRS, the practical implications that would arise for U.S. issuers applying IFRS, and the possible impact on the U.S. capital markets. Although this proposal by the SEC is only a concept and is not developed enough to be at the proposed rulemaking stage, it is significant in that the SEC is willing to request formal comments on the concept.
Two other interesting developments that may affect these IFRS proposals are the SEC's establishment of an Advisory Committee on Improvements to Financial Reporting and initiation of a roundtable discussion on mutual recognition, each of which occurred in June of this year. The Advisory Committee will study the U.S. financial reporting requirements and recommend ways to reduce complexities and costs. The roundtable participants considered how foreign markets and foreign brokers might be permitted to operate in the United States without registering with the SEC. While not necessarily related, these developments, along with recent IFRS proposals, may indicate a current environment at the SEC conducive to significant change with respect to public company financial statement reporting.
Those interested in the U.S. GAAP/IFRS reconciliation issue should review the SEC release relating to the non-U.S. issuer IFRS proposal and the U.S. issuer concept release because they provide a very good description of the history of the U.S. GAAP reconciliation requirement, the most significant SEC concerns regarding acceptance of accounting principles other than U.S. GAAP, and the work undertaken to date by the FASB and IASB on the convergence of U.S. GAAP and IFRS.