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1 Number 667 January 16, 2008 Client Alert Latham & Watkins Corporate & Litigation Departments SEC Accepts Financial Statements From Foreign Private Issuers Without Reconciliation to US GAAP If Prepared Under International Financial Reporting Standards The SEC has taken a bold step towards the adoption of global accounting standards by permitting foreign private issuers to file IFRS financial statements without reconciliation to US GAAP. On December 21, 2007, the US Securities and Exchange Commission (SEC) unanimously approved final rules that will allow foreign private issuers (FPIs) to use financial statements without reconciliation to US GAAP if they are prepared using the English language version of the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). 1 The new rules will apply to financial statements for financial years ending after November 15, and will become effective March 4, The new rules will have a broad and growing impact. More than 100 countries already permit or require use of IFRS for preparing financial statements of listed companies, including all countries in the European Union, Israel, Mexico, Venezuela, Australia and South Africa. 4 Canada, India, Brazil, South Korea, China and Chile are in various stages of adopting IFRS as well. 5 In addition to making it easier for companies listed in these countries to access the US capital markets, the SEC expects that the new rules will give US investors better and more comparable financial information when they invest in USregistered non-us companies. The new rules are expected to substantially increase investment opportunities and to facilitate cross-border capital formation. 6 The SEC s adoption of the new rules together with the SEC s publication of the concept release last year are developments that can dramatically affect US reporting requirements and the manner and location in which companies raise capital in the future. On January 14, 2008, John White, the director of the SEC s Division of Corporation Finance, noted that the SEC is deeply committed to the development of a single global set of high quality accounting rules. 7 Mr. White s remarks demonstrate that the SEC is building on the actions of the past year to quickly and effectively achieve this overall goal and promoting capital formation. The New Rules and Their Implementation The Securities Exchange Act of 1934 (Exchange Act) and the rules adopted by the SEC generally require FPIs whose securities are registered for sale or listed in the US to present audited statements of income, financial position, changes in shareholders equity and Latham & Watkins operates as a limited liability partnership worldwide with an affiliated limited liability partnership conducting the practice in the United Kingdom and Italy. Under s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue,, NY , Phone: Copyright 2008 Latham & Watkins. All Rights Reserved.

2 cash flows for each of their past three financial years. 8 The new rules apply only to FPIs that file on Form 20-F. 9 Prior to the adoption of these new rules, Form 20-F gave FPIs only two options: either prepare financial statements and schedules in accordance with US GAAP or prepare those statements and schedules in accordance with generally accepted accounting principles of another jurisdiction and provide a footnote reconciliation to US GAAP. 10 The required reconciliation included a narrative description of differences and a quantitative reconciliation of specific line items in the financial statements, including net income, major balance sheet captions and cash flow. 11 The SEC s new revisions provide FPIs with a third option. If an FPI uses the English language version of IFRS as issued by the IASB, the SEC will no longer require a footnote reconciliation to US GAAP. 12 The new rules will apply both to annual financial statements for financial years ending after November 15, 2007 and to interim periods within those years, so neither will need to be reconciled to US GAAP if the applicable requirements are met. 13 Similarly, FPIs will no longer be required to file reconciliations to US GAAP with regard to the required selected (typically five year) historical financial information that is disclosed to the SEC pursuant to Item 3 of Form 20-F if that information was prepared in compliance with IFRS. 14 In order to be eligible, however, the issuer must unreservedly and explicitly state in the notes to the financial statements that they are in compliance with IFRS as issued by the IASB. 15 In addition, the new provisions require that the FPI s independent auditor opines in its report that the financial statements comply with IFRS as issued by the IASB. If the auditor s report contains a qualification relating to the application of IFRS as issued by the IASB, the issuer will be required to provide the reconciliation to US GAAP. 16 In cases where FPIs follow a variation of IFRS, rather than IFRS as issued by the IASB, the new rules are still available if the issuer and the auditor can each provide the necessary assertions that the financial statements comply with IFRS as issued by the IASB. 17 In other words, if the financial statements comply with both the home country version of IFRS as well as IFRS as issued by the IASB, the new rules remain available. In this regard, the SEC staff has noted that IFRS as adopted by the European Union differs from IFRS as issued by the IASB but that for the vast majority of E.U. issuers listed in the US the difference has no practical significance and as a result, their financial statements would be identical to those prepared under IFRS as published by the IASB. 18 Form 20-F also includes a number of disclosure requirements that refer to specific pronouncements of US GAAP, including statements and interpretations of the Financial Accounting Statements Board (FASB). Under the new rules, FPIs using IFRS as issued by the IASB will still be required to respond to items of Form 20-F that refer to US GAAP. 19 However, rather than using the specific pronouncements of US GAAP, the new rules require that issuers disclose information that satisfies the purpose underlying those pronouncements. Furthermore, they are not required to repeat any of the information that is contained in their IFRS-compliant financial statements. 20 It should be noted, however, that the SEC instructions to the new rules expressly preserve the requirement of oil and gas companies to provide unaudited supplementary information related to proved oil and gas reserves. 21 When it adopted the revisions to the reporting requirements, the SEC recognized that the European Commission previously implemented regulations allowing listed companies to avoid certain provisions of International Accounting Standard 39 (Financial Measurements: Recognition And

3 Measurement) regarding the use of the full fair value option and hedge accounting. 22 The European carve out to IAS 39 is of particular importance to the banking industry. Under the new rules, European issuers that are already registered with the SEC may file financial statements that comply with the carve out to IAS 39 without reconciliation to US GAAP for their first two financial years ending after November 15, 2007 if their financial statements otherwise comply with IFRS and the issuer provides an audited reconciliation to IFRS as issued by the IASB. 23 For the financial years that follow the first two financial years after November 15, 2007, these companies must either submit financial statements that were prepared in accordance with IFRS as issued by the IASB or provide a reconciliation to US GAAP. 24 In the meantime, the SEC will continue to discuss the accounting for derivative and hedging transactions with the IASB, the FASB, and the European Commission. 25 The SEC also acknowledged that there are a number of areas for which IFRS does not yet provide a specific standard or interpretation. For example, the SEC recognized there are currently no specific standards or interpretations for the accounting treatment of common control mergers, recapitalizations, reorganizations, and acquisitions of minority interests. 26 The IASB and the FASB have, however, been working together on formulating and announcing joint standards and interpretations. For example, in December 2007, the FASB issued FASB Statements No. 141 (Business Combinations) and No. 160 (Noncontrolling Interests in Consolidated Financial Statements), 27 while the IASB issued revised IFRS 3 (Business Combinations) in January It will likely take some time until there are exhaustive common standards and interpretations for IFRS. Until then, it will be particularly important for FPIs using IFRS that seek to avoid the footnote reconciliation requirement to discuss specifically with their independent auditor and legal counsel each of the required disclosures in areas where there is not yet a common standard or interpretation. It is also important to remember that not all IFRS is created equal: where a company s financial statements do not comply with IFRS as issued by the IASB, the SEC will continue to require reconciliation to US GAAP. The Ability to Present Financial Statements Without Reconciliation to US GAAP Does Not Change the Rules Governing Audits The new rules adopted by the SEC do not change the rules that govern the independent audits accompanying financial statements. Although FPIs may now present their IFRS (as issued by the IASB)-compliant financial statements without reconciliation to US GAAP, the independent audit must still be conducted in accordance with the standards set by the Public Company Accounting Oversight Board (PCAOB) and with US Generally Accepted Audit Standards. 29 In 2003, the PCAOB adopted certain pre-existing professional standards from the American Institute of Certified Public Accountants (AICPA), including the requirement that the independent auditor is a member of the AICPA SEC Practice Section. This requirement sought to enhance the quality of SEC filings by FPIs whose financial statements are audited by non-us audit firms. The new rules do not change the membership requirement, but the SEC has noted that the PCAOB is generally reviewing the audit implications that follow from the decision to permit IFRScompliant financial statements in SEC filings. 30

4 The US Statutory Safe Harbors For Certain Forward Looking Statements And IFRS Financial Statements Form 20-F requires FPIs to disclose qualitative and quantitative information about market risks that are inherent in derivative financial instruments, other financial instruments and derivative commodity instruments. 31 Forward looking statements regarding such market risks are not included in the financial statements and are generally intended to be covered by the safe harbor provisions of 21E of the Exchange Act and 27A of the Securities Act of 1933 (Securities Act). 32 Similar to Form 20-F, IFRS 7 (Financial Instruments: Disclosures) also requires information about market risks. This analysis will frequently be based on the same forward looking information as the market risks that are disclosed in Form 20-F. 33 Unlike the disclosure required by Form 20-F, disclosure of information regarding market risks is made in the footnotes to the IFRS financial statements. As recognized by the SEC, 21E of the Exchange Act and 27A of the Securities Act specifically excludes information from the statutory safe harbor if it is included in a financial statement prepared in accordance with generally accepted accounting principles. 34 According to the SEC, this means that safe harbor provisions for certain forward looking statements would not be available for IFRScompliant financial statements. The SEC staff has expressed its awareness of this issue, believes it merits further consideration, and has suggested that it may undertake additional rulemaking on this point in the future. 35 Conclusion The SEC has taken a bold step towards the adoption of global accounting standards by permitting FPIs to file IFRS financial statements without reconciliation to US GAAP. Consistent with the goal of assisting the movement towards a single set of high-quality, globally accepted accounting standards, the SEC will only accept financial statements that comply with the English language version of IFRS as issued by the IASB. 36 In this regard, the SEC works closely with the IASB staff, foreign regulators and the Committee of European Securities Regulators, which was charged by the European Commission with evaluating the implementation of IFRS in the European Union to avoid conflicting conclusions regarding the application and enforcement of IFRS. 37 In addition, the SEC may go even further in the future by also allowing US domestic issuers and investment companies that are subject to the Investment Company Act of 1940 to use financial statements prepared under IFRS instead of US GAAP. 38 Although the lower burdens for raising capital and the increased transparency for investors are to be welcomed, there are a number of important issues that will need to be analyzed before any issuer should embrace the possibility of using IFRS instead of reconciliation to, or use of, US GAAP. For example, the issuer may have entered into contracts that include covenants based on US GAAP measurements. In addition, there are still significant areas where the IASB has not yet adopted global standards, leading to temporary uncertainty and regional diversion that may affect investors perceptions of FPIs financial statements. Moreover, all issuers should carefully analyze with their US legal counsel whether use of IFRS financial statements for purposes of SEC reporting requirements is advisable under applicable US securities laws, including the possible impact that the use of IFRS may have on the issuer s disclosure and reporting requirements and the availability of safe harbors.

5 Endnotes 1 Acceptance From Foreign Private Issuers Of Financial Statements Prepared In Accordance With International Financial Reporting Standards Without Reconciliation To US GAAP (SEC International Series Release No. 1306), Securities and Exchange Commission (December 21, 2007), available at sec.gov/rules/final/2007/ pdf. 2 See id. 3 The new rules will become effective March 4, 2008, which is 60 days after publication in the Federal Register. The SEC advises FPIs with a fiscal year ending after November 15, 2007 that prepare financial statements using IFRS as issued by the IASB and that want to file their annual report on Form 20-F before March 4, 2008 without reconciliation to US GAAP to contact the SEC staff. Foreign Private Issuers Wishing to File Their Annual Report on Form 20-F before March 4, 2008 and Exclude US GAAP Information Should Consult with the Staff, last modified on January 14, 2008, available at sec.gov/divisions/corpfin/guidance/cf20fgaap. htm. During his remarks at the Seventh Annual Institute On Securities Regulation In Europe, John White, the director of the SEC s Division of Corporation Finance, also recommended that registrants seeking to file IFRS-compliant financial statements without reconciliation to US GAAP before March 4, 2008, contact the SEC staff. He noted, however, that all formal waivers must be in writing. Remarks of John White, Seventh Annual Institute On Securities Regulation In Europe, January 14, 2008, expected to be posted on the SEC website on or about January 18, Use of IFRSs by Jurisdiction, Deloitte Touche Tohmatsu, last updated December 31, 2007, available at useias.htm. 5 Id., and Acceptance From Foreign Private Issuers Of Financial Statements Prepared In Accordance With International Financial Reporting Standards Without Reconciliation To US GAAP (SEC International Series Release No. 1302), Securities and Exchange Commission (July 2, 2007), p , available at proposed/2007/ pdf 6 SEC Takes Action To Improve Consistency Of Disclosure To US Investors In Foreign Companies, Securities and Exchange Commission (November 15, 2007), available at 7 Remarks of John White, Seventh Annual Institute On Securities Regulation In Europe, January 14, 2008, expected to be posted on the SEC Web site on or about January 18, Exchange Act 13(a) and 15(d), Form 20-F and Regulation S-X. 9 SEC International Series Release No. 1306, p. 28. Thus FPIs that voluntarily file on Form 10-K would not be eligible to use the new rules. Presumably, Canadian FPIs that file on Form 40-F would also not be eligible because Canada has not yet adopted IFRS as issued by the IASB. See Use of IFRSs by Jurisdiction, Deloitte Touche Tohmatsu, n. 7 ( Canada has announced a plan to adopt IFRSs in full as Canadian Financial Reporting Standards effective 2011 ), last updated December 31, 2007, available at country/useias.htm. 10 Form 20-F, Item 17(c). 11 Id. 12 Revised Item 17, SEC International Series Release No. 1306, p and Instruction 2 to Item 3.A., SEC International Series Release No. 1306, p Revised Item 17, SEC International Series Release No. 1306, p Id Id. at 32, n. 75 (quoting comment letter from the European Commission). 19 Id. at Revised Item 5 and Revised Item 11, SEC International Series Release No. 1306, p Instruction 2 to Revised Item 18 provides as follows: 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 Accounting standards: Commission endorses IAS 39, IP/04/1385, European Commission

6 (November 19, 2004) available at europa.eu/rapid/pressreleasesaction. do?reference=ip/04/ 1385&format=HTML& aged=0&language=en&guilanguage=en. For a further discussion of the impact of the European Commission s derogation from IFRS, and particularly regarding IAS 39, see The impact of the transition to IFRS for French banking groups, available at cbreport/2005/study1.pdf. 23 Special Instruction For Certain European Issuers to Revised Item 17, SEC International Series Release No. 1306, p Id. at Id. at Id. at Business Combinations: Applying the Acquisition Method Joint Project of the IASB and FASB, last updated December 4, 2007, available at project/bc_acquisition_method.shtml#plans. 28 The new requirements of IFRS 3 come into effect on July 1, 2009 but earlier adoption is permitted. IASB, Business Combinations, available at IASB+Projects/Business+Combinations/ Business+Combinations+II.htm Id. at 72, fn Form 20-F, Item Exchange Act 21E(c) and Securities Act 27A(c); see also SEC International Series Release No. 1306, p IFRS 7- Ready Or Not, PriceWaterhouseCoopers, available at docid/24d308407fa6fc b817/ $file/pwc_ifrs-ready_or_not.pdf; also IFRS 7 Financial Instruments: Disclosure, Ernst & Young (2d ed.), p. 20, available at ey.com/global/assets.nsf/russia_e/ifrs_7_ 2nd_edition_final_version/$file/IFRS_7_2nd_ edition_final_version.pdf. 34 Exchange Act 21E(b)(2)(A) and Securities Act 27A(b)(2)(A); see also SEC International Series Release No. 1306, p Id. at 33 (noting that according to the IASC Foundation Constitution, the authoritative text of any Exposure Draft or International Accounting Standard or International Financial Reporting Standards or draft or final Interpretation shall be that published by the IASB in the English Language). 37 Id. at On August 7, 2007, the SEC released a concept release stating that accepting IFRS for US issuers is expected to enable investors to more efficiently compare financial results. In addition, the SEC believes that permitting US issuers to use IFRS may result in substantial cost-savings if such issuers have many foreign subsidiaries that use IFRS as well. In its release, the SEC noted, however, that US issuers may have entered into contracts, including loan documents and leases, that include covenants based on US GAAP measurements. To assess the effects of permitting US issuers to use IFRS, the SEC requested comments and convened roundtable meetings on December 13 and December 17, See Concept Release On Allowing US Issuers To Prepare Financial Statements In Accordance With International Financial Reporting Standards (SEC Release No ), Securities and Exchange Commission (August 7, 2007), p , available at concept/2007/ pdf.

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