SEC Proposes a Roadmap that Could Lead to Mandatory Use of IFRS by U.S. Issuers Beginning in 2014-2016; Also Proposes Rules Permitting Early Use of IFRS by Certain U.S. Issuers SUMMARY The SEC has published a proposed Roadmap that could lead to the use of financial statements prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) for all U.S. issuers. The proposed Roadmap sets out a series of milestones that the SEC would evaluate in 2011 in order to determine whether to mandate adoption of IFRS for U.S. issuers. If the SEC were to mandate use of IFRS, it is considering requiring IFRS reporting for issuers that file annual reports on Form 10-K beginning with fiscal years ending on or after December 15, 2014, in the case of large accelerated filers, December 15, 2015, in the case of accelerated filers and December 15, 2016, in the case of all other filers. The SEC also is proposing to permit the 20 largest issuers by market capitalization in industries in which IFRS is the most common basis of financial reporting to report under IFRS voluntarily beginning with fiscal years ending on or after December 15, 2009. To implement this proposal and accommodate the use of IFRS, the SEC has also proposed conforming rules and amendments throughout Regulation S-X, Regulation S-K and other areas under the Exchange Act and Securities Act. The SEC has solicited comments on all aspects of the proposed Roadmap. Comments should be submitted no later than February 19, 2009. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
IMPLICATIONS Regardless of whether an issuer expects to implement IFRS 1 on an early basis, or whether it would be eligible to do so, all issuers should begin considering possible adoption of IFRS. The SEC currently anticipates that three years of audited IFRS financial statements would be required in the first year of IFRS implementation. Accordingly, issuers implementing IFRS (either on a voluntary or mandatory basis) would need to devote time and resources to convert existing U.S. GAAP financial statements to IFRS sufficient to have those financial statements audited. In addition, issuers would need to ensure that their internal controls are modified and updated as necessary to accommodate a move to IFRS in order to avoid a negative determination as to the effectiveness of internal control over financial reporting by either their management or their auditors. As noted in the SEC s proposing release setting forth the Roadmap (the Proposing Release ), U.S. GAAP financial statements are used by issuers, investors and others in a variety of ways outside of SEC financial reporting, including regulatory reporting, debt and other contractual covenants and compensation measures. In new credit facilities, indentures and other contracts using financial measures, issuers should consider how best to address the possibility that U.S. GAAP may be replaced by IFRS as the primary accounting standard in the United States. On the assumption that the SEC may ultimately adopt rules mandating the use of IFRS (which is not expected to occur prior to 2011), issuers will want to perform a comprehensive review and analysis of the impact that a change to IFRS may have on them, including changes in accounting treatment of existing or proposed contractual arrangements, business combinations and equity investees, among others. Issuers will also want to begin to consider their financial reporting vis-à-vis the investment community and various financial metrics that will be presented in the future. Moreover, issuers will want to review their existing indentures, credit facilities and other contracts to determine the impact that a change to IFRS may have on their contractual rights and obligations, including whether they will effectively be required to continue to maintain U.S. GAAP books and records and controls and report, in some manner, financial results under U.S. GAAP. If the SEC adopts its proposed rules, issuers that may be eligible to elect to use IFRS should consider whether they will be prepared to do so (if desired) in a timely manner. In making the determination to convert to IFRS, eligible issuers will want to consider a variety of factors, including investor relations and competitive considerations, the costs of making the transition (including the potential need to hire additional accounting personnel, any increases in audit costs and any contractual or SEC requirements to 1 References in this Memorandum to IFRS mean IFRS as issued by the IASB. The SEC s proposal would require that any use of IFRS by U.S. issuers in the preparation of their financial statements be in the form as issued by the IASB, with no jurisdictional variations. -2-
continue to maintain U.S. GAAP books and records and controls) and the preparedness of the issuer s accounting policies, procedures and controls to make an orderly transition. On the other hand, the SEC has indicated that, in the event it decides not to require mandatory conversion for all U.S. issuers, it could also decide to require eligible issuers that voluntarily adopt IFRS early to revert to U.S. GAAP (and is seeking comment on whether it should). Accordingly, absent further guidance from the SEC, U.S. issuers that wish to convert early should take steps to ensure that they are able to revert to U.S. GAAP if necessary. BACKGROUND IFRS has achieved increasing acceptance over the past several years, with approximately 113 countries currently requiring or permitting domestic, listed issuers to report using IFRS, according to the Proposing Release. This in turn has led to an increasing need for U.S. investors to evaluate IFRS financial statements as they monitor their non-u.s. investments, as well as for U.S. companies that compete for capital on a global basis to understand and use IFRS financial statements to remain competitive. The Proposing Release states the SEC s belief that promoting a single set of high-quality globally accepted accounting standards will benefit investors by enabling them to more easily compare financial information across companies and geographies. Given the growing prevalence of IFRS, the SEC has endorsed continued evaluation of IFRS to determine whether it can meet the goals and requirements set forth by the SEC. The SEC s proposed Roadmap follows a series of initiatives that have been undertaken to work towards a single set of globally accepted accounting standards. These include work by the Financial Accounting Standards Board ( FASB ) and the IASB to promote convergence between U.S. GAAP and IFRS, the SEC s 2007 amendments to allow foreign private issuers to file financial statements prepared in accordance with IFRS without a U.S. GAAP reconciliation, 2 the SEC s 2007 Concept Release addressing whether U.S. issuers should be permitted to use IFRS in their SEC filings and a series of roundtables with investors, issuers, accounting firms and others to receive input about the use of IFRS. PROPOSED ROADMAP AND RULES Proposed Roadmap The Proposing Release sets forth a proposed Roadmap with milestones that could, if achieved, lead to the use of IFRS by all U.S. issuers. The SEC also expects to consider and monitor the development and 2 See our previous Memorandum, dated November 16, 2007, entitled U.S. GAAP Reconciliation: SEC Approves Rules to Eliminate Requirement for U.S. GAAP Reconciliation by Foreign Private Issuers that File Financial Statements Prepared in Accordance with IFRS as Issued by the IASB Effective Year-End 2007. -3-
implementation of IFRS to determine whether it is a globally accepted set of accounting standards and whether it is consistently applied (i.e., applied as issued by the IASB, rather than through jurisdictional variations). In addition to the milestones, the SEC expects to review the status of the milestones, as well as the results of an impact study to be conducted by the Office of the Chief Accountant, and would determine in 2011 whether to proceed with rules requiring use of IFRS beginning in 2014 for certain issuers. Potential Implementation Schedule. The SEC is considering implementing IFRS in stages, beginning with fiscal years ending on or after December 15, 2014 for large accelerated filers ($700 million or more in worldwide public float), fiscal years ending on or after December 15, 2015 for accelerated filers ($75 million or more (but less than $700 million) in worldwide public float), and fiscal years ending on or after December 15, 2016 for all other filers. 3 Because the SEC anticipates requiring three years of audited IFRS financial statements during the first year of IFRS reporting, the Proposing Release anticipates that an SEC decision by 2011 would permit issuers to begin to use IFRS in internal accounting in 2012, thereby allowing issuers to develop IFRS financial statements over the three-year period. The SEC also has indicated that during the milestone review period, it may expand the eligibility criteria for those U.S. issuers entitled to elect to use IFRS early. The SEC also expects to consider whether to change the reporting standards for foreign private issuers, as foreign private issuers currently are permitted to prepare financial statements in accordance with U.S. GAAP, IFRS or another comprehensive set of accounting principles with a reconciliation to U.S. GAAP. Applicability. As proposed, the Roadmap for potential mandatory IFRS implementation would apply only to U.S. issuers with respect to their periodic reports filed under Sections 13 or 15(d) of the Exchange Act, proxy and information statements filed under Section 14 of the Exchange Act and registration statements filed under Section 7 of the Securities Act and Section 12 of the Exchange Act. For this purpose, U.S. issuer means an issuer (including a foreign private issuer) that files annual reports on Form 10-K or that files a registration statement under the Securities Act for which foreign private issuer status is not an eligibility requirement. 4 The proposed Roadmap would not apply to issuers that are investment companies under the Investment Company Act or to financial reports filed by regulated entities, such as registered broker-dealers. 3 4 The Proposing Release does not specify the measurement date for large accelerated or accelerated filer status or the ramifications of a non-accelerated filer becoming an accelerated filer (or vice versa) during the transition period. The Proposing Release does not specifically address whether the requirements would apply to companies that file periodic reports with the SEC on a voluntary basis. -4-
Milestones. The proposed Roadmap sets forth a number of milestones that may lead to the implementation of mandatory IFRS reporting for all U.S. issuers. The principal milestones include the following: Improvements in Accounting Standards. The SEC will determine whether IFRS is of high quality and sufficiently comprehensive prior to mandating its adoption in the United States. Among other things, the SEC will investigate the progress made by the FASB and the IASB in converging U.S. GAAP and IFRS and in addressing certain areas in which the SEC believes that IFRS may provide insufficient guidance to issuers. The SEC also intends to review the IASB s process with respect to the adoption and review of accounting standards, noting the following factors, among others: the extent to which development of standards occurs under a robust, independent process that includes due process and provides for input from all affected parties; and the extent to which the IASB considers accounting standards and amendments to reflect new issues or changing practices on a sufficiently prompt basis. Accountability and Funding of the IASC Foundation. The IASB is the standard-setting body of the IASC Foundation. Governance of the IASC Foundation rests with 22 Trustees who are responsible for its and the IASB s oversight and funding. In considering whether to adopt IFRS, the SEC will consider the extent to which the IASC Foundation has a secure and stable funding mechanism that also promotes the foundation s independence. In addition, the SEC will review the functioning of a Monitoring Group, which is composed of securities authorities (including the SEC) in various jurisdictions. The SEC envisions that the Monitoring Group will approve nominations for IASC Foundation Trustees, review funding arrangements of the IASC Foundation and generally address those matters over which the Trustees have responsibility. Improvement in the Ability to Use Interactive Data for IFRS Reporting. The SEC will consider the progress made in developing tags for interactive data reporting that would permit U.S. issuers to provide IFRS financial statements in an interactive data format. 5 Education and Training. The SEC recognizes the effort required to educate and train preparers, reviewers and users of financial statements with respect to IFRS. In making further decisions with respect to IFRS, the SEC will take into account the status and progress of education and training efforts. Experience from Limited Early Use of IFRS. As described further below, the SEC is proposing to permit limited early use of IFRS by companies in circumstances in which the SEC believes that IFRS would enhance the comparability of financial reporting among 5 Under the SEC s proposed rules relating to interactive data reporting, foreign private issuers using IFRS would be required to provide financial statements including interactive data format starting with fiscal periods ending on or after December 15, 2010. The SEC expects that if the rules relating to interactive data reporting are adopted, they would also apply to U.S. issuers that elect to file IFRS financial statements, although the SEC has not specified whether those U.S. issuers would benefit from the extended deadline for interactive data reporting applicable to foreign private issuers. The proposed deadline for domestic and foreign large accelerated filers using U.S. GAAP and having a worldwide public float of greater than $5 billion is fiscal periods ending on or after December 15, 2008. See our previous Memorandum, dated June 9, 2008, entitled SEC Financial Reporting: SEC s Mandatory XBRL Financial Data Initiative May Require Immediate Effort by 500 Largest Companies Using US GAAP. -5-
industry participants in a manner that would benefit investors. The SEC believes that this trial period, which it expects will elicit feedback from issuers, auditors and others, will help inform the SEC s decision whether to mandate IFRS. Additional Considerations. In addition to the specified milestones, the SEC is proposing to consider a number of other factors in determining whether to mandate the use of IFRS, including: the various additional uses of financial statements and figures prepared and computed in accordance with U.S. GAAP, including for regulatory purposes, tax reporting, indenture and credit facility covenants and market indices (such as the S&P 500) that only include companies reporting in U.S. GAAP, and the impact that a change to IFRS may have in these circumstances; changes in internal accounting policies, procedures and controls required to implement IFRS; the impact a change to IFRS may have on companies with U.S. GAAP financial statements that may wish to conduct an initial public offering and that would be required to convert U.S. GAAP financial statements to IFRS for purposes of the registration statement; various issues confronting audit firms, including system changes, training activities, hiring practices and competitive considerations, as well as the ability of audit firms to provide audit opinions on IFRS financial statements; 6 the impact of a change to IFRS on the various standards that have been promulgated by the Public Company Accounting Oversight Board, some of which contain references to U.S. GAAP; and the implications of accounting standards implemented by a multi-jurisdictional body, as opposed to standards that are focused solely on U.S. companies and U.S. accounting concerns. The SEC also would continue to review and consider the status of development and implementation of IFRS. The SEC notes in the Proposing Release that in some areas, IFRS is less developed and also less prescriptive than U.S. GAAP, and therefore may provide less implementation guidance to financial statement preparers and users. The SEC notes that although greater flexibility and optionality may lead to more varied application of IFRS among issuers and reduce comparability of financial information, less rigid guidance may, on the other hand, provide issuers with flexibility to apply IFRS with a view to the underlying economic nature of the transaction or matter in question, which could improve comparability. The SEC also notes that IFRS encourages issuers to include more detailed accounting disclosure in instances in which specific guidance is not available or more than one accounting treatment is permissible. Given the SEC s statements, it is not clear how much further development of IFRS would be required in order for the SEC to determine that IFRS represents an acceptable set of accounting standards. 6 The Proposing Release notes, as one example, the lower threshold under IFRS for recognizing a provision for a legal contingency, and the difficulty auditors may have in obtaining audit inquiry letters from issuers lawyers that apply the lower threshold. -6-
Optional Early Implementation for Certain Issuers As part of the SEC s milestones, the SEC is proposing to permit limited early use of IFRS in circumstances in which the SEC believes that use of IFRS would enhance comparability of financial reporting across industry participants in a manner that would benefit investors. U.S. issuers would need to meet certain eligibility criteria and obtain a letter of no objection from the SEC staff in order to file financial statements prepared under IFRS prior to adoption of additional IFRS-related rules by the SEC. The proposed criteria are as follows: Industry Eligibility. The issuer must be in an industry in which IFRS is used as the basis of financial reporting more than any other basis of financial reporting by the 20 largest listed companies worldwide by market capitalization within that industry. Industry Determination. For purposes of determining whether an issuer is in an eligible IFRS industry, the composition of an industry would be determined with reference to one of a variety of accepted industry classification schemes. 7 A single classification scheme must be used for compiling the list of companies in the industry. Identification of Basis of Financial Reporting. IFRS as issued by the IASB (which would not include jurisdictional variations) must be the most prevalent basis of financial reporting within the 20 largest companies in the industry. For example, an industry in which eight of the 20 largest issuers use IFRS, seven use U.S. GAAP and five use another basis of financial reporting would be considered an eligible industry. Basis of financial reporting would refer to the accounting principles under which a company publishes its audited financial statements. Under the proposed rules, a company reporting under more than one set of standards could be counted as using any of the standards used. In addition, to the extent that the 20 largest listed companies include companies reporting under a jurisdictional variation of IFRS or it is not clear that the financial statements were prepared under IFRS as issued by the IASB, the issuer would be required to state that no information came to its attention from the content of the financial statements analyzed or otherwise that caused it to believe that the financial statements were not prepared in accordance with IFRS as issued by the IASB. Calculation of Market Capitalization. Market capitalization would equal aggregate worldwide market value of outstanding voting and non-voting common equity securities, determined using a widely accepted source as of the same day for each company within 180 days preceding the date on which the SEC staff receives the request for a letter of no objection. 7 The industry could be assessed using North American Industry Classification System (NAICS) codes at the three-digit level, Standard Industrial Classification (SIC) codes at the two-digit level, or the International Standard Industrial Classification (ISIC) codes at the Division level. Alternatively, privately provided, published and widely accepted industry classification schemes at a similar level of detail could also be used. The Proposing Release does not provide additional detail as to what would be considered a widely accepted industry classification scheme, but provides as examples the Industry Classification Benchmark (ICB) at the Sector level or the Global Industry Classification Standard (GICS) at the Industry level. -7-
One of the 20 Largest Companies in Industry. An issuer seeking to use IFRS also must be one of the 20 largest listed companies by market capitalization in its industry as of the same date that market capitalization is determined for others in the industry. Certain Categories of Issuers Ineligible. Investment companies, employee stock purchase, savings and similar plans and smaller reporting companies (in general, less than $75 million in worldwide public float) would not be eligible to early report using IFRS. Based on a review using SIC codes, the SEC has estimated that at least 110 U.S. issuers in 34 eligible industries would be eligible to receive a letter of no objection from the Staff. Staff No-Objection Letter. An issuer that believes it meets the eligibility criteria and wishes to present its financial statements under IFRS would first need to seek and obtain a no-objection letter from the SEC staff. The letter would not commit the issuer to using IFRS and would be valid for three years from the date of the SEC staff s response i.e., the issuer would be able to report under IFRS at any time during that three-year period, without having to re-determine whether it meets the eligibility criteria set forth above. A no-objection letter and the related request would be posted on the SEC s website; however, a request letter that does not receive a no-objection response would not be posted, although presumably it could be obtained through a Freedom of Information Act (FOIA) request or other procedure. Implementation Schedule. U.S. issuers eligible to report according to IFRS would be permitted to do so beginning with financial statements for fiscal years ending on or after December 15, 2009. The first reports containing financial statements prepared in accordance with IFRS must be financial statements in an annual report on Form 10-K, with three years of financial statements presented in accordance with IFRS. 8 Reconciliations to U.S. GAAP. U.S. issuers that convert to IFRS voluntarily would be required to provide a reconciliation to U.S. GAAP. The SEC has proposed two alternatives for presenting the reconciliation once upon initial adoption of IFRS or on a continuing basis thereafter and has solicited comment on which alternative is appropriate. No additional reconciliation requirement: Under the first proposal, no reconciliation to U.S. GAAP would be required beyond the reconciliation and disclosure required under IFRS 1, First-Time Adoption of International Financial Reporting Standards. IFRS 1 requires reconciliations of an issuer s equity reported under previous GAAP to IFRS for the date of transition and the end of the latest period presented in the most recent annual financial statements prepared under previous GAAP, and of its total comprehensive income, as well as a summary of material adjustments to the statement of cash flows. IFRS 1 requires the reconciling disclosure for only the first year IFRS is used. 8 U.S. issuers would not be permitted to commence reporting under IFRS in an interim SEC filing. Similarly, an issuer that chooses to revert to U.S. GAAP reporting would only be permitted to do so in an annual report on Form 10-K. In the Proposing Release, the SEC indicated that it is not inclined to allow U.S. issuers to present only two years of financial statements in accordance with IFRS (with the third year presented in accordance with U.S. GAAP), but is seeking comments on this point. -8-
Additional reconciliation requirement: The SEC s alternative proposal would require certain supplemental U.S. GAAP financial information on an annual basis covering a threeyear period. In particular, reconciliations to U.S. GAAP would be required for balance sheets, income statements, cash flow statements, statements of changes in shareholders equity and statements of comprehensive income for the three years of financial statements included in each annual report. 9 With regard to ongoing reconciliation, the SEC has noted the following: Quarterly reports would not need to include these reconciliations, nor would the supplemental disclosures need to be audited or reviewed by an issuer s auditors or be subject to management s assessment of internal control over financial reporting or the related internal control audit. However, the information would be subject to liability under the Exchange Act and the Securities Act and would be subject to management s Sarbanes-Oxley Act certifications, as well as disclosures and determinations relating to disclosure controls and procedures. By requiring U.S. issuers to make supplemental U.S. GAAP disclosures, and therefore necessarily requiring issuers to maintain U.S. GAAP books and records and controls, issuers could more easily revert to U.S. GAAP in the event that the SEC ultimately determined not to proceed with mandatory IFRS reporting. 10 The SEC does not anticipate requiring supplemental U.S. GAAP financial information if it ultimately mandates the use of IFRS. Additional Annual Report Disclosures. In the first year of adoption, a U.S. issuer electing IFRS would be required to disclose prominently in the Business section of its annual report on Form 10-K the conversion to IFRS, the reasons for the change, the corporate governance processes that were followed in electing to make the change (e.g., whether a stockholder vote was held and the extent to which the board of directors and audit committee considered the matter), 11 the date the issuer submitted its request for no-objection and the date such request was granted. Similar disclosure would be required in the event an IFRS issuer decided to revert back to U.S. GAAP. Proposed Amendments to SEC Rules to Provide for IFRS Reporting To enable IFRS issuers all U.S. issuers that convert to IFRS voluntarily to report under IFRS, the SEC has proposed a variety of new rules and amendments, including rules under Regulation S-X and 9 10 11 The text of the proposed rule requires a reconciliation of financial information from IFRS to U.S. GAAP but does not provide the additional specificity regarding the reconciliation that is set forth in the Proposing Release. The SEC also notes in the Proposing Release that it has not yet determined whether it would require issuers to revert back to U.S. GAAP in the event that it determines not to mandate IFRS for all issuers. Accordingly, in the absence of future guidance, electing issuers may wish to maintain U.S. GAAP books and records and controls. The Proposing Release does not take a position as to whether issuers should seek stockholder approval prior to converting to IFRS. -9-
Regulation S-K and amendments to Form 8-K. Many of these proposed rules would impact not only IFRS issuers, but also foreign private issuers that report under IFRS. References to Generally Accepted Accounting Principles. In general, existing references to generally accepted accounting principles would refer to IFRS for those preparing financial statements in accordance with IFRS. On the other hand, references to specific U.S. GAAP requirements generally would refer to disclosure that satisfies the objective of the relevant disclosure requirements, rather than referring to specific comparable IFRS requirements. An exception to this general principle would apply to references to specific U.S. GAAP requirements in Form 8-K (e.g., requirements relating to costs associated with exit or disposal activities) for IFRS issuers, these would be replaced by references to specific provisions of IFRS. Regulation G (Non-GAAP Financial Measures). For IFRS issuers, GAAP as used in Regulation G (relating to non-gaap financial measures) would refer to IFRS. However, where an IFRS issuer includes a non-gaap financial measure derived from a measure calculated in accordance with U.S. GAAP, GAAP would refer to U.S. GAAP for purposes of the required reconciliation under Regulation G and related disclosure. Accordingly, it would appear that IFRS issuers would be permitted to provide non-gaap measures derived from U.S. GAAP or IFRS measures. Selected Financial Data. Item 301(a) of Regulation S-K requires selected financial data for the last five fiscal years. The proposed rules would require only three years of IFRS data during the first year of implementation. The Proposing Release indicates that an additional year of IFRS data would be required each year thereafter, until all five years are presented in accordance with IFRS; however, the text of the proposed rule appears to permit less than five years of IFRS data only during the first year of implementation. It is not clear whether the proposed rule would require presentation of U.S. GAAP information for the two earliest fiscal years. Market Risk and Safe Harbor Provisions. The SEC notes in the Proposing Release that the financial statement note disclosure required by IFRS calls for forward-looking market risk disclosure similar to that required by Item 305 of Regulation S-K. Unlike the disclosure required by Item 305 of Regulation S-K, information contained in financial statements is not covered by the statutory safe harbors for forward-looking statements provided by the Securities Act and the Exchange Act. The SEC notes that it has previously received comments from foreign private issuers seeking to obtain safe harbor or similar relief for these disclosures. To date, the SEC has declined requests to provide such relief, but the Proposing Release seeks comments on this issue. Financial Statements Required in Tender Offers and Going Private Transactions. With respect to financial information required in a Schedule TO tender offer statement or Schedule 13E-3 going private transaction statement, the proposed rules would eliminate the U.S. GAAP reconciliation requirement for financial information prepared in accordance with IFRS if the relevant filing is made by a foreign private issuer or an IFRS issuer. Rules Relating to Financial Statements of Other Entities. Under the proposed rules, financial statements of other entities required by Rules 3-05 (relating to businesses acquired or to be acquired), 3-09 (relating to unconsolidated subsidiaries and 50%-or-less-owned persons) and 3-14 (relating to real estate operations to be acquired) of Regulation S-X included in a filing by an IFRS issuer would be permitted to be prepared in accordance with IFRS. 12 The Proposing Release also notes that consistent with current rules, guarantor 12 In addition, for purposes of determining whether an entity is significant to an IFRS issuer under Rule 1-02(w) of Regulation S-X (to determine, for example, whether separate financial statements are (footnote continued on next page) -10-
financial statements under Rule 3-10 of Regulation S-X or financial statements of affiliates of an issuer whose securities collateralize an issue registered or being registered under Rule 3-16 of Regulation S-X should be prepared in the same manner as the financial statements of the registrant. The proposed rules also enumerate those provisions of Regulation S-X that would no longer be applicable to issuers preparing IFRS financial statements. Industry Guides. The SEC indicates in the Proposing Release that it does not intend to amend the rules relating to the SEC s Industry Guides. The SEC notes that for information required that extends back more than three years, U.S. GAAP information could be used for the extended period. In addition, the Proposing Release notes that in the case of Guide 5, Preparation of Registration Statements Relating to Interests in Real Estate Limited Partnerships, an issuer need not convert prior performance information relating to the general partner and its affiliates to IFRS if the partnership is otherwise eligible to use IFRS. FAS 69. The proposed rules would continue to require disclosure under FAS 69, Disclosure About Oil and Gas Producing Activities, even if the financial statements are prepared in accordance with IFRS. The SEC is not proposing to make any changes to its Accounting Series Releases, Financial Releases or Staff Accounting Bulletins. The SEC notes that IFRS issuers would not be required to look to the SEC s U.S. GAAP guidance, but that issuers may find that guidance useful as they apply International Accounting Standard 8, Accounting Policies, Changes in Accounting Estimates and Errors, which provides that for those areas in which an IFRS pronouncement does not exist, issuers should use judgment in developing accounting policies that reflect the economic substance of transactions and that in applying this judgment, issuers may consider accounting pronouncements by other standard setters that use a similar conceptual framework to develop accounting standards, to the extent such pronouncements do not conflict with IFRS. Comment Process The SEC has solicited comments on all aspects of the proposed Roadmap and is specifically seeking comment in the following areas, among others: the SEC s proposed schedule for making a determination on whether to mandate the adoption of IFRS, as well as the proposed implementation schedule, and whether implementation should be staged or non-staged; factors that the SEC should consider when measuring the progress of U.S. investors, issuers and other market participants towards a transition to IFRS; the proposal to permit early adoption of IFRS for certain issuers, and the proposed categories of industries and issuers that would be eligible for early adoption; the proposed no-objection letter procedure for determining IFRS eligibility; whether stockholder approval should be required to voluntarily use IFRS; (footnote continued) required for an equity investee or whether pro forma financial statements are required for an acquisition), significance testing would be applied using IFRS, which presumably would require that the applicable entity s financial statements be available in IFRS. -11-
whether IFRS issuers should be required to revert back to U.S. GAAP if the SEC determines not to proceed with IFRS; whether issuers should be permitted to file two years, rather than three years, of IFRS financial statements in their first annual reports containing IFRS financial statements; the SEC s two alternative proposals for IFRS to U.S. GAAP reconciliation, including whether any supplemental U.S. GAAP information should be audited, whether the supplemental information should be deemed to be furnished rather than filed for purposes of Section 18 of the Exchange Act and whether the supplemental information should be addressed in Management s Discussion and Analysis of Financial Condition and Results of Operations ; whether other specific references to U.S. GAAP should also reference specific IFRS pronouncements; and whether Form 8-K should require forward-looking disclosure regarding an issuer s consideration of whether it will elect to file IFRS financial statements. Comments should be submitted no later than February 19, 2009. * * * Copyright Sullivan & Cromwell LLP 2008-12-
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