[Federal Register Volume 69, Number 53 (Thursday, March 18, 2004)]
[Proposed Rules]
[Pages 12904-12919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5982]



[[Page 12903]]

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Part II





Securities and Exchange Commission





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17 CFR Part 249



First-Time Application of International Financial Reporting Standards; 
Proposed Rule

  Federal Register / Vol. 69, No. 53 / Thursday, March 18, 2004 / 
Proposed Rules  

[[Page 12904]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 249

[Release Nos. 33-8397; 34-49403; International Series Release No. 1274; 
File No. S7-15-04]
RIN 3235-AI92


First-Time Application of International Financial Reporting 
Standards

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendment to form.

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SUMMARY: The Commission is proposing to amend Form 20-F to provide a 
one-time accommodation relating to financial statements prepared under 
International Financial Reporting Standards (``IFRS'') for foreign 
private issuers registered with the SEC. This accommodation would apply 
to foreign private issuers that have not previously published financial 
statements under IFRS, formerly known as International Accounting 
Standards (``IAS''), and that publish IFRS financial statements for the 
first time for any financial year beginning no later than January 1, 
2007.
    The accommodation would permit eligible foreign private issuers for 
their first year of reporting under IFRS to file two years rather than 
three years of statements of income, changes in shareholders' equity 
and cash flows prepared in accordance with IFRS, with appropriate 
related disclosure. The accommodation would retain current requirements 
regarding the reconciliation of financial statement items to generally 
accepted accounting principles (``GAAP'') as used in the United States 
(``U.S. GAAP''), but modify the form in which the reconciliations are 
presented in the first filing that includes IFRS financial statements.
    In addition, we are proposing to amend Form 20-F to require certain 
disclosures of all foreign registrants that change their basis of 
accounting to IFRS.

DATES: Please submit your comments on or before April 19, 2004.

ADDRESSES: Comments may be submitted electronically or by paper. 
Electronic comments may be submitted by: (1) electronic form on the SEC 
Web site (http://www.sec.gov) or (2) e-mail to [email protected]. 
Mail paper comments in triplicate to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington 
DC 20549-0609. All submissions should refer to file number S7-13-04; 
this file number should be included on the subject line if e-mail is 
used. To help us process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov).\1\ Comments 
are also available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, NW., Washington, 
DC 20549.
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    \1\ We do not edit personal, identifying information, such as 
names or electronic mail addresses, from electronic submissions. 
Submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Questions about this release should be 
directed to Michael D. Coco, Special Counsel, Office of International 
Corporate Finance, Division of Corporation Finance, at (202) 942-2990, 
or to Susan Koski-Grafer, Office of the Chief Accountant, (202) 942-
4400, U.S. Securities and Exchange Commission, 450 Fifth Street, NW., 
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Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is publishing for comment 
proposed amendments to Form 20-F \2\ under the Securities Exchange Act 
of 1934 (the ``Exchange Act'').\3\ Form 20-F is the combined 
registration statement and annual report form for foreign private 
issuers \4\ under the Exchange Act. It also sets forth disclosure 
requirements for registration statements filed by foreign private 
issuers under the Securities Act of 1933 (the ``Securities Act'').\5\
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    \2\ 17 CFR 249.220f.
    \3\ 15 U.S.C. 78a et seq.
    \4\ The term ``foreign private issuer'' is defined in Exchange 
Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is a 
non-government foreign issuer, except for a company that (1) has 
more than 50% of its outstanding voting securities owned by U.S. 
investors and (2) has either a majority of its officers and 
directors residing in or being citizens of the United States, a 
majority of its assets located in the United States, or its business 
principally administered in the United States.
    \5\ 15 U.S.C. 77a et seq.
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I. Background

A. Overview of the Proposal

    Foreign private issuers that register securities with the SEC, and 
that report on a periodic basis thereafter under section 13(a) or 15(d) 
of the Exchange Act,\6\ are currently required to present audited 
statements of income, changes in shareholders' equity and cash flows 
for each of the past three financial years,\7\ prepared on a consistent 
basis of accounting.\8\ These issuers also are generally required to 
present selected financial data covering each of the past five 
financial years.\9\
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    \6\ 15 U.S.C. 78m(a) or 78o(d). Section 13(a) of the Exchange 
Act requires every issuer of a security registered pursuant to 
Section 12 of the Exchange Act [15 U.S.C. 781] to file with the 
Commission such annual reports and such other reports as the 
Commission may prescribe. Section 15(d) of the Exchange Act requires 
each issuer that has filed a registration statement that has become 
effective pursuant to the Securities Act to file such supplementary 
and periodic information, documents and reports as may be required 
pursuant to Section 13 in respect of a security registered pursuant 
to Section 12, unless the duty to file under Section 15(d) has been 
suspended for any financial year.
    \7\ Consistent with Form 20-F, IFRS and general usage outside 
the United States, we use the term ``financial year'' to refer to a 
fiscal year. See Instruction 2 to Item 3 of Form 20-F.
    \8\ See Item 8.A.2 for Form 20-F. Foreign private issuers are 
also required to present audited balance sheets as of the end of the 
past two financial years.
    \9\ See Item 3.A.1 of Form 20-F.
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    The Commission is proposing for comment a new General Instruction G 
to Form 20-F that would allow a foreign private issuer that has not 
previously published financial statements under IFRS to omit for its 
first year of reporting under IFRS financial statements for the 
earliest of the three financial years for which it would otherwise be 
required to file financial statements under our current rules. This 
proposed accommodation would be available to issuers that adopt IFRS, 
either voluntarily or by mandate, for the first time for a financial 
year that begins no later than January 1, 2007.\10\ We are making this 
proposal as a one-time accommodation to eligible foreign private 
issuers who, under current SEC rules, would be required to provide 
audited financial statements prepared in accordance with IFRS for the 
latest three financial years when they change their basis of accounting 
to IFRS. These proposals are intended to facilitate the transition of 
foreign companies to IFRS and to improve the quality of their financial 
disclosure. For similar reasons, we are soliciting comment on various 
alternatives with respect to the presentation of interim financial 
statements prepared in accordance with IFRS by issuers during their 
transition.
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    \10\ As described below in Section I.C, in several countries the 
presentation of financial statements in accordance with IFRS becomes 
mandatory for financial years starting on or after January 1, 2005. 
For purposes of this release, we refer to that financial year as 
``year 2005,'' regardless of the actual beginning date of a 
company's financial year, and the three prior financial years as 
``year 2002,'' ``year 2003,'' and ``year 2004,'' respectively. 
Accordingly, the financial statements for those years are referred 
to as ``year 2002 financial statements,'' ``year 2003 financial 
statements,'' and ``year 2004 financial statements.'' For issuers 
adopting IFRS for the first time during another financial year, we 
refer to the earliest of the three years for which financial 
statements are presently required under Form 20-F as the ``third 
financial year,'' the second financial year as the ``second 
financial year,'' and the financial year in which an issuer switches 
to IFRS as the ``most recent financial year.''

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[[Page 12905]]

    In addition, we are proposing certain disclosures from foreign 
private issuers that change their basis of accounting to IFRS during 
any year. This disclosure relates to certain mandatory and elective 
accounting treatments that an issuer may apply in adopting IFRS for the 
first time and the reconciliations from Previous GAAP \11\ to IFRS 
required by IFRS. The proposed disclosures would provide investors with 
consistent and transparent information about the transition by a 
company from Previous GAAP to IFRS and the impact of that transition on 
the company's published financial results.
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    \11\ This release and the proposed amendments use the term 
``Previous GAAP'' to refer to the basis of accounting that a first-
time adopter uses immediately before adopting IFRS. This usage is 
consistent with IFRS. See International Financial Reporting Standard 
1: ``First-time Adoption of International Financial Reporting 
Standards,'' as issued in 2003 (``IFRS 1''), Appendix A.
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B. International Financial Reporting Standards

    The International Accounting Standards Board (``IASB'') was 
established under the International Accounting Standards Committee 
Foundation to develop global standards for financial reporting. The 
IASB is now empowered to develop and approve IFRS independently.\12\ 
Effective April 1, 2001, the IASB assumed accounting standard setting 
responsibilities from its predecessor body, the International 
Accounting Standards Committee (``IASC'').\13\
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    \12\ Standards that are newly developed by the IASB or are 
extensive revisions of earlier International Accounting Standards 
are entitled International Financial Reporting Standards. In general 
usage, and in this release, the term IFRS will be used to encompass 
both IAS and IFRS. The term IFRS is used to refer both to the body 
of IASB pronouncements generally and to individual standards 
applicable in specific circumstances. Standards applicable to first-
time adopters are set forth in IFRS 1. For purposes of this release, 
financial statements ``based on IFRS'' and ``prepared in accordance 
with IFRS'' refer to financial statements that an issuer can 
unreservedly and explicitly state are in compliance with IFRS and 
that are not subject to any qualification relating to the 
application of IFRS.
    \13\ This was the culmination of a reorganization in 2000 based 
on the recommendations of the report ``Recommendations on Shaping 
the IASC for the Future.'' From 1973 until that restructuring, the 
entity for setting International Accounting Standards had been known 
as the IASC. The IASC issued 41 standards on major topical areas 
through December 2000, which are entitled International Accounting 
Standards. There was no actual ``committee'' of that name, although 
the predecessor standard-setting board was known as the IASC Board.
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    In February 2000, the Commission issued a Concept Release on 
International Accounting Standards, seeking public comment on the 
elements necessary to encourage convergence towards a high quality 
global financial reporting framework while upholding the quality of 
financial reporting domestically.\14\ The release also sought comments 
as to the conditions under which the Commission should accept financial 
statements of foreign private issuers that are prepared using IFRS, 
including the issue of reconciliation of financial statements prepared 
under IFRS to U.S. GAAP. The Commission has not proposed or adopted any 
rules as a result of the concept release, and continues to monitor 
international developments in the subject areas that are discussed in 
the release. The staff has encouraged the efforts of the Financial 
Accounting Standards Board (``FASB'') and the IASB to work towards 
achieving greater convergence between U.S. GAAP and IFRS to achieve a 
common set of high-quality accounting standards.\15\ While convergence 
towards such a common set of standards, together with other 
developments promoting uniform interpretation and effective enforcement 
in respect of IFRS, would provide an opportunity for us to consider 
acceptance of financial statements prepared under IFRS without 
reconciliation to U.S. GAAP, we are not at this time proposing to 
eliminate the U.S. GAAP reconciliation.
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    \14\ Release No. 33-7801 (February 16, 2000).
    \15\ See ``Chief Accountant Welcomes Actions by FASB and IASB,'' 
Press Release 2003-178, December 19, 2003 (available at http://www.sec.gov/news/press/2003-178.htm) and ``Actions by FASB, IASB 
Praised,'' Press Release 2002-154, October 29, 2002 (available at 
http://www.sec.gov/news/press/2002-154.htm).
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C. Countries Adopting IFRS as National Accounting Standards

    Several countries in the European Union (``EU'') and elsewhere 
throughout the world currently allow their domestic issuers, or foreign 
issuers, or both, to prepare financial statements for securities 
regulatory purposes using IFRS.\16\ In June 2002, the EU adopted a 
regulation requiring companies incorporated under the laws of one of 
its Member States, and whose securities are publicly traded within the 
EU (``listed EU companies''), to prepare their consolidated financial 
statements for each financial year starting on or after January 1, 2005 
on the basis of accounting standards issued by the IASB.\17\ This 
regulation applies to listed EU companies in all present and future EU 
Member States,\18\ and the EU Member States may extend the requirements 
to non-public companies. Other countries, including Australia, also 
have adopted similar requirements mandating the use of IFRS by public 
companies for all periods beginning after January 1, 2005.
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    \16\ See http://www.iasplus.com/country/useias.htm for a list of 
countries that require or allow the use of IFRS.
    \17\ Regulation (EC) No. 1606/2002 of the European Parliament 
and of the Council of 19 July 2002 on the application of 
international accounting standards, Official Journal L. 243, 11/09/
2002 P. 0001-0004 (the ``EU Regulation''). EU regulations have the 
force of law within EU Member States without further implementing 
legislation at the national level.
    \18\ The current EU Member States are: Austria, Belgium, 
Denmark, Finland, France, Germany, Greece, Ireland, Italy, 
Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United 
Kingdom. The ten countries approved for EU membership starting in 
May 2004 are: the Czech Republic, Estonia, Hungary, Latvia, 
Lithuania, Poland, Slovenia and the Slovak Republic. These IFRS 
requirements also apply in the three European Economic Area 
countries of Iceland, Liechtenstein, and Norway.
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    In accordance with these requirements, listed EU companies in those 
countries not currently using IFRS must convert from the existing 
national accounting standards to IFRS no later than 2005.\19\ The 
companies also will have to provide financial statements and 
transitional disclosures as directed by IFRS and by national securities 
regulators and other authorities in those countries. It has been 
estimated that these requirements will affect approximately 7,000 
companies in the EU.\20\
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    \19\ In the EU, a limited number of companies meeting certain 
criteria will be permitted an extension until 2007 to adopt IFRS. 
See Section II.A, below.
    \20\ Committee of European Securities Regulators (``CESR''), 
``European Regulation on the Application of IFRS in 2005: 
Recommendation for Additional Guidance Regarding the Transition to 
IFRS,'' (December 2003) (``CESR Recommendation'').
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    IFRS are in a period of significant updating and improvement in 
preparation for the implementation of IFRS for such a large number of 
companies in 2005. The IASB has stated that following completion of 
standards setting revision and development work in early 2004, it will 
establish a ``quiet period'' during which any further new standards 
issued would not have required implementation dates until after year 
2005.\21\
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    \21\ See the September 2003 presentation on the IASB website at 
http://www.iasb.org.uk/docs/bdpapers/2003/0309w02.pdf for reference 
to the 2005 ``stable platform.''
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    IFRS 1 requires only one year of comparative information for the 
year IFRS is adopted, but allows for the presentation of additional 
years either voluntarily or pursuant to regulation. With certain 
exceptions, IFRS 1 requires a company to apply retrospectively for all 
periods presented the IFRS standards in place at the end of the year in 
which the company adopts IFRS, rather than those IFRS standards that 
were in effect

[[Page 12906]]

during those periods. SEC rules usually would require companies that 
change their basis of accounting to another GAAP to present audited 
financial statements for the past three financial years in the new 
GAAP. However, at the beginning of year 2003, the IASB had not 
finalized some of the IFRS that many foreign private issuers will be 
required to apply retrospectively when they adopt IFRS for the first 
time for year 2005. We recognize that because some standards were not 
yet finalized during the reporting period to which they will have to be 
applied, the application of IFRS in the preparation of financial 
statements for year 2003 could be difficult and burdensome. In 
addition, we are aware that the nature of the national conversions to 
IFRS and the number of companies that are expected to convert, either 
by mandate or voluntarily, present particular concerns for companies 
and the accounting profession for the preparation of IFRS financial 
statements. These considerations will compound the difficulties 
ordinarily encountered in restating prior reporting periods under new 
accounting standards. As a result, we are proposing these changes to 
Form 20-F at this time to facilitate the transition of companies to 
IFRS. As discussed below, because IFRS may continue to be developed 
that may affect issuers that adopt IFRS in future years, we propose 
that the accommodation also extend to first-time adopters for financial 
years beginning no later than January 1, 2007.

II. Discussion of Proposed Accommodation To Permit Omission of IFRS 
Financial Statements for the Third Financial Year

    The Commission's present requirement for foreign private issuers 
providing information in accordance with Form 20-F is for three years 
of audited statements of income, changes in shareholders' equity and 
cash flows, and two years of audited balance sheets, prepared on a 
consistent basis of accounting.\22\ For example, current rules would 
require that a calendar year company preparing its financial statements 
for filing with the Commission for the financial year ended December 
31, 2005, include audited statements of income, changes in 
shareholders' equity and cash flows for each of the years ended 
December 31, 2003, 2004 and 2005, together with audited balance sheets 
as of December 31, 2004 and 2005, all prepared in accordance with a 
single set of generally accepted accounting principles.
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    \22\ See Item 8.A.2 for Form 20-F.
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    Issuers that adopt IFRS for the first time for year 2005 may 
encounter significant difficulties in presenting statements of income, 
equity, and cash flows for year 2003 due to the number and scope of 
IFRS improvement projects that were not finalized at the beginning of 
year 2003. The Commission is concerned that companies in this situation 
may have difficulty recasting results accurately under IFRS for year 
2003, and may find that such efforts would involve undue cost and 
effort for an uncertain benefit. We also are concerned that efforts 
undertaken to ``look back'' on those results for the third financial 
year, particularly year 2003 results, and attempts to recast those 
results under IFRS as they exist at the end of year 2005 or later, may 
be unduly burdensome for some companies to execute at the time they 
first adopt IFRS.\23\
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    \23\ These companies would be following the standards pronounced 
in IFRS 1, which requires retrospective application in most areas, 
and requires comparative financial statements for year 2004 for 
companies that present IFRS financial statements for the first time 
for year 2005. IFRS 1 does allow specific limited exemptions from 
its provisions to avoid costs that would be likely to exceed the 
benefits to users of financial statements. For example, a company 
may measure an item of property, plant and equipment at the date of 
transition to IFRS at its fair value rather than historical cost. 
IFRS 1 also prohibits retrospective application of IFRS if that 
would require management to make judgments about past conditions 
where the outcome of a transaction is already known.
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A. Eligibility Requirements

    The proposed accommodation would apply to a foreign private issuer 
that adopts IFRS for the first time for a financial year that begins no 
later than January 1, 2007. It would not be available to a company that 
previously had published audited financial statements prepared in 
accordance with IFRS, either voluntarily or by mandate. The proposed 
accommodation also would not be available to a company adopting a set 
of accounting standards that includes deviations from the standards 
promulgated by the IASB and the IASC. The accommodation would only be 
available to a company that is able to state unreservedly and 
explicitly that its general-purpose financial statements comply with 
IFRS, and whose audited financial statements are not subject to any 
qualification relating to the application of IFRS.
    Under the EU Regulation mandating the use of IFRS, EU Member States 
may allow companies to defer their adoption of IFRS until year 2007 if 
(1) a company is listed both in the EU and on a non-EU exchange and 
currently uses internationally accepted standards as its primary 
accounting standards, or (2) a company has only publicly traded debt 
securities. Because IFRS may continue to evolve, issuers that initially 
adopt IFRS for years after 2005 also may face difficulties in preparing 
IFRS financial statements for the third financial year. We therefore 
believe it is appropriate to allow the accommodation to apply to 
companies that adopt IFRS for the first time for any financial year 
through year 2007, whether they do so voluntarily, under the extended 
compliance provisions of the EU Regulation, or under another mandate.
    Eligible issuers would be able to apply the proposed accommodation 
to registration statements and annual reports. For an issuer to be 
eligible to exclude IFRS financial statements for the third financial 
year from a registration statement (1) the most recent audited 
financial statements required by Item 8.A.2 of Form 20-F must be for a 
financial year beginning no later than January 1, 2007, (2) the company 
must not have previously published audited financial statements 
prepared in accordance with IFRS for an earlier financial year, and (3) 
the audited financial statements for the company's most recent 
financial year must be prepared in accordance with IFRS.
    To be eligible to apply the accommodation to an annual report 
relating to a company's financial year beginning no later than January 
1, 2007, (1) the company must not have previously published audited 
financial statements prepared in accordance with IFRS for an earlier 
financial year and (2) the company must have prepared its audited 
financial statements for the year covered by the annual report in 
accordance with IFRS.
    As proposed, the accommodation would extend to companies that 
switch their basis of accounting to IFRS for a financial year that 
begins no later than January 1, 2007. We are proposing this time frame, 
in part, because of the requirements outlined under the EU 
Regulation.\24\ Below we ask for comments on whether this proposed time 
frame is appropriate.
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    \24\ See footnote 17, above.
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Questions
     Will the conversion to IFRS for year 2005 make 
it difficult for issuers to recast year 2003 results accurately? What 
specific issues will be encountered and how difficult will they be to 
address? What additional information would first-time adopters

[[Page 12907]]

need to provide IFRS financial statements for the third-year back that 
they would not already have in connection with their reconciliation to 
U.S. GAAP? What other difficulties might the application of IFRS create 
for first-time adopters? Will first-time adopters in earlier or later 
years face similar issues? Are the proposed amendments appropriate to 
address those challenges? If not, what issues are not addressed by the 
proposed amendments? Should they be addressed, and, if so, how?
     Will any first-time adopters be required by 
their home country to publish financial statements prepared in 
accordance with IFRS for the third year back? If so, should we require 
their inclusion in SEC filings? Why or why not? If a company publishes 
IFRS financial statements for the third year back but is not required 
to do so, should we require inclusion of those financial statements in 
SEC filings?
     Is the proposed time frame, which provides the 
accommodation to companies that switch to IFRS for any financial year 
beginning no later than January 1, 2007, appropriate? Would this date 
create eligibility concerns for issuers that have a 52-week financial 
year? If so, how should we address those concerns?
     Should the proposed accommodation be extended to 
apply in any other circumstances, such as for issuers that, either 
voluntarily or pursuant to a home country or other requirement, adopt 
IFRS for the first time for years after year 2007? Should the 
accommodation apply for an indefinite period? Are there other 
circumstances in which the proposed exception to the requirement to 
present three years of financial statements on a consistent basis 
should be considered? What are they?
     Would extending the proposed accommodation to 
apply to issuers that adopt IFRS for the first time later than year 
2007 encourage a broader use of IFRS? Why or why not?
     If first-time adopters of IFRS were not able to 
avail themselves of the proposed accommodation, would they be likely to 
continue to include in their SEC filings financial statements prepared 
in accordance with Previous GAAP rather than preparing financial 
statements prepared in accordance with IFRS for the third financial 
year? What are the advantages and disadvantages of each approach?

B. Primary Financial Statements

1. IFRS Financial Statements
    With respect to the consolidated financial statements and other 
financial information required by Item 8.A of Form 20-F, the proposed 
amendment would allow eligible foreign private issuers for their first 
year of reporting under IFRS to present only two years of audited IFRS 
financial statements in their applicable filings instead of three 
years. Eligible companies would be permitted to omit audited financial 
statements for the earliest of the three years prepared in accordance 
with IFRS when providing the financial statements required by Item 
8.A.2. For example, an eligible foreign private issuer that changes to 
IFRS in its Form 20-F annual report for its year ended December 31, 
2005 would present, as its financial statements required by Item 8.A, 
audited balance sheets prepared in accordance with IFRS as of December 
31, 2004 and 2005, and audited statements of income, shareholders' 
equity and cash flows prepared in accordance with IFRS for the years 
ended December 31, 2004 and 2005. All instructions to Item 8, including 
instructions requiring audits in accordance with U.S. generally 
accepted auditing standards, would continue to apply.
    All first-time adopters are required under IFRS 1 to include in the 
notes to the financial statements a reconciliation to IFRS from 
Previous GAAP. The proposed form and content requirements for this 
reconciliation in SEC filings are discussed below in Section III.B.
2. U.S. GAAP Financial Information
    In accordance with Items 17(c) or 18 of Form 20-F, as applicable, 
companies relying on the accommodation would continue to be required to 
provide a reconciliation to U.S. GAAP for the two financial years 
covered by the financial statements prepared in accordance with IFRS. 
That reconciliation is required to be audited and would be included as 
a note to the audited financial statements. We are not proposing any 
changes with respect to this reconciliation to U.S. GAAP.
    While this proposal seeks to address the difficulties that would be 
imposed on companies in connection with the preparation of audited 
financial statements under IFRS for the third financial year, we 
believe that investors nonetheless find valuable three-year trend 
information that is prepared on a consistent basis of accounting. 
Although companies making use of the proposed accommodation will not 
have three-year information based on IFRS, in almost all instances they 
will have available three-year information based on U.S. GAAP. However, 
U.S. GAAP information is generally presented in the form of a 
reconciliation from the GAAP used in the primary financial statements. 
Companies making use of the accommodation will not present financial 
statements based on IFRS for the third financial year. Further, as 
discussed below, the filing will not necessarily include financial 
statements based on Previous GAAP. In addition, any reconciliation to 
U.S. GAAP from IFRS would have different starting points and different 
reconciling items than the previously prepared reconciliation from 
Previous GAAP to U.S. GAAP, and investors would not have a consistent 
base on which to evaluate the adjustments made to produce U.S. GAAP 
information.
    To ensure that filings will contain three years of information 
prepared on a consistent basis of accounting, we are proposing that 
companies that use the accommodation present, as part of the U.S. GAAP 
reconciliation footnote, condensed U.S. GAAP financial information for 
the three most recent financial years in a level of detail consistent 
with that for interim financial statements required by Article 10 of 
Regulation S-X.\25\ This financial information will include condensed 
income statements and balance sheets prepared in accordance with U.S. 
GAAP, but neither notes to this information nor a statement of changes 
to shareholders' equity will be required.\26\ The financial information 
would be required to be audited and generally would be included in the 
U.S. GAAP reconciliation note to a

[[Page 12908]]

company's audited financial statements based on IFRS.
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    \25\ 17 CFR 210.10-01. This is consistent with existing staff 
practice of requiring Article 10-level U.S. GAAP information when 
the numerical reconciliation of net income and shareholder equity 
alone is not sufficient to produce an information content 
substantially similar to U.S. GAAP and Regulation S-X as specified 
by Items 17 and 18 of Form 20-F.
    \26\ We are not proposing to require that companies provide a 
balance sheet prepared in accordance with U.S. GAAP for the third 
year back. We also are not proposing to require condensed cash flow 
statements prepared in accordance with U.S. GAAP. Item 17(c)(2)(iii) 
of Form 20-F permits cash flow statements prepared in accordance 
with International Accounting Standard 7, as amended in October 
1992, without a reconciliation to U.S. GAAP. Therefore, the cash 
flow statements for the past two financial years prepared in 
accordance with IFRS by a first-time adopter making use of the 
accommodation would not be required to be reconciled to U.S. GAAP. 
In light of the absence of U.S. GAAP information for those two 
financial years, requiring a condensed cash flow statement for the 
third financial year would appear not useful to investors as well as 
overly burdensome to companies.
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    In their initial registration statements filed with the SEC, 
foreign private issuers that do not use U.S. GAAP to prepare their 
primary financial statements are required to prepare a reconciliation 
to U.S. GAAP covering the two most recent financial years.\27\ Foreign 
private issuers in this situation would not be required to present the 
additional condensed U.S. GAAP financial information.
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    \27\ Item 17(c)(2)(i) of Form 20-F.
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3. Previous GAAP Financial Statements
    As proposed, issuers that rely on the accommodation will not be 
required to include any financial statements, textual discussion or 
other financial information based on their Previous GAAP. The exclusion 
of Previous GAAP financial statements is intended to decrease the risk 
of investor confusion because filings will not contain two sets of 
audited financial statements based on different accounting principles 
that are not comparable. The proposal also is intended to relieve 
issuers of the burden of maintaining two sets of financial statements 
and obtaining auditor consents for financial statements prepared on a 
basis of accounting that issuers no longer use.
    We do not propose to prohibit issuers from including, incorporating 
by reference or referring to Previous GAAP financial statements in 
their annual reports, registration statements and prospectuses filed 
with the SEC. Issuers may elect to include or incorporate by reference 
financial statements prepared in accordance with Previous GAAP for the 
two financial years preceding the most recent financial year and 
selected historical financial data based on Previous GAAP for the four 
years preceding the most recent financial year. Issuers that elect to 
include or incorporate by reference financial information prepared in 
accordance with Previous GAAP would similarly include or incorporate 
narrative disclosure of the company's operating and financial review 
and prospects under Item 5 of Form 20-F for the reporting periods 
covered by Previous GAAP financial information.\28\
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    \28\ See Section II.D, below.
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    Issuers also may refer to Previous GAAP financial statements and 
financial information without including or incorporating these 
materials in a disclosure document. For example, a company may find it 
useful to refer investors to its prior year annual report which 
included Previous GAAP financial information. However, if an issuer 
includes, incorporates by reference or refers to Previous GAAP selected 
financial data or financial information in a disclosure document, then 
the issuer would, under the proposed amendments to Form 20-F, ensure 
that there is appropriate cautionary language with respect to that 
data. Issuers electing to include or incorporate Previous GAAP 
financial information must disclose, at an appropriate prominent 
location, that the filing contains financial information based on the 
basis of accounting that the company previously used, which is not 
comparable to financial information based on IFRS. We are not proposing 
specific legends or language that should be used by issuers in this 
situation, since we believe that appropriate language may vary 
depending on the use made of Previous GAAP information.
Questions
     Is the proposed amendment to permit two years of 
IFRS financial statements for foreign private issuers adopting IFRS 
through year 2007, coupled with the permitted exclusion of financial 
statements prepared on the basis of Previous GAAP, consistent with the 
best interests of investors? Will investors receive adequate 
information on which to base investment decisions if two rather than 
three years of statements of income, changes in shareholders' equity 
and cash flows are presented on a consistent basis?
     Are there other alternatives that should be 
considered to address the challenges presented by the mandated use of 
IFRS? What are they?
     Would the presentation of three years of 
condensed U.S. GAAP financial information in a level of detail 
consistent with interim financial statements prepared under Article 10 
of Regulation S-X create a significant burden to first-time adopters of 
IFRS? What would be the difficulties and costs of preparing that 
information? Would that level of information be useful to investors? 
What level of information would be useful to investors and not unduly 
burdensome to prepare?
     If a filing does not contain Previous GAAP 
financial statements or IFRS financial statements for the third year 
back, would the proposed requirement for three years of condensed U.S. 
GAAP information adequately address issues related to the different 
starting points and reconciling items used in the reconciliations from 
Previous GAAP to U.S. GAAP and from IFRS to U.S. GAAP?
     Do our proposals contain sufficient guidance on 
the form and content of the condensed U.S. GAAP financial information 
to be provided? Should we require financial information beyond income 
statements and balance sheets from companies that would be required to 
provide condensed U.S. GAAP information? If so, what further 
information? Should we require that they include notes to the financial 
information in addition to the required reconciliation?
     Should foreign private issuers that do not use 
U.S. GAAP to prepare their primary financial statements in their 
initial registration statements filed with the SEC be required to 
present the additional condensed U.S. GAAP financial information in 
addition to the two-year reconciliation to U.S. GAAP? Why or why not? 
Would this be unduly burdensome?
     Should issuers be prohibited from including 
Previous GAAP financial statements, financial information and textual 
discussions based thereon in a registration statement, prospectus or 
annual report prepared in accordance with Form 20-F?
     If we were to prohibit issuers from including 
Previous GAAP financial statements and financial information in a 
document, should we require, permit or prohibit the issuer to make 
reference to other SEC filings or other documents that include such 
financial statements and information?
     Is is appropriate to permit issuers to include, 
incorporate or refer to Previous GAAP financial information and, if so, 
for what periods and to what extent? If issuers elect to include or 
incorporate Previous GAAP financial information, should we require 
operating and financial review and prospects disclosure pursuant to 
Item 5 of Form 20-F related to that information?
     Would Previous GAAP financial statements be 
useful to investors and should issuers be required to provide them? 
Should inclusion in previous annual reports filed with us on Form 20-F 
be sufficient in this regard? Would investors be likely to compare 
information based on IFRS with information based on Previous GAAP? If 
we require or permit financial statements and other information based 
on Previous GAAP, where should that information be located and how 
should it be formatted?
     Is inclusion of Previous GAAP financial 
information likely to cause investor confusion regarding the basis of 
accounting used in preparing financial information? How could any 
confusion or comparison be minimized? Should we provide more specific 
guidance on the location or substance of disclosure stating that a 
filing contains financial

[[Page 12909]]

information based on Previous GAAP that is not comparable to financial 
information based on IFRS?
     Should Previous GAAP financial information be 
presented in a ``side-by-side'' format with IFRS financial 
information?\29\ What additional disclosure would be necessary, if any? 
Should it be accompanied by a legend stating that the information is 
not comparable to financial information based on IFRS? If so, where 
should the legend be located? Would a ``side-by-side'' format present 
difficulties relating to disclosure contained in audit reports relating 
to the different bases of GAAP used? Similarly, how would the notes to 
the financial statements be presented in a clear manner if different 
GAAPs were presented therein?
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    \29\ CESR has recommended a similar approach to the presentation 
of comparative information prepared on different bases of 
accounting. See CESR Recommendation.
---------------------------------------------------------------------------

     If issuers include, incorporate or refer to 
Previous GAAP financial statements or financial information in a 
disclosure document, should we require specific legends or other 
language? Should any Previous GAAP information included be presented in 
a separate section of the disclosure document?

C. Selected Financial Data

    Under Item 3.A of Form 20-F, issuers must provide five years of 
selected financial data. The company may omit data for the earliest two 
years if it represents that the information cannot be provided without 
unreasonable effort or expense and states the reasons in the 
filing.\30\ As part of the accommodation for foreign private issuers 
switching to IFRS, we are proposing to include in new General 
Instruction G to Form 20-F an instruction that would address how first-
time adopters should present their selected financial data.
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    \30\ This accommodation is generally used by foreign private 
issuers that are registering with the SEC for the first time and in 
their filings shortly after initial SEC registration, until the 
registrants develop a five-year history of financial information on 
a consistent basis.
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    The proposed amendment requires that eligible issuers, in providing 
the key financial information about their financial condition pursuant 
to Item 3.A of Form 20-F, provide selected historical financial data 
based on IFRS for the two most recent financial years. Selected 
historical financial data prepared in accordance with U.S. GAAP shall 
continue to be required for the five most recent financial years, 
unless the company is permitted to omit U.S. GAAP information for any 
of the earliest of the five years under Instruction 2 to Item 3.A.
    As with Previous GAAP financial statements, we do not propose to 
require or prohibit issuers from including, incorporating by reference 
or referring to Previous GAAP selected financial data in their annual 
reports, registration statements and prospectuses filed with the 
SEC.\31\ If an issuer includes, incorporates by reference or refers to 
Previous GAAP selected financial data or financial information in a 
disclosure document, then the issuer should take care to assure that 
there is appropriate cautionary language with respect to that data. 
However, we do not believe that selected financial data based on 
Previous GAAP should be presented in a ``side-by-side'' format with 
selected financial data based on IFRS, as this could lead to comparison 
between periods for which financial data is presented on a different 
basis.
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    \31\ Information may be incorporated by reference only when the 
relevant form so allows, and existing rules regarding incorporation 
by reference shall apply. See Securities Act Rule 411 [17 CFR 
230.411] and Exchange Act Rule 12b-23 [17 CFR 240.12b-23].
---------------------------------------------------------------------------

Questions
     Should five years of selected financial data 
based on U.S. GAAP be required in a separate section of the document, 
rather than with the IFRS selected data?
     Should we require selected financial data based 
on Previous GAAP? If so, where should it be located? Should we 
expressly prohibit a ``side-by-side'' disclosure format for selected 
financial data based on Previous GAAP and IFRS? Conversely, should we 
permit or require such a disclosure format? Would inclusion of Previous 
GAAP selected financial data, whether presented in a ``side-by-side'' 
format or otherwise, be likely to cause investor confusion regarding 
the basis of accounting used? If so, how could any confusion or the 
likelihood of comparison be minimized?

D. Operating and Financial Review and Prospects

    Registration statements and annual reports must contain a narrative 
discussion of the financial condition of the issuer that enables 
investors to see the company through the eyes of management and 
provides the context within which the financial statements should be 
analyzed. This information should describe, in a clear and 
straightforward manner, the quality and potential variability of the 
company's earnings and cash flow so that investors can ascertain the 
likelihood that past performance is indicative of future 
performance.\32\ We are proposing to include in new General Instruction 
G to Form 20-F an instruction that would clarify how issuers should 
present this disclosure relating to operating and financial review and 
prospects.
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    \32\ See, e.g., Release 33-8350 (December 19, 2003) for recent 
Commission guidance regarding management's discussion and analysis 
of financial condition and results of operation.
---------------------------------------------------------------------------

    In providing disclosure under Item 5 of Form 20-F, management 
should focus on the financial statements from the past two financial 
years prepared in accordance with IFRS, as well as the reconciliation 
to U.S. GAAP for the same two financial years. The discussion also 
should explain any differences between IFRS and U.S. GAAP that are not 
otherwise discussed in the reconciliation and that the company believes 
are necessary for an understanding of the financial statements as a 
whole.\33\ Management should not include in this section any discussion 
relating to financial statements prepared in accordance with Previous 
GAAP, unless the issuer has elected to include or incorporate by 
reference such Previous GAAP financial information.
---------------------------------------------------------------------------

    \33\ Form 20-F, Instruction 2 to Item 5.
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Questions
     Is there additional information that would be 
useful to investors that should be included in the disclosure of 
operating and financial review and prospects? If so, what is it?
     Should we require that disclosure of operating 
and financial review and prospects based on Previous GAAP financial 
information, if included, refer to the reconciliation to U.S. GAAP? If 
so, why? How is that information likely to benefit investors? Would 
requiring that information create undue burdens for issuers?

E. Other Disclosures

1. Business and Derivatives Disclosure
    Under Item 4 of Form 20-F, an issuer must provide information about 
its business operations, the products it makes and the services it 
provides, and the factors that affect its business. The financial 
information that is included in response to this requirement is 
generally based on the primary financial statements of the company.\34\ 
We are proposing to include in new General Instruction G to Form 20-F 
an instruction that would clarify that for

[[Page 12910]]

companies preparing their financial statements under IFRS, the 
reference to accounting principles in Item 4 would refer to IFRS and to 
neither Previous GAAP nor U.S. GAAP.
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    \34\ Instruction 1 to Item 4.B notes that information should be 
provided with reference to the accounting principles used in 
preparing the primary financial statements, not to U.S. GAAP 
(assuming the primary financial statements are not in U.S. GAAP).
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    Under Item 11 of Form 20-F, an issuer must provide information 
about its use of derivatives, providing extensive quantitative and 
qualitative disclosures about market risk. We are proposing to include 
in new General Instruction G to Form 20-F an instruction that would 
clarify that for companies preparing their financial statements under 
IFRS, information provided in response to this requirement would be 
based on IFRS.
    We request comment on whether the proposed requirement, which 
clarifies that companies preparing their financial statements under 
IFRS should also base their Item 4 company information and Item 11 
derivatives disclosure on IFRS, is sufficient. If the proposal is not 
sufficient, we request comment on what additional information related 
to business operations and the use of derivatives should be required.
2. Disclosure Pursuant to Industry Guides
    Companies that are engaged in certain lines of business are subject 
to various industry guides.\35\ In particular, bank holding companies 
are subject to the special disclosure provisions of Industry Guide 3--
Statistical Disclosure by Bank Holding Companies.\36\ Industry Guide 3 
requires affected companies to provide additional information with 
respect to the distribution of assets and liabilities, interest rates 
applicable to assets and liabilities, the investment portfolio, the 
loan portfolio, and loan loss experience, usually over a three-year or 
five-year period. In addition, companies with property-casualty 
insurance reserves are subject to the special disclosure provisions of 
Industry Guide 6--Disclosures Concerning Unpaid Claims and Claim 
Adjustment Expenses of Property-Casualty Insurance Underwriters.\37\ 
Industry Guide 6 requires affected companies to disclose additional 
information that provides a reconciliation of claims reserves over a 
three-year period and a table showing loss reserve development over a 
ten-year period.
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    \35\ Industry Guides serve as expressions of the policies and 
practices of the Division of Corporation Finance. They are of 
assistance to issuers, their counsel and others preparing 
registration statements and reports, as well as to the Commission's 
staff.
    \36\ 17 CFR 229.801(c) and 802(c). Foreign banks that are 
registered with the SEC, whether or not they are organized as 
holding companies, are subject to Industry Guide 3.
    \37\ 17 CFR 229.801(f) and 802(f). Foreign companies that are 
registered with the SEC and that have property-casualty insurance 
reserves are subject to Industry Guide 6.
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    Foreign banks will frequently have difficulty obtaining certain 
information to comply with the statistical disclosure requirements of 
Industry Guide 3, inasmuch as the categories and classifications 
specified by the guide are heavily influenced by U.S. banking 
regulation and some categories and classifications may not be 
sufficient by themselves to permit a complete understanding of a 
foreign bank's operations. Likewise, foreign insurance companies will 
often have difficulty obtaining sufficient data regarding property-
casualty claim reserves to prepare the loss reserve development table 
required by Industry Guide 6. In both instances, and especially in the 
case of initial foreign registrants, the SEC staff has accepted 
alternative treatments or granted limited accommodations, so long as 
essential and material information is presented to investors.
    The staff is not proposing any specific amendments with respect to 
information required to be disclosed pursuant to Industry Guides 3 and 
6 by a foreign private issuer that changes its basis of accounting to 
IFRS. We are not aware of any general accommodation that foreign 
registrants that adopt IFRS and that are subject to these Industry 
Guides will need under the Guides. The information required by Industry 
Guide 3 represents specific statistical information that is not defined 
by GAAP, and therefore the change from Previous GAAP to IFRS for 
foreign registrants that are subject to Industry Guide 3 should not 
affect the availability of information required by the Guide or impose 
significant burdens or expenses on those registrants to provide that 
information. With respect to Guide 6, although IFRS constitutes a 
comprehensive basis of accounting, at present there is no standard 
under IFRS that relates to insurance contracts. Some issuers use home 
country standards, or, if there are none, they use U.S. GAAP and 
provide Guide 6 information on that basis.\38\ In the staff's 
experience, some foreign registrants that are subject to Industry Guide 
6 already apply U.S. GAAP with respect to their accounting for 
insurance contracts. First-time adopters similarly may choose to apply 
U.S. GAAP accounting for insurance contracts in preparing their IFRS 
financial statements and therefore would be able to continue (if an 
existing registrant) or begin (if a new registrant) to provide Guide 6 
information.
---------------------------------------------------------------------------

    \38\ The IASB has issued an exposure draft that would allow 
companies to continue their existing accounting practices for 
insurance contracts, subject to certain limitations, until the IASB 
has adopted final standards for insurance contracts. See ``Exposure 
Draft: ED 5 Insurance Contracts,'' ``Draft Implementation Guidance: 
ED 5 Insurance Contracts,'' and ``Basis for Conclusions on Exposure 
Draft: ED 5 Insurance Contracts.''
---------------------------------------------------------------------------

    On behalf of the staff, we request comment on whether amendments 
would be appropriate to address the information required under Industry 
Guide 3 or Industry Guide 6 in the context of first-time adopters 
changing their basis of accounting to IFRS. In addition, as it has 
traditionally done, the SEC staff will consider appropriate 
accommodations in respect of specific registrants or a class of 
registrants.

F. Financial Statements and Information for Interim Periods for the 
Transition Year

    Questions relating to the appropriate presentation of financial 
statements during the financial year in which an issuer first changes 
its basis of accounting from Previous GAAP to IFRS \39\ raise unique 
issues. During the Transition Year, a foreign issuer will be finalizing 
the changeover of its internal accounting systems in order to be able 
to publish financial statements in accordance with IFRS. However, the 
issuer may not be in a position to publish financial statements that 
fully comply with IFRS covering interim periods in the Transition Year 
and comparable periods in the prior year.\40\ Even if an issuer were in 
a position to publish interim period IFRS financial statements, these 
financial statements would not be comparable to the issuer's previously 
published annual financial statements prepared in accordance with 
Previous GAAP.\41\
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    \39\ This financial year is referred to as the ``Transition 
Year.'' For foreign issuers with a calendar year-end that are 
subject to the EU Regulation, the Transition Year would be the 
financial year ended December 31, 2005.
    \40\ Interim financial statements prepared in accordance with 
IFRS would comply with the requirements of IAS 34. Under that 
standard, a company must publish either full financial statements 
that are as complete as annual financial statements, or condensed 
financial statements that satisfy the conditions in paragraphs 9 and 
10 of IAS 34. Those conditions provide that condensed interim 
financial statements should include, at a minimum, each of the 
headings and subtotals that were included in the most recent annual 
financial statements and the selected explanatory notes required by 
IAS 34. Any other line items or notes should be included if their 
omission would render the interim financial statements misleading.
    \41\ In addition, under IFRS 1, paragraph 36, an issuer's first 
IFRS financial statements must include at least one year of IFRS 
comparative information. We believe that it is unlikely that foreign 
issuers will have IFRS financial statements covering two financial 
years prior to the Transition Year (meaning financial years 2003 and 
2004 for a calendar year end issuer as noted in footnote 39).

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[[Page 12911]]

    In registration statements under the Securities Act and the 
Exchange Act and in prospectuses under the Securities Act, if the 
document is dated more than nine months after the end of the last 
audited financial year, foreign private issuers must provide 
consolidated interim financial statements covering at least the first 
six months of the financial year and the comparative period for the 
prior financial year.\42\ These unaudited interim period financial 
statements must be prepared using the same basis of accounting as the 
audited financial statements contained in the document and include or 
incorporate by reference a reconciliation to U.S. GAAP.\43\
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    \42\ Form 20-F, Item 8.A.5. None of the discussion in this 
subsection applies to disclosure included in Reports on Form 6-K 
that are furnished to the Commission, except to the extent those 
reports are incorporated by reference into a registration statement 
or prospectus.
    \43\ Form 20-F, Item 17(c).
---------------------------------------------------------------------------

    If the document is dated less than nine months after the last 
financial year, foreign private issuers are required to include in the 
registration statement or prospectus any published financial 
information that is more current than what is required.\44\ When this 
type of information is presented, the issuer must describe any material 
variations from U.S. GAAP and quantify variations not present in the 
most recent financial year, but generally need not provide a full 
reconciliation to U.S. GAAP for interim period non-U.S. GAAP financial 
information.\45\
---------------------------------------------------------------------------

    \44\ Form 20-F, Item 8.A.5.
    \45\ Form 20-F, Instruction 3 to Item 8.A.5.
---------------------------------------------------------------------------

    Under these provisions, foreign private issuers that are switching 
to IFRS and are required to present financial statements for an interim 
period in the Transition Year will present three years of audited 
financial statements and two years of unaudited interim period 
financial statements in accordance with Previous GAAP.\46\ For example, 
a foreign private issuer that has a financial year end of December 31 
and that is required to switch to IFRS for year 2005 would include or 
incorporate by reference in a registration statement or prospectus 
filed during year 2005 audited financial statements for the years ended 
December 31, 2002, 2003 and 2004 and (when required) unaudited 
financial statements for the six months ended June 30, 2004 and 2005, 
all prepared in accordance with Previous GAAP and (when required) 
containing a reconciliation to U.S. GAAP.\47\
---------------------------------------------------------------------------

    \46\ In addition, the disclosure relating to Operating and 
Financial Review and Prospects in accordance with Item 5 of Form 20-
F will relate to Previous GAAP financial statements.
    \47\ Foreign private issuers may also present financial 
statements for interim periods longer than six months, for example 
nine months.
---------------------------------------------------------------------------

    In the situation when a foreign private issuer is required to 
present interim period financial statements for the Transition Year, 
the issuer also may have published financial statements covering those 
current and prior year interim periods in accordance with IFRS. Under 
current requirements, issuers must include this information in their 
SEC documents.\48\ The issuer also would provide appropriate and 
prominent disclosure in the documents that the IFRS financial 
statements are not comparable to Previous GAAP financial statements.
---------------------------------------------------------------------------

    \48\ Form 20-F, Instruction 3 to Item 8.A.5.
---------------------------------------------------------------------------

    We understand that, under the approach outlined above (which is 
consistent with our current requirements), foreign private issuers that 
change to IFRS may be required to maintain their accounts in accordance 
with Previous GAAP and IFRS and to publish two separate sets of interim 
period financial statements during the Transition Year. This approach 
may result in additional burdens being placed on foreign issuers as 
well as uncertainty among investors with respect to which financial 
statements to use to assess an issuer's operating results. Below, we 
ask several questions relating to alternative proposals with respect to 
interim period financial statements published during the Transition 
Year.
Questions
     To comply with these requirements, issuers may 
be required to maintain financial statements prepared in accordance 
with both Previous GAAP and IFRS for interim periods of the Transition 
Year. Would it be unduly burdensome to maintain books and records in 
accordance with both Previous GAAP and IFRS during this time? What 
costs and other burdens will this impose on issuers? Are companies that 
are mandated to switch to IFRS prohibited from continuing to publish 
financial statements prepared in accordance with Previous GAAP during 
their Transition Year? If so, who or what prohibits it?
     Will foreign issuers be likely to avoid 
registering securities under the Securities Act and the Exchange Act 
during the latter months of a Transition Year and early months of the 
year after in order to avoid being required to include interim 
financial statements in a disclosure document, and therefore be 
required to publish interim financial information in accordance with 
Previous GAAP? How can we reduce any impediment to foreign companies 
undertaking registered offerings during a Transition Year while 
ensuring that investors receive clear, sufficient, up-to-date 
information?
     Are investors likely to be confused with the 
presentation of interim financial statements using two bases of 
accounting covering the same periods? If so, what steps could be taken 
to minimize this confusion?
     As proposed, an issuer must include in its SEC 
filings both IFRS financial statements and Previous GAAP financial 
statements for current and prior year interim periods, when both are 
available. Should we provide issuers with a choice of whether to 
provide interim financial statements prepared under Previous GAAP or 
under IFRS, when both are available?
     When the Transition Year is year 2004 or 2005, 
in lieu of requiring both Previous GAAP and available IFRS interim 
financial statements for two years, would it be preferable to require 
audited financial statements prepared in accordance with IFRS for the 
last full financial year, with unaudited IFRS financial statements for 
interim periods in both years? \49\ This approach would not be in 
technical compliance with IFRS 1, which requires that first-time 
adopters include one year of comparative information under IFRS.\50\ 
Should we permit audit reports that are qualified as to this provision 
of IFRS 1? Should we make similar accommodations when an issuer's 
Transition Year is later than year 2005? Why or why not?
---------------------------------------------------------------------------

    \49\ For example, for a calendar year company that adopts IFRS 
in year 2005 this would mean audited IFRS financial statements for 
year 2004 and unaudited IFRS financial statements for interim 
periods in years 2004 and 2005.
    \50\ See IFRS 1, paragraph 36.
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     When the Transition Year is year 2004 or 2005, 
would it be appropriate instead to require three years of audited 
financial statements prepared in accordance with Previous GAAP and 
unaudited financial statements prepared in accordance with IFRS for 
interim periods in two years with the same level of disclosure as in 
annual financial statements? \51\ Would issuers be likely to prepare 
full IFRS financial statements for interim periods? If not, why not? 
Should an issuer's first set of IFRS financial statements filed with 
the SEC

[[Page 12912]]

be audited if they are for two years of interim periods? Why or why 
not? How would issuers assess and prepare disclosure of their operating 
and financial review and prospects? What other specific issues would 
companies face in presenting financial statements under both Previous 
GAAP and IFRS? How could those issues be addressed? Should we make 
similar accommodations when an issuer's Transition Year is later than 
year 2005?
---------------------------------------------------------------------------

    \51\ For example, for a calendar year company that adopts IFRS 
in year 2005 this would mean audited Previous GAAP financial 
statements for years 2002, 2003 and 2004 with unaudited IFRS 
financial statements for interim periods in years 2004 and 2005.
---------------------------------------------------------------------------

III. Disclosures About First-Time Adoption of IFRS

    As proposed, the amendments to Form 20-F include certain disclosure 
requirements that apply to all first-time adopters of IFRS regardless 
of the year in which they change their basis of accounting. These 
requirements relate to the issuer's reliance on any of the exceptions 
to the general restatement and measurement principles allowed under 
IFRS 1 and to the reconciliation of Previous GAAP financial statements 
to IFRS.

A. Disclosure About Exceptions to IFRS

    IFRS 1 establishes both elective and mandatory exceptions to the 
principle that a first-time adopter must comply with each IFRS 
effective at the reporting date for its first IFRS financial 
statements.\52\ Paragraphs 13 through 25 of IFRS 1 set out the elective 
exceptions, and paragraphs 26 through 34 set out the mandatory 
exceptions. The elective exceptions, which a company may elect to use 
individually, relate to business combinations (paragraph 15); fair 
value or revaluation as deemed cost (paragraphs 16-19); employee 
benefits (paragraph 20); cumulative translation differences (paragraphs 
21 and 22); compound financial instruments (paragraph 23); and assets 
and liabilities of subsidiaries, associates and joint ventures 
(paragraphs 24 and 25). IFRS 1 does not permit a first-time adopter to 
apply these elective exceptions to other items by analogy.
---------------------------------------------------------------------------

    \52\ This principle is set forth in IFRS 1, IN2.
---------------------------------------------------------------------------

    The mandatory exceptions prohibit retroactive application of IFRS 
to three important items: derecognition of financial instruments and 
financial liabilities (paragraph 27); hedge accounting (paragraphs 28-
30); and information to be used in preparing IFRS estimates (paragraphs 
31-34).
    We are proposing to amend Item 5 of Form 20-F in order to add an 
instruction that would require an issuer to discuss its application of 
the exceptions under IFRS 1. Under the proposal, any issuer relying on 
any of the elective or mandatory exceptions from IFRS must include in 
the discussion of its operating and financial review and prospects 
based on its IFRS financial statements provided in response to Item 5 
of Form 20-F detailed discussion of each exception used and the 
circumstances that gave rise to its use. In this discussion, the issuer 
should:
     Identify the items or class of items to which 
the exception was applied (e.g., specific business combination, asset 
or category of asset, pension plan, financial instrument, etc.); and
     Describe what accounting principle was used and 
how it was applied (e.g., if a business combination was treated as a 
pooling based on Previous GAAP that would have been treated as a 
purchase under IAS 22).

The issuer would be required to provide an explanation of the 
significance of each exception to the company's financial condition and 
to the changes in its financial condition and results of operations. 
Where material, the company also would have to identify the line items 
in the financial statements that were affected by the exceptions from 
IFRS.
    The discussion of each elective exception used would include, where 
material, qualitative disclosure of the impact on financial condition 
and changes in the company's financial condition and results of 
operation that the alternatives would have had. When relying on a 
mandatory exception, the issuer must describe the exception and state 
that it complied.
    Under the proposal, a first-time adopter that relies on any of the 
elective or mandatory exceptions to the general restatement and 
measurement principles that IFRS allows also would be required to 
identify those exceptions in the notes to its audited financial 
statements.
Questions
     Should first-time adopters be required to 
provide the additional information proposed under Item 5 of Form 20-F? 
Will this information be useful for investors, and will it be unduly 
burdensome for issuers to provide? In either case, commenters should 
provide supporting information relating to the utility of the 
information (or lack thereof) and the costs and difficulties associated 
with disclosing this information.
     Should issuers be required to disclose more 
information with respect to the mandatory or elective exceptions? If 
so, what information would that be, what usefulness would this 
information have to investors, and what burdens would be imposed on 
issuers to disclose this information?
     Have we given sufficient guidance with respect 
to the information to be disclosed under the proposed amendment to Item 
5? Should there be greater specificity relating to the required 
information? Are the proposals regarding the information to be provided 
in Item 5 and in the notes to the primary financial statements about 
IFRS exceptions sufficiently clear so as to avoid duplicative 
disclosure? If not, what further clarification is necessary?

B. Reconciliation From Previous GAAP

    All first-time adopters are required under IFRS 1 to include in the 
notes to audited financial statements a reconciliation from Previous 
GAAP to IFRS that gives ``sufficient data to enable users to understand 
the material adjustments to the balance sheet and income statement,'' 
and if presented under Previous GAAP, the cash flow statement.\53\ We 
are proposing to amend Item 8 of Form 20-F to add an instruction 
requiring a similar level of information in the reconciliation of 
Previous GAAP to IFRS that first-time adopters must include in their 
SEC filings. This reconciliation is to be included as a note to the 
audited financial statements with respect to the first financial year 
for which the issuer adopts IFRS.\54\
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    \53\ IFRS 1, paragraph 40.
    \54\ For example, a first-time adopter with a financial year-end 
of December 31, 2005 would include the reconciliation as part of the 
financial statements contained in the annual report on Form 20-F for 
that year.
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    In proposing that companies must provide in their reconciliation 
information sufficient to allow investors to understand the material 
adjustments to the balance sheet and income statement, and, if 
presented under Previous GAAP, to the cash flow statement, we are not 
proposing specific form or content requirements. A reconciliation 
following Example 11 provided in paragraph IG63 of the Implementation 
Guidance to IFRS 1 (``IG63''), which quantifies balance sheet and 
income statement captions at a level of detail comparable to that 
required by Article 10 of Regulation S-X, would meet the required level 
of information under the proposed amendment to Item 8. IG63 is not 
mandatory for all first-time adopters. We believe, however, that 
following the example reconciliation that it provides would assure that 
first-time adopters that are registered with the SEC provide a 
comparable level of information with respect to the reconciliation. 
Companies may also comply with the proposed

[[Page 12913]]

amendment to Item 8 in other ways, for example by providing a 
reconciliation that satisfies the requirements of Item 17 of Form 20-F. 
There may be other alternative formats that are developed as large 
numbers of companies begin to apply IFRS and IFRS 1.
Questions
     Should we specify the form and content of the 
reconciliation from Previous GAAP to IFRS? For example, should we 
require that the information included in the reconciliation be similar 
in form and content to that in the example provided in IG63? Should we 
require a level of content different from that set out in IG63? If so, 
what level of information would be appropriate?
     Would providing a reconciliation from Previous 
GAAP to IFRS that is substantially similar in form and content to the 
example set forth in IG63 as best practice be unduly burdensome to 
issuers? If so, what specific difficulties would issuers face in 
providing that level of information? How could they be addressed?
     Would investors find the reconciliation 
information as proposed more useful in comparing different registrants 
than information required under IFRS alone? If not, why not? What 
additional information should be required, if any?

IV. General Request for Comments

    We request and encourage any interested persons to submit comments 
regarding:
     the proposed changes that are the subject of 
this release,
     additional or different changes, or
     other matters that may have an effect on the 
proposals contained in this release.
    We are particularly interested in commenter views on whether all or 
part of these rules should ``sunset'' after a particular period of 
time. Specifically, will General Instruction G be useful or relevant 
three years after the year 2007 transition to IFRS is complete? If we 
were to automatically delete the provision, should the time period be 
longer or shorter?
    We request comment from the point of view of registrants, 
investors, accountants, and other market participants. In addition to 
the changes proposed in this release, we also solicit comments related 
to whether and how industry guide disclosure requirements should be 
revised for first-time adopters to whom the proposed accommodation 
would apply. With regard to any comments, we note that such comments 
are of greatest assistance to our rulemaking initiative if accompanied 
by supporting data and analysis of the issues addressed in those 
comments.

V. Paperwork Reduction Act

A. Background

    The proposed amendments affect Form 20-F, which contains 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\55\ We are submitting the 
proposed amendments to the Office of Management and Budget (``OMB'') 
for review in accordance with the PRA.\56\ The titles for the 
collections of information are:
---------------------------------------------------------------------------

    \55\ 44 U.S.C. 3501 et seq.
    \56\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Form 20-F'' (OMB Control No. 3235-0288);
    (2) ``Form F-1'' (OMB Control No. 3235-0258);
    (3) ``Form F-2'' (OMB Control No. 3235-0257);
    (4) ``Form F-3'' (OMB Control No. 3235-0256); and
    (5) ``Form F-4'' (OMB Control No. 3235-0325).

These forms were adopted pursuant to the Securities Act and Exchange 
Act and set forth the disclosure requirements for annual reports and 
registration statements filed by foreign private issuers to ensure that 
investors are informed. The hours and costs associated with preparing, 
filing and sending these forms constitute reporting and cost burdens 
imposed by each collection of information. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid OMB control number.
    The proposed amendment, if adopted, would add a new General 
Instruction G to Form 20-F to permit an eligible foreign private issuer 
to file two years rather than three years of statements of income, 
changes in shareholders' equity and cash flows prepared in accordance 
with IFRS. The proposal also would affect the selected financial data, 
the operating and financial review and prospects disclosure, interim 
financial information, and other related disclosure that eligible 
issuers would provide. In particular, so as to provide three years of 
information prepared on a consistent basis of accounting, the proposed 
amendment requires companies to present condensed U.S. GAAP financial 
information in a level of detail consistent with that for interim 
financial statements required by Article 10 of Regulation S-X. These 
amendments would be collections of information for purposes of the 
Paperwork Reduction Act. The amendments, if adopted, also would require 
all first-time adopters of IFRS to provide certain disclosure relating 
to exceptions from IFRS upon which they relied. They also would clarify 
the level of information required in the reconciliation to IFRS of 
financial statements prepared in accordance with Previous GAAP. For 
purposes of this Paperwork Reduction Analysis, these proposed 
amendments, if adopted, would result in an increase in the hour and 
cost burden calculations. As discussed in the cost-benefit analysis in 
Section VI, however, we believe this proposed amendment would eliminate 
potential burdens and costs for foreign issuers that adopt IFRS for the 
first time and would benefit investors by clarifying financial 
disclosure.\57\ The disclosure will be mandatory. There would be no 
mandatory retention period for the information disclosed, and responses 
to the disclosure requirements would not be kept confidential.
---------------------------------------------------------------------------

    \57\ Because the current PRA estimates for Forms 20-F, F-1, F-2, 
F-3 and F-4 do not include an estimate of the burden of preparing 
three years of financial statements in accordance with IFRS during a 
company's transition to IFRS, our estimate of the impact of our rule 
changes does not include any reduction for not having to prepare the 
third year of financial statements in accordance with IFRS.
---------------------------------------------------------------------------

    For purposes of the Paperwork Reduction Act, we estimate that the 
one-time incremental increase in the paperwork burden for all first-
time adopters of IFRS prior to 2007 would be approximately 11,370 hours 
of company time and approximately $10,231,200 for the services of 
outside professionals.\58\ We estimate that the one-time incremental 
increase in the paperwork burden for all first-time adopters of IFRS 
after that period would be approximately 5,685 hours of company time 
and approximately $5,115,600 for the services of outside professionals. 
We estimated the average number of hours

[[Page 12914]]

each entity spends completing the forms and the average hourly rate for 
outside professionals. That estimate includes the time and the cost of 
in-house preparers, reviews by executive officers, in-house counsel, 
outside counsel, independent auditors and members of the audit 
committee.\59\
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    \58\ As discussed below in Sections V.B and V.C, we estimate 
that the proposed accommodation (as described in Section II, above) 
will lead to a one-time increase of 2 percent in the total number of 
burden hours per response, and that the proposed disclosures about 
the first-time adoption of IFRS (as described in Section III, above) 
will lead to a one-time increase of an additional 2 percent in the 
total number of burden hours per response. Accordingly, a total one-
time increase of 4 percent in the number of burden hours per 
response will be borne by companies that switch to IFRS for a 
financial year beginning no later than January 1, 2007. For 
companies that adopt IFRS for the first time in a later financial 
year, only the 2 percent increase associated with the proposed 
disclosure requirements described in Section III of this release 
will apply. For convenience, the estimated PRA hour burdens have 
been rounded to the nearest whole number, and the estimated PRA cost 
burdens have been rounded to the nearest $10.
    \59\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures. For Securities Act 
registration statements, we also consider additional reviews of the 
disclosure by underwriter's counsel and underwriters.
---------------------------------------------------------------------------

B. Burden and Cost Estimates Related to the Proposed Accommodation

1. Form 20-F
    We estimate that currently foreign private issuers file 1,194 Form 
20-Fs each year. We also estimate that foreign private issuers incur 
25% of the burden required to produce the Form 20-Fs resulting in 
769,826 annual burden hours incurred by foreign private issuers out of 
a total of 3,079,304 annual burden hours. Thus, we estimate that 2,579 
total burden hours per response are currently required to prepare the 
Form 20-F. We further estimate that outside professionals account for 
75% of the burden to produce the Form 20-Fs at an average cost of $300 
per hour for a total cost of $692,843,400.
    We estimate that currently approximately 35% of the companies that 
file Form 20-F will be impacted by the proposal.\60\ We expect that, if 
adopted, the proposed amendment would cause 417 foreign private issuers 
to have increased burden hours. We estimate that for each of the 
companies affected by the proposal, there would occur an increase of 2 
percent (52 hours) in the number of burden hours required to prepare 
their Form 20-F, for a total increase of 21,684 hours. We expect that 
foreign private issuers would incur 25% of these increased burden hours 
(5,421 hours). We further expect that outside firms would incur 75% of 
the increased burden hours (16,263 hours) at an average cost of $300 
per hour for a total of $4,878,900 in increased costs.
---------------------------------------------------------------------------

    \60\ This figure is based on our estimate of the ratio of the 
actual number of foreign private issuers that (1) are incorporated 
in countries that will require or permit the use of IFRS beginning 
in year 2005, (2) are incorporated in countries that presently 
permit but do not require the use of IFRS, (3) have filed either an 
annual report and/or a registration statement on Form 20-F between 
January 1 and December 31, 2002; and (4) appear current with their 
reporting obligations under the Exchange Act as of December 31, 
2002, to the actual number of the applicable forms that were filed 
between January 1 and December 1, 2002. For purposes of this 
estimate we have excluded the number of foreign private issuers that 
we estimate currently include IFRS financial statements in their SEC 
filings (50).
---------------------------------------------------------------------------

    Thus, we estimate that the proposed amendment to Form 20-F would 
increase the annual burden incurred by foreign private issuers in the 
preparation of Form 20-F to 775,247 burden hours. We further estimate 
that the proposed amendment would increase the total annual burden 
associated with Form 20-F preparation to 3,100,988 burden hours, which 
would increase the average number of burden hours per response to 
2,597. We further estimate that the proposed amendment would increase 
the total annual costs attributed to the preparation of Form 20-F by 
outside firms to $697,722,300.
2. Form F-1
    We estimate that currently foreign private issuers file 43 
registration statements on Form F-1 each year. We also estimate that 
foreign private issuers incur 25% of the burden required to produce a 
Form F-1 resulting in 22,860 annual burden hours incurred by foreign 
private issuers out of a total of 91,440 annual burden hours. Thus, we 
estimate that 2,127 total burden hours per response are currently 
required to prepare a registration statement on Form F-1. We further 
estimate that outside professionals account for 75% of the burden to 
produce a Form F-1 at an average cost of $300 per hour for a total cost 
of $20,574,000.
    We estimate that currently approximately 30% of the companies that 
file registration statements on Form F-1 will be impacted by the 
proposal.\61\ We expect that, if adopted, the proposed amendment would 
cause 13 foreign private issuers to have more burden hours. We estimate 
that for each of the companies affected by the proposal, there would 
occur an increase of 2 percent (43 hours) in the number of burden hours 
required to prepare their registration statements on Form F-1, for a 
total increase of 559 hours. We expect that foreign private issuers 
would bear 25% of these increased burden hours (140 hours). We further 
expect that outside firms would benefit from 75% of the reduced burden 
hours (420 hours) at an average cost of $300 per hour for a total of 
$126,000 in increased costs.
---------------------------------------------------------------------------

    \61\ This figure is based on our estimate of the ratio of the 
number of foreign private issuers that (1) are incorporated in 
countries that will require or permit the use of IFRS beginning in 
year 2005, (2) are incorporated in countries that presently permit 
but do not require the use of IFRS, (3) have filed a Form F-1 
between January 1 and December 31, 2002; and (4) appear current with 
their reporting obligations under the Exchange Act as of December 
31, 2003, to the actual number of registration statements on Form F-
1 that were filed between January 1 and December 1, 2002.
---------------------------------------------------------------------------

    Thus, we estimate that the proposed amendment to Form 20-F would 
increase the annual burden incurred by foreign private issuers in the 
preparation of Form F-1 to 23,000 burden hours. We also estimate that 
the proposed amendment would increase the total annual burden 
associated with Form F-1 preparation to 92,000 burden hours, which 
would increase the average number of burden hours per response to 
2,140. We further estimate that the proposed amendment would increase 
the total annual costs attributed to the preparation of Form F-1 by 
outside firms to $20,700,000.
3. Form F-2
    We estimate that currently foreign private issuers file three 
registration statements on Form F-2 each year. We also estimate that 
foreign private issuers incur 25% of the burden required to produce a 
Form F-2 resulting in 699 annual burden hours incurred by foreign 
private issuers out of a total of 2,796 annual burden hours. Thus, we 
estimate that 932 total burden hours per response are currently 
required to prepare a registration statement on Form F-2. We further 
estimate that outside professionals account for 75% of the burden to 
produce a Form F-2 at an average cost of $300 per hour for a total cost 
of $629,100.
    Based on a review of the three registration statements on Form F-2 
that were filed between January 1 and December 31, 2002, we expect 
that, if adopted, the proposed amendments would affect one company. We 
estimate that there would occur an increase of 2 percent (19 hours) in 
the number of burden hours required to prepare a registration statement 
on Form F-2. We expect that the foreign private issuer would bear 25% 
of these increased burden hours (5 hours). We further expect that 
outside firms would bear 75% of the increased burden hours (15 hours) 
at an average cost of $300 per hour, for a total of $4,500 in increased 
costs.
    Thus, we estimate that the proposed amendment to Form 20-F would 
increase the annual burden incurred by foreign private issuers in 
preparation of Form F-2 to 704 burden hours. We further estimate that 
the proposed amendment would increase the total annual burden 
associated with Form F-2 preparation to 2,816 hours, which would 
increase the average number of burden hours per response to 939. We 
further estimate that the proposed amendment would increase the total 
annual costs attributed to the

[[Page 12915]]

preparation of Form F-2 by outside firms to $633,600.
4. Form F-3
    We estimate that currently foreign private issuers file 120 
registration statements on Form F-3 each year. We also estimate that 
foreign private issuers incur 25% of the burden required to produce a 
Form F-3 resulting in 4,980 annual burden hours incurred by foreign 
private issuers out of a total of 19,920 annual burden hours. Thus, we 
estimate that 166 total burden hours per response are currently 
required to prepare a registration statement on Form F-3. We further 
estimate that outside professionals account for 75% of the burden to 
produce a Form F-3 at an average cost of $300 per hour for a total cost 
of $4,482,000.
    We estimate that currently approximately 45% of the companies that 
file registration statements on Form F-3 will be impacted by the 
proposal.\62\ We expect that, if adopted, the proposed amendment would 
cause 54 foreign private issuers to have more burden hours. We estimate 
that for each of the companies affected by the proposal, there would be 
an increase of 2 percent (3 hours) in the number of burden hours 
required to prepare their registration statements on Form F-3, for a 
total increase of 162 hours. We expect that foreign private issuers 
would bear 25% of this increased burden hours (41 hours). We further 
expect that outside firms would bear 75% of the increased burden hours 
(120 hours) at an average cost of $300 per hour for a total of $36,000 
in increased costs.
---------------------------------------------------------------------------

    \62\ This figure is based on our estimate of the ratio of the 
number of foreign private issuers that (1) are incorporated in 
countries that will require or permit the use of IFRS beginning in 
year 2005, (2) are incorporated in countries that presently permit 
but do not require the use of IFRS, (3) have filed a Form F-3 
between January 1 and December 31, 2002; and (4) appear current with 
their reporting obligations under the Exchange Act as of December 
31, 2003, to the actual number of registration statements on Form F-
3 that were filed between January 1 and December 1, 2002.
---------------------------------------------------------------------------

    Thus, we estimate that the proposed amendment to Form 20-F would 
increase the annual burden incurred by foreign private issuers in the 
preparation of Form F-3 to 5,021 burden hours. We further estimate that 
the proposed amendment would increase the total annual burden 
associated with Form F-3 preparation to 20,084 burden hours, which 
would increase the average number of burden hours per response to 167. 
We further estimate that the proposed amendment would increase the 
total annual costs attributed to the preparation of Form F-3 by outside 
firms to $4,518,000.
5. Form F-4
    We estimate that currently foreign private issuers file 61 
registration statements on Form F-4 each year. We also estimate that 
foreign private issuers incur 25% of the burden required to produce a 
Form F-4 resulting in 20,267 annual burden hours incurred by foreign 
private issuers out of a total of 81,068 annual burden hours. Thus, we 
estimate that 1,323 total burden hours per response are currently 
required to prepare a registration statement on Form F-4. We further 
estimate that outside professionals account for 75% of the burden to 
produce a Form F-4 at an average cost of $300 per hour for a total cost 
of $18,240,300.
    We estimate that currently approximately 20% of the companies that 
file registration statements on Form F-4 will be impacted by the 
proposal.\63\ We expect that, if adopted, the proposed amendment would 
cause 12 foreign private issuers to have more burden hours. We estimate 
that for each of the companies affected by the proposal, there would 
occur an increase of 2 percent (26 hours) in the number of burden hours 
required to prepare their registration statements on Form F-4, for a 
total increase of 312 hours. We expect that foreign private issuers 
would bear 25% of these increased burden hours (78 hours). We further 
expect that outside firms would bear 75% of the increased burden hours 
(234 hours) at an average cost of $300 per hour for a total of $70,200 
in increased costs.
---------------------------------------------------------------------------

    \63\ This figure is based on our estimate of the ratio of the 
number of foreign private issuers that (1) are incorporated in 
countries that will require or permit the use of IFRS beginning in 
year 2005, (2) are incorporated in countries that presently permit 
but do not require the use of IFRS, (3) have filed a Form F-4 
between January 1 and December 31, 2002; and (4) appear current with 
their reporting obligations under the Exchange Act as of December 
31, 2003, to the actual number of registration statements on Form F-
4 that were filed between January 1 and December 1, 2002.
---------------------------------------------------------------------------

    Thus, we estimate that the proposed amendment to Form 20-F would 
increase the annual burden incurred by foreign private issuers in the 
preparation of Form F-4 to 20,345 burden hours. We further estimate 
that the proposed amendment would increase the total annual burden 
associated with Form F-4 preparation to 81,380 burden hours, which 
would increase the average number of burden hours per response to 
1,334. We further estimate that the proposed amendment would increase 
the total annual costs attributed to the preparation of Form F-4 by 
outside firms to $18,310,500.

C. Burden and Cost Estimates Related to the Disclosure About First-Time 
Adoption of IFRS

    The proposed requirements that will apply to all first-time 
adopters of IFRS regardless of the year in which they change their 
basis of accounting relate to the issuer's reliance on any of the 
exceptions from IFRS and to the reconciliation of Previous GAAP 
financial statements to IFRS. We estimate that these requirements, if 
adopted, would cause a one-time increase of 2 percent in the number of 
burden hours required to prepare Forms 20-F, F-1, F-2, F-3 and F-4, 
respectively. We further estimate that the same number of companies 
would be affected by these amendments as by the proposed amendments 
related to the accommodation. Accordingly, the burden and cost 
estimates related to the proposed disclosure about first-time adoption 
of IFRS will be the same as the burden and cost estimates related to 
the proposed accommodation. We therefore refer to the calculations 
provided above in Section V.B. As with the burden increases related to 
the accommodation, they will be a one-time increase that a company will 
incur in the year in which it adopts IFRS as its basis for accounting.

D. New Burden Estimates

    Based on the preceding analysis and assuming that the number of 
respondents for each of the affected forms remains unchanged, the 2 
percent burden increase due to the proposed accommodation and the 
further 2 percent increase due to the proposed disclosure requirements 
for all first-time IFRS adopters will, together, increase the total 
burden estimates for companies from 769,826 hours to 780,668 for Form 
20-F (an increase from 2,579 hours to 2,615 hours per form), from 
22,860 hours to 23,140 hours for Form F-1 (an increase from 2,127 hours 
to 2,153 hours per form), from 699 hours to 709 hours for Form F-2 (an 
increase from 932 hours to 946 hours per form), from 4,980 hours to 
5,062 for Form F-3 (an increase from 166 hours to 168 hours per form), 
and from 20,267 hours to 20,423 hours for Form F-4 (an increase from 
1,323 hours to 1,345 hours per form). As discussed above in footnote 
58, after year 2007 the 2 percent burden increase from the proposed 
accommodation will no longer apply and only the 2 percent increase due 
to the proposed disclosure requirements for all first-time IFRS 
adopters will remain.

[[Page 12916]]

E. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order 
to:
     evaluate whether the proposed collections of 
information are necessary for the proper performance of the functions 
of the Commission, including whether the information will have 
practical utility;
     evaluate the accuracy of our estimates of the 
burden of the proposed collections of information;
     determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected;
     evaluate whether there are ways to minimize the 
burden of the collections of information on those who respond, 
including through the use of automated collection techniques or other 
forms of information technology; and
     evaluate whether the proposed amendments will 
have any effects on any other collections of information not previously 
identified in this section.

Any member of the public may direct to us any comments concerning the 
accuracy of these burden estimates and any suggestions for reducing the 
burdens. Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the OMB, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
send a copy of the comments to Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-
0609, with reference to File No. S7-13-04. Requests for materials 
submitted to the OMB by us with regard to these collections of 
information should be in writing, refer to File No. S7-13-04, and be 
submitted to the Securities and Exchange Commission, Records 
Management, Office of Filings and Information Services, 450 Fifth 
Street, NW., Washington, DC 20549. Because the OMB is required to make 
a decision concerning the collections of information between 30 and 60 
days after publication, your comments are best assured of having their 
full effect if the OMB receives them within 30 days of publication.

VI. Cost-Benefit Analysis

    A significant number of foreign private issuers that file 
registration statements or annual reports with the SEC will adopt IFRS 
as their basis for accounting, either voluntarily or pursuant to 
regulatory requirement. The amendments to Form 20-F proposed in this 
release seek to facilitate the transition of those foreign companies to 
IFRS and to improve the clarity of their financial disclosure. 
Currently, Form 20-F requires that foreign private issuers provide 
three years of audited financial statements prepared using a consistent 
basis of accounting. Although we are not proposing to require the use 
of IFRS in SEC filings, as an accommodation to foreign companies that 
adopt IFRS for the first time during a financial year that begins no 
later than January 1, 2007, we are proposing to allow them to omit IFRS 
financial statements for the earliest of the three years that would 
otherwise be required under our rules, with appropriate related 
disclosure. Current requirements for a reconciliation to U.S. GAAP will 
remain in place.
    We also are proposing additional requirements for all first-time 
IFRS adopters regarding disclosure of exceptions to IFRS and 
clarifications regarding reconciliation from Previous GAAP to IFRS. We 
are sensitive to the costs and benefits of our proposal, which we 
discuss below.

A. Expected Benefits

    The proposed accommodation is intended to benefit eligible issuers 
by relieving them of the burden and difficulties related to restating 
financial statements for a prior financial year using IFRS standards 
that were not finalized during the period to which they would have to 
be applied. We are concerned that retroactive application of IFRS for 
the third year back would lead to uncertain results, and cause 
potential investor confusion. The number of companies that will be 
required to switch their basis of accounting to IFRS and the additional 
companies that switch to IFRS voluntarily also will compound the 
difficulties that both companies and the accounting profession 
ordinarily face when recasting prior reporting periods under new 
standards. The proposed accommodation is intended to benefit those 
parties by minimizing those difficulties. The proposed accommodation 
also is intended to benefit investors by improving the clarity and 
quality of financial disclosure required of companies that adopt IFRS 
for the first time.
    The proposed amendments that, if adopted, would require from all 
first-time IFRS adopters detailed disclosure related to their reliance 
on voluntary and mandatory exceptions to IFRS are intended to benefit 
investors by providing clarification of the effect that use of those 
exceptions had on the company's financial condition. This disclosure 
would appear in the company's required discussion of its operating and 
financial review and prospects.
    We also are proposing amendments to Form 20-F that, if adopted, 
would clarify the level of information required in the reconciliation 
to IFRS of financial statements prepared in accordance with Previous 
GAAP. This clarification is intended to benefit investors by providing 
a comparable level of information in that reconciliation to enable 
readers to understand any material adjustments to the financials 
statements.

B. Expected Costs

    The proposed amendments to Form 20-F are likely to result in some 
costs to companies that are first-time adopters of IFRS, although we 
anticipate that these costs are justified by the reduced burden. We 
believe that the principal cost to issuers relying on the proposed 
accommodation will relate to the proposed requirement that they include 
three years of condensed U.S. GAAP financial information. Based on our 
assumption that most companies will already have this information 
available, however, we believe that the additional cost of including it 
in their SEC filings will be minimal. The other proposed amendments 
relating to the accommodation for first-time IFRS adopters are intended 
to clarify how information required under existing rules should be 
presented when based on primary financial statements prepared in 
accordance with IFRS. Therefore, these elements of the proposed 
accommodation should add little extra burden to companies that rely on 
it.
    We note that the proposed requirements relating to interim 
financials statements do not vary significantly from existing 
requirements. They may, however, create additional costs for companies 
that may be required to maintain financial statements prepared in 
accordance with both Previous GAAP and IFRS for interim periods during 
the year in which they switch to IFRS. We request comment on the nature 
and extent of these potential costs.
    Other amendments proposed in this release will, if adopted, apply 
to all first-time IFRS adopters. These proposals relate to the 
reconciliation from Previous GAAP to IFRS and to the use of any 
exceptions to IFRS. Because reconciliation from Previous GAAP to IFRS 
is required under the transition rules in IFRS 1, we do not anticipate 
that our proposed standard clarifying the level of information that the

[[Page 12917]]

reconciliation should contain will result in an increased cost to 
companies. We do recognize that the proposals relating to the use of 
IFRS exceptions, if adopted, will require additional disclosure and, 
consequently, an increase in costs for companies that would be required 
to provide that disclosure. We request comment on the nature and extent 
of that cost increase.
    The proposed accommodation may involve some costs to investors, who 
would not have available the third year of financial statements 
prepared under IFRS. We believe that this cost is minimal, however, 
based on our assumption that the results of retroactive application of 
IFRS for the third financial year back may be uncertain and confusing. 
The requirement that companies relying on the proposed accommodation 
include three years of condensed U.S. GAAP information is intended to 
reduce any cost to investors by ensuring that filings contain three 
years of information prepared on a consistent basis of accounting. The 
proposed accommodation also may create a competitive disadvantage to 
companies that are not eligible to rely on it, including domestic 
companies and foreign companies that would not be considered first-time 
adopters of IFRS under the amendment. Most of these costs are difficult 
to quantify. We request comment on these potential costs.

C. Comment Solicited

    We request your views on the costs and benefits described above, 
particularly with regard to the questions raised after Sections II.A-F 
and Section III, as well as on any other costs and benefits that could 
result from adoption of the proposed amendment to Form 20-F. For 
example, are we correct in our assumptions relating to the potential 
costs and difficulties that companies may face when they adopt IFRS? 
What benefits may be created by encouraging more companies to adopt 
IFRS as their basis of accounting, and for whom? What is the likely 
economic impact of these or other costs or benefits? Can they be 
quantified in any meaningful way? If so, how and what conclusions 
should be drawn? The Commission also requests any supporting data to 
quantify the expected costs and the value of the anticipated benefits.

VII. Regulatory Flexibility Act Certification

    The Commission hereby certifies pursuant to 5 U.S.C. 605(b), that 
the amendment to Form 20-F under the Exchange Act contained in this 
release, if adopted, would not have a significant economic impact on a 
substantial number of small entities. The proposal would add a new 
General Instruction to Form 20-F that would permit eligible foreign 
private issuers to file two years rather than three years of statements 
of income, changes in shareholders' equity and cash flows prepared in 
accordance with IFRS, with appropriate related disclosure. The 
amendments, if adopted, also would require all first-time adopters to 
provide information relating to exceptions from IFRS on which they 
relied and to satisfy a required level of information in their 
reconciliation to IFRS from Previous GAAP. Based on an analysis of the 
language and legislative history of the Act, Congress does not appear 
to have intended the Regulatory Flexibility Act to apply to foreign 
issuers. For this reason, the proposed amendment should not have a 
significant economic impact on a substantial number of small entities.
    We solicit written comments regarding this certification. We 
request that commenters describe the nature of any impact on small 
entities and provide empirical data to support the extent of the 
impact.

VIII. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (''SBREFA''),\64\ a rule is ``major'' if it has resulted, 
or is likely to result in:
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    \64\ Pub. L. No. 104-121, Title 2, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million 
or more;
     A major increase in costs or prices for 
consumers or individual industries; or
     A significant adverse effect on competition, 
investment or innovation.

We request comment on the potential impact of the proposed amendments 
on the economy on an annual basis. Commenters are requested to provide 
empirical data and other factual support for their views if possible.
    Section 2(b) of the Securities Act \65\ and Section 3(f) of the 
Exchange Act \66\ require us, when engaging in rulemaking that requires 
us to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider whether the action will 
promote efficiency, competition, and capital formation. Section 
23(a)(2) of the Exchange Act \67\ requires us, when adopting rules 
under the Exchange Act, to consider the impact that any new rule would 
have on competition. In addition, Section 23(a)(2) prohibits us from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 77b(b).
    \66\ 15 U.S.C. 78c(f).
    \67\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The purpose of this proposed amendment to Form 20-F is to provide 
an accommodation to companies that switch to IFRS during a financial 
year beginning no later than January 1, 2007, and have not published 
IFRS financial statements for an earlier financial year. This proposal 
is designed to increase efficiency, competition and capital formation 
by alleviating the burden and cost that eligible companies would face 
if required to recast under IFRS their results for the third financial 
year for inclusion in annual reports and registration statements filed 
with us. Because those companies may find it difficult to recast their 
financial results under IFRS for the third financial year, we believe 
that the proposed amendment is likely to promote market efficiency by 
eliminating financial disclosure that would be costly to produce and of 
questionable value. As a result of the more reliable disclosure under 
the proposed amendment, we believe that investors may be able to make 
more informed investment decisions and that capital may be allocated on 
a more efficient basis.
    The proposed amendments also would require all foreign companies 
that change their basis of accounting to IFRS to provide information 
relating to exceptions to IFRS on which they relied and to satisfy a 
required level of information in their reconciliation to IFRS from 
Previous GAAP. We believe that this is likely to increase efficiency, 
competition and capital formation by enabling investors to base their 
investment decisions on a better understanding of the financial 
information of those companies, leading to a more efficient allocation 
of capital.
    We solicit comment on these matters as they regard the proposed 
amendments. For example, would the proposals have an adverse effect on 
competition that is neither necessary nor appropriate in furtherance of 
the purposes of the Exchange Act? For example, would the proposals 
create an adverse competitive effect on U.S. issuers or on foreign 
issuers that could not rely on the accommodation? Would the proposed 
amendments, if adopted, promote efficiency, competition and capital 
formation? Commenters are

[[Page 12918]]

requested to provide empirical data and other factual support for their 
views, if possible.

IX. Statutory Basis

    We propose the amendment to Exchange Act Form 20-F pursuant to 
Sections 6, 7, 10, and 19(a) of the Securities Act of 1933 as amended, 
and Sections 3, 12, 13, 15, 23 and 36 of the Securities Exchange Act of 
1934.

Text of Proposed Amendments

List of Subjects in 17 CFR Part 249

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, the Commission proposes to amend 
Title 17, chapter II of the Code of Federal Regulations as follows:

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    1. The authority citation for part 249 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 78a, et seq. and 7201 et seq.; and 18 
U.S.C. 1350, unless otherwise noted.
* * * * *
    2. Amend Form 20-F (referenced in Sec.  249.220f) by adding General 
Instruction G, Instruction 4 to Item 5, and Instruction 3 to Item 8 to 
read as follows:

    Note: The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 20-F

    Registration Statement pursuant to Section 12(b) or (g) of the 
Securities Exchange Act of 1934.
* * * * *

General Instructions

* * * * *

G. Change to International Financial Reporting Standards

    (a) Omission of Certain Required Financial Statements. If the 
company changes the body of accounting principles used in preparing its 
financial statements presented pursuant to Item 8.A.2 of Form 20-F 
(``Item 8.A.2'') to the International Financial Reporting Standards 
(``IFRS'') published by the International Accounting Standards Board, 
the company may omit the earliest of the three years of audited 
financial statements required by Item 8.A.2 if the company satisfies 
the conditions set forth in this instruction. For purposes of this 
instruction, the term ``financial year'' refers to the first financial 
year beginning on or after January 1 of the same calendar year.
    (b) Applicable Documents. This instruction shall be available only 
for the following registration statements and annual reports:
    (1) Registration statements. This instruction shall be available 
for registration statements if: (A) the company's most recent audited 
financial statements required by Item 8.A.2 are for a financial year 
that begins no later than January 1, 2007; (B) prior to the company's 
publication of audited financial statements for that financial year, 
the company had not published audited financial statements prepared in 
accordance with IFRS for an earlier financial year; and (C) the audited 
financial statements for the company's most recent financial year for 
which audited financial statements are required by Item 8.A.2 are 
prepared in accordance with IFRS.
    (2) Annual reports. This instruction shall be available for annual 
reports if: (A) the annual report relates to a financial year that 
begins no later than January 1, 2007; (B) prior to the company's 
publication of audited financial statements for that financial year, 
the company had not published audited financial statements prepared in 
accordance with IFRS for any earlier financial year; and (C) the 
audited financial statements for the company's financial year to which 
the annual report relates are prepared in accordance with IFRS.
    (c) Selected Financial Data. The selected historical financial data 
required pursuant to Item 3.A of Form 20-F shall be based on financial 
statements prepared in accordance with IFRS and shall be presented for 
the two most recent financial years. The company shall present selected 
historical financial data in accordance with U.S. GAAP for the five 
most recent financial years, except as the company is otherwise 
permitted to omit U.S. GAAP information for any of the earliest of the 
five years pursuant to the Instruction to Item 3.A of Form 20-F.
    (d) Information on the Company. The reference in Item 4.B of Form 
20-F to ``the body of accounting principles used in preparing the 
financial statements'' means IFRS and not the basis of accounting that 
the company previously used (``Previous GAAP'') or accounting 
principles used only to prepare the U.S. GAAP reconciliation.
    (e) Operating and Financial Review and Prospects. The company shall 
present the information required pursuant to Item 5. The discussion 
should focus on the financial statements for the two most recent 
financial years prepared in accordance with IFRS. The company should 
refer to the reconciliation to U.S. GAAP for those years and discuss 
any aspects of the differences between IFRS and U.S. GAAP, not 
otherwise discussed in the reconciliation, that the company believes 
are necessary for an understanding of the financial statements as a 
whole. No part of the discussion should relate to financial statements 
prepared in accordance with Previous GAAP.
    (f) Financial Information. With respect to the financial 
information required by Item 8.A, all instructions contained in Item 8, 
including the instruction requiring audits in accordance with U.S. 
generally accepted auditing standards, shall apply. A company that 
provides information that responds to Item 8.A.5 of Form 20-F for its 
2005 financial year shall also include its published interim financial 
information prepared in accordance with IFRS.
    (g) Quantitative and Qualitative Disclosures About Market Risk. 
Information in the document that responds to Item 11 of Form 20-F shall 
be presented on the basis of IFRS.
    (h) Financial Statements. The document shall include financial 
statements that comply with Item 17 or 18 of Form 20-F as follows:
    (1) Financial Statements in accordance with IFRS. The company may 
omit the earliest of the three years of financial statements required 
by Item 8.A.2.
    (2) U.S. GAAP Information. (A) The U.S. GAAP reconciliation 
required by Item 17(c) or 18 shall relate to the same periods covered 
by the financial statements prepared in accordance with IFRS; (B) the 
audited financial statements included pursuant to Instruction G.h.1 
above shall contain, in addition to the reconciliation to U.S. GAAP, 
condensed financial information prepared in accordance with U.S. GAAP 
for the three most recent financial years. The form and content of this 
financial information shall be in a level of detail substantially 
similar to that required by Article 10 of Regulation S-X.
    Instructions: 1. Condensed financial information prepared in 
accordance with U.S. GAAP provided in response to Instruction G.h.2.B 
shall contain income statements and balance sheets. Condensed cash flow 
statements prepared in accordance with U.S. GAAP shall not be required 
under this instruction, nor does this instruction affect the number of 
years for which a company must provide a balance sheet prepared in 
accordance with U.S. GAAP under Item 8.A.2. Companies are not required 
to provide notes to this condensed financial information.

[[Page 12919]]

    2. An eligible company relying on this General Instruction G may 
elect to include or incorporate by reference financial data prepared in 
accordance with Previous GAAP. A company electing to include or 
incorporate by reference Previous GAAP financial information shall 
prominently disclose, at an appropriate location in the document, that 
the document contains or incorporates by reference financial statements 
and other financial information based on both IFRS and Previous GAAP, 
and that the information based on Previous GAAP is not comparable to 
information prepared in accordance with IFRS.
    3. Companies electing to include or refer to Previous GAAP 
financial information shall:
    (a) Present or refer to selected historical financial data prepared 
in accordance with Previous GAAP for the four financial years prior to 
the most recent financial year.
    (b) Present operating and financial review and prospects 
information pursuant to Item 5 that focuses on the financial statements 
for the two most recent financial years prior to the most recent 
financial year that were prepared in accordance with Previous GAAP. The 
discussion need not refer to the reconciliation to U.S. GAAP. No part 
of the discussion should relate to financial statements prepared in 
accordance with IFRS.
    (c) Include or incorporate by reference comparative financial 
statements prepared in accordance with Previous GAAP that cover the two 
financial years prior to the most recent financial year.
* * * * *
Item 5. Operating and Financial Review and Prospects
* * * * *
    Instructions to Item 5.
* * * * *
    4. To the extent the primary financial statements reflect the use 
of exceptions permitted or required by IFRS 1, the company shall:
    (A) Provide detailed information as to the exceptions used, 
including:
    i. an indication of the items or class of items to which the 
exception was applied, and
    ii. a description of what accounting principle was used and how it 
was applied.
    (B) Include, where material, qualitative disclosure of the impact 
on financial condition, changes in financial condition and results of 
operations that alternatives would have had.
    (C) Explain the significance of the exception used to the company's 
financial condition, changes in financial condition and results of 
operations and, where material, identify the line items in the 
financial statements affected by the exceptions from IFRS.
* * * * *
Item 8. Financial Information
* * * * *
    Instructions to Item 8.
* * * * *
    3. If the primary financial statements included in the document 
represent the first filing by the company with the SEC of consolidated 
financial statements prepared in accordance with IFRS, the notes to the 
financial statements prepared in accordance with IFRS shall disclose 
the following:
    (A) The reconciliation from Previous GAAP to IFRS required by IFRS 
1 shall be presented in a form and level of information sufficient to 
explain all material adjustments to the balance sheet and income 
statement and, if presented under Previous GAAP, to the cash flow 
statement; and
    (B) To the extent the primary financial statements reflect the use 
of exceptions permitted or required by IFRS 1, the company shall 
identify each exception used, including:
    i. an indication of the items or class of items to which the 
exception was applied, and;
    ii. a description of what accounting principle was used and how it 
was applied.
* * * * *

    Dated: March 11, 2004.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-5982 Filed 3-17-04; 8:45 am]
BILLING CODE 8010-01-P