[Federal Register Volume 73, Number 3 (Friday, January 4, 2008)]
[Rules and Regulations]
[Pages 986-1012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25250]
[[Page 985]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 210, 230, 239 and 249
Acceptance From Foreign Private Issuers of Financial Statements
Prepared in Accordance With International Financial Reporting Standards
Without Reconciliation to U.S. GAAP; Final Rule
Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules
and Regulations
[[Page 986]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 230, 239 and 249
[Release Nos. 33-8879; 34-57026; International Series Release No. 1306;
File No. S7-13-07]
RIN 3235-AJ90
Acceptance From Foreign Private Issuers of Financial Statements
Prepared in Accordance With International Financial Reporting Standards
Without Reconciliation to U.S. GAAP
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Commission is adopting rules to accept from foreign
private issuers in their filings with the Commission financial
statements prepared in accordance with International Financial
Reporting Standards (``IFRS'') as issued by the International
Accounting Standards Board (``IASB'') without reconciliation to
generally accepted accounting principles (``GAAP'') as used in the
United States. To implement this, we are adopting amendments to Form
20-F, conforming changes to Regulation S-X, and conforming amendments
to other regulations, forms and rules under the Securities Act and the
Securities Exchange Act. Current requirements regarding the
reconciliation to U.S. GAAP do not change for a foreign private issuer
that files its financial statements with the Commission using a basis
of accounting other than IFRS as issued by the IASB.
EFFECTIVE DATE: March 4, 2008.
Compliance Date: Amendments regarding acceptance of financial
statements prepared in accordance with IFRS as issued by the IASB are
applicable to financial statements for financial years ending after
November 15, 2007 and interim periods within those years contained in
filings made after the effective date. Amendments to General
Instruction G of Form 20-F relating to first-time adopters of IFRS are
applicable to filings made after the effective date.
FOR FURTHER INFORMATION CONTACT: Michael D. Coco, Special Counsel,
Office of International Corporate Finance, Division of Corporation
Finance, at (202) 551-3450, or Katrina A. Kimpel, Professional
Accounting Fellow, Office of the Chief Accountant, at (202) 551-5300,
U.S. Securities and Exchange Commission, 100 F Street, NE., Washington,
DC 20549-3628.
SUPPLEMENTARY INFORMATION: The Commission is amending Form 20-F \1\
under the Securities Exchange Act of 1934 (the ``Exchange Act''),\2\
Rules 1-02, 3-10 and 4-01 of Regulation S-X,\3\ Forms F-4 and S-4 under
the Securities Act of 1933 (the ``Securities Act''),\4\ and Rule 701
under the Securities Act.\5\
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\1\ 17 CFR 249.220f.
\2\ 15 U.S.C. 78a et seq. Form 20-F is the combined registration
statement and annual report form for foreign private issuers under
the Exchange Act. It also sets forth disclosure requirements for
registration statements filed by foreign private issuers under the
Securities Act of 1933. 15 U.S.C. 77a et seq.
The term ``foreign private issuer'' is defined in Exchange Act
Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer means
any foreign issuer other than a foreign government except an issuer
that meets the following conditions: (1) More than 50 percent of the
issuer's outstanding voting securities are directly or indirectly
held of record by residents of the United States; and (2) any of the
following: (i) The majority of the executive officers or directors
are United States citizens or residents; (ii) more than 50 percent
of the assets of the issuer are located in the United States; or
(iii) the business of the issuer is administered principally in the
United States.
\3\ 17 CFR 210.1-02, 17 CFR 210.3-10 and 17 CFR 210.4-01.
Regulation S-X sets forth the form and content of requirements for
financial statements.
\4\ 17 CFR 239.34 and 17 CFR 239.13.
\5\ 17 CFR 230.701.
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Table of Contents
I. Executive Summary
A. Proposed Amendments
B. Overview of Comments Received
C. Summary of Final Amendments
II. Acceptance of IFRS Financial Statements from Foreign Private
Issuers Without a U.S. GAAP Reconciliation
A. The IASB
1. Governance and Structure
2. Funding
B. The Convergence Process
C. Investor Understanding and Education
D. Consistent and Faithful Application of IFRS in Practice
E. Regulatory Processes and Infrastructure to Promote Consistent
and Faithful Application of IFRS
III. Discussion of the Amendments
A. Eligibility and Implementation
1. Foreign Private Issuer Status
2. IFRS as Issued by the IASB
3. Implementation
B. Amendments to Effect Acceptance of IFRS Financial Statements
without Reconciliation to U.S. GAAP
1. General
2. Interim Period Financial Statements
a. Financial Information in Securities Act Registration
Statements and Prospectuses and Initial Exchange Act Registration
Statements Used Less Than Nine Months After the Financial Year End
b. Financial Statements in Securities Act Registration
Statements and Prospectuses and Initial Exchange Act Registration
Statements Used More Than Nine Months after the Financial Year End
c. Transition Period Interim Financial Statements in Securities
Act Registration Statements and Prospectuses and Initial Exchange
Act Registration Statements
C. Related Accounting and Disclosure Issues
1. Selected Financial Data
2. Other Form 20-F Disclosure
a. Reference to U.S. GAAP Pronouncements in Form 20-F
b. Disclosure from Oil and Gas Companies
c. Market Risk Disclosure and the Safe Harbor Provisions
3. IFRS Treatment of Certain Areas
4. Other Considerations Relating to IFRS and U.S. GAAP Guidance
5. First-Time Adopters of IFRS
6. Check Boxes on the Cover Page of Form 20-F
D. Regulation S-X
1. Application of the Amendments to Rules 3-05, 3-09, and 3-16
a. Significance Testing
b. Separate Historical Financial Statements of Another Entity
Provided under Rule 3-05 or 3-09
2. Pro Forma Financial Statements Provided under Article 11
3. Financial Statements Provided under Rule 3-10
4. Conforming Amendment to Rule 4-01
E. Application of the Amendments to other Forms, Rules and
Schedules
1. Conforming Amendments to Securities Act Forms F-4 and S-4
2. Conforming Amendment to Rule 701
3. Schedule TO and Schedule 13E-3
4. Small Business Issuers
F. Application to Filings under the Multijurisdictional
Disclosure System
G. Periodic Reporting Deadlines for Foreign Private Issuers
H. Quality Control Issues
IV. Paperwork Reduction Act
A. Background
B. Burden and Cost Estimates Related to the Accommodation
1. Form 20-F
2. Form F-1
3. Form F-4
4. Form S-4
5. Rule 701
V. Cost-Benefit Analysis
A. Expected Benefits
B. Expected Costs
VI. Regulatory Flexibility Act Certification
VII. Consideration of Impact on the Economy, Burden on Competition
and Promotion of Efficiency, Competition and Capital Formation
Analysis
VIII. Statutory Basis and Text of Final Amendments
I. Executive Summary
A. Proposed Amendments
The Commission has long viewed reducing the disparity between the
accounting and disclosure practices of the United States and other
countries as an important objective both for the protection of
investors and the efficiency of capital markets.\6\ The use
[[Page 987]]
of a single set of high-quality globally accepted accounting standards
by issuers will help investors understand investment opportunities
outside the United States more clearly and with greater comparability
than if those issuers disclosed their financial results under a
multiplicity of national accounting standards, and it will enable
issuers to access capital markets worldwide at a lower cost.
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\6\ See ``Acceptance from Foreign Private Issuers of Financial
Statements Prepared in Accordance with International Financial
Reporting Standards without Reconciliation to U.S. GAAP,'' Release
No. 33-8818 (July 2, 2007) [72 FR 37962 (July 11, 2007)] (the
``Proposing Release'') for a summary of the Commission's past
consideration of a single set of globally accepted accounting
standards.
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Towards this end, the Commission has undertaken several measures to
foster the use of International Financial Reporting Standards
(``IFRS'') as issued by the International Accounting Standards Board
(``IASB'') and fully supports the efforts of the IASB and the Financial
Accounting Standards Board (``FASB'') to converge their accounting
standards.\7\ Specifically, the Commission has adopted rules to
encourage the use of IFRS, which has become increasingly widespread
throughout the world. Approximately 100 countries now require or allow
the use of IFRS, and many other countries are replacing their national
standards with IFRS. Following the adoption of a regulation in the
European Union (``EU'') to require companies incorporated in one of its
Member States and whose securities are listed on an EU regulated market
to use IFRS beginning with their 2005 financial year,\8\ we adopted an
accommodation to allow any foreign private issuer preparing its
financial statements using IFRS for the first time to provide two years
rather than three years of financial statements in their filings with
the Commission.\9\ Acknowledging the significant efforts expended by
many foreign private issuers in their transition to IFRS, we also
extended compliance dates for management's report on internal control
over financial reporting.\10\
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\7\ See the Proposing Release for a summary of the IASB, the
FASB and the process of convergence.
\8\ 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.
\9\ Release No. 33-8567 (April 12, 2005) [70 FR 20674 (April 20,
2005)] (the ``2005 Adopting Release''). Other than first-time
adopters of IFRS eligible to rely on that accommodation, 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, are required to present audited statements of
income, changes in shareholders' equity and cash flows for each of
the past three financial years.
\10\ Release No. 33-8545 (March 2, 2005) [70 FR 11528 (March 8,
2005)].
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Most recently, on July 11, 2007, the Commission issued for public
comment a proposal to amend Form 20-F and Regulation S-X to accept
financial statements of foreign private issuers that are prepared on
the basis of the English language version of IFRS as published by the
IASB without a reconciliation to U.S. GAAP.\11\ We did not propose to
change existing reconciliation requirements for foreign private issuers
that file their financial statements under other sets of accounting
standards, or that are not in full compliance with IFRS as issued by
the IASB.\12\ As part of our efforts to foster a single set of globally
accepted accounting standards, we are now adopting amendments to accept
from foreign private issuers financial statements prepared in
accordance with IFRS as issued by the IASB in filings with the
Commission without reconciliation to U.S. GAAP.
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\11\ As used in this release the phrase ``IFRS as issued by the
IASB'' refers to the authoritative text of IFRS, which, according to
the IASC Foundation Constitution, is published in English. See
``International Financial Reporting Standards (IFRSs), including
International Accounting Standards (IASs) and Interpretations as at
1 January 2007,'' Preface to International Financial Reporting
Standards, at 23. As described below in Section III.A.2., the
Proposing Release used the phrase ``IFRS as published by the IASB''
to refer to the authoritative text of IFRS.
\12\ See Items 17 and 18 of Form 20-F; see also Article 4 of
Regulation S-X. See the Proposing Release for a history of the
reconciliation requirement.
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B. Overview of Comments Received
In the Proposing Release we sought comment on a number of issues,
including the goal of achieving a single set of global accounting
standards, the role of the IASB as standard setter, the potential
effect of the proposed rule changes on convergence, the ability of
investors and others to understand and use IFRS financial statements
without a U.S. GAAP reconciliation, and the application of IFRS by
preparers of financial statements. We received approximately 125
comment letters in response to the Proposing Release from a wide
variety of respondents, including investors, analysts, foreign and U.S.
issuers, business associations, accounting firms, law firms, credit
rating agencies and regulators.\13\ The majority of commenters agreed
that, overall, the use of high-quality, internationally accepted
accounting standards was an important and worthwhile goal. In general,
commenters supporting the proposal, which included many foreign private
issuers, accounting firms, legal firms and foreign standard setters, as
well as some investors, agreed that IFRS were suitable to be used as an
internationally accepted set of standards. Further, they expressed that
allowing IFRS without a U.S. GAAP reconciliation would be perceived as
recognition of the adequacy of the convergence process to date and
would promote and encourage the ongoing convergence process. However,
the views of several other commenters, including those representing
some institutional investors and analysts, were mixed. While these
commenters also expressed the view that IFRS have the potential to
fulfill the role of a set of high-quality, international standards at
some time in the future, some thought the time was not yet ripe for
accepting those financial statements without a U.S. GAAP
reconciliation. Among the varying reasons cited by those who believed
the time had not yet come were that the convergence process is
insufficient to date and adopting the proposal would likely slow, and
possibly halt, the convergence process. Other commenters did think that
the time was ripe to accept financial statements prepared in accordance
with IFRS as issued by the IASB without a U.S. GAAP reconciliation.
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\13\ These comment letters are available on the Commission's
Internet Web site, located at http://www.sec.gov/comments/s7-13-07/s71307.shtml, and in the Commission's Public Reference Room in its
Washington, DC headquarters.
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Regarding the effect on information quality if the U.S. GAAP
reconciliation was removed, many commenters in support of the proposal
stated that the reconciliation information is highly technical and not
widely understood. These commenters also generally expressed confidence
in the quality of application of IFRS in practice. On the other hand,
commenters that expressed concerns with the proposal supported the
usefulness of both the quantitative and qualitative aspects of the U.S.
GAAP reconciliation. These commenters cited the presence of significant
differences in important line items, such as net income, in the U.S.
GAAP reconciliations of many foreign private issuers as evidence that
the convergence process is not sufficiently complete. In their view,
such differences would be more difficult to discern without the U.S.
GAAP reconciliation. They also asserted that the U.S. GAAP
reconciliation is helpful to financial statement quality, and they
advocated further cross-jurisdictional structural and enforcement
efforts regarding IFRS, including efforts to strengthen governance of
the IASB and funding of the International Accounting Standards
Committee (``IASC'') Foundation, the stand-alone
[[Page 988]]
organization responsible for overseeing the activities of the IASB.
Many commenters that supported the proposal also urged the
Commission to make amendments that go further than those we proposed.
These commenters suggested that the Commission also accept from foreign
private issuers financial statements prepared using jurisdictional
adaptations of IFRS without a U.S. GAAP reconciliation, jurisdictional
adaptations of IFRS with a reconciliation to IFRS as issued by the
IASB, or any home country GAAP with a reconciliation to IFRS as issued
by the IASB.
C. Summary of Final Amendments
The Commission has considered the comments received and believes it
is appropriate at this time to adopt revisions, substantially as
proposed, to Items 17 and 18 of Form 20-F to allow foreign private
issuers to include in their filings with the Commission financial
statements prepared in accordance with IFRS as issued by the IASB
without reconciliation to U.S. GAAP. However, the amendments adopted
differ in some areas in consideration of the responses we received to
questions we asked in the Proposing Release.
In summary, the Commission is adopting amendments that:
Permit foreign private issuers to file financial
statements prepared in accordance with IFRS as issued by the IASB
without reconciliation to U.S. GAAP;
Require that foreign private issuers taking advantage of
this option state explicitly and unreservedly in the notes to their
financial statements that such financial statements are in compliance
with IFRS as issued by the IASB and provide an unqualified auditor's
report that opines on that compliance;
Allow these foreign private issuers also to file financial
statements for required interim periods without reconciliation to U.S.
GAAP (and without providing disclosure under Article 10 of Regulation
S-X) if the interim financial statements fully comply with IAS 34;
Extend indefinitely the two-year accommodation contained
in General Instruction G of Form 20-F to all first-time adopters of
IFRS as issued by the IASB; and
Make conforming amendments to Rules 1-02, 3-10 and 4-01 of
Regulation S-X, Securities Act Forms F-4 and S-4, and Securities Act
Rule 701.
II. Acceptance of IFRS Financial Statements From Foreign Private
Issuers Without a U.S. GAAP Reconciliation
In the Proposing Release, the Commission requested comment on a
number of broad areas with regard to whether we should proceed with our
proposal to accept from foreign private issuers IFRS financial
statements without a reconciliation to U.S. GAAP. Commenters had a
range of views on these areas and offered useful input, and we
considered many factors in our determination to adopt these amendments.
We received mixed views on the utility of the information provided by
the U.S. GAAP reconciliation of IFRS financial statements. Some
commenters expressed concern about the overall quality of IFRS, either
due to institutional considerations such as the governance or funding
of the IASB or due to operational considerations such as the future of
the convergence process. As described below, there are initiatives that
directly address these concerns. We believe these initiatives will be
more effective in addressing concerns than any indirect effects of
retaining the reconciliation requirement to U.S. GAAP for financial
statements that comply with IFRS as issued by the IASB.
We believe that it is appropriate to adopt these amendments at this
time because we expect our acceptance of IFRS financial statements
without a U.S. GAAP reconciliation will encourage more foreign issuers
to prepare financial statements in accordance with IFRS. We also expect
it will facilitate capital formation for foreign private issuers that
are registered with the Commission. Adopting these amendments now may
serve as an incentive to encourage the use of IFRS as issued by the
IASB, as well as to support their development as a truly globally
accepted set of high-quality accounting standards.
A. The IASB
In the Proposing Release we noted that the IASB's sustainability,
governance and continued operation in a stand-alone manner as a
standard setter are significant considerations in our acceptance of
IFRS financial statements without a U.S. GAAP reconciliation, as those
factors relate to the ability of the IASB to continue to develop high-
quality globally accepted standards. We solicited comment on ways in
which the Commission could further support the IFRS standard-setting
and interpretive processes, and also how the Commission should consider
its role with regard to the IASB.
1. Governance and Structure
Commenters generally agreed that the IASB is a stand-alone standard
setter with a robust due process in its standard-setting
procedures.\14\ Although most commenters did not express concerns over
governance, a few commenters identified several concerns relating to
the organization, governance and operation of the IASB as standard
setter. Specifically, these commenters felt that improvements were
needed to enhance the geographic diversity of the board,\15\ and to
better align its membership with investor interests.\16\
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\14\ See, for example, letters from American Bankers
Association, Georg Merkl (``Merkl''), and UBS AG (``UBS'').
\15\ See, for example, letter from Korean Accounting Institute
and Korean Accounting Standards Board (``KAI-KASB'').
\16\ See, for example, letter from CFA Institute Centre for
Financial Market Integrity (``CFA Institute'').
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In reflection on these comments and its own considerations, the
Commission has joined other authorities responsible for capital market
regulation--the European Commission, the Financial Services Agency of
Japan and the International Organization of Securities Commissions
(``IOSCO'')--to work together to achieve a means of greater
accountability for the IASB and the IASC Foundation to those
governmental authorities charged with protecting investors and
regulating capital markets.\17\ This interest in increasing the
accountability of the IASB and the IASC Foundation is a reflection of
the widespread acceptance of IFRS. The increased use of IFRS has raised
interest in establishing formal ties between securities regulatory
stakeholders and the IASC Foundation.
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\17\ See, SEC Press Release No. 2007-226, November 7, 2007,
available at: http://www.sec.gov/news/press/2007/2007-226.htm.
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The authorities described in the paragraph above propose to utilize
the occasion of the IASC Foundation's 2008 Constitution review to put
forward, in collaboration with the IASC Foundation, certain changes to
strengthen the IASC Foundation's governance framework, while
emphasizing the continued importance of an independent standard-setting
process. Central to this effort is the establishment of a new
monitoring body within the governance structure of the IASC Foundation
to reinforce the existing public interest oversight function of the
IASC Foundation Trustees. Likewise we note the IASC Foundation
Trustees' announcement of their proposals, following a strategy
[[Page 989]]
review over recent months, to enhance the organization's governance
arrangements and reinforce the organization's public
accountability.\18\
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\18\ See, IASC Foundation Press Release, ``Trustees Announce
Strategy to Enhance Governance--Report on Conclusions at Trustees
Meeting,'' November 6, 2007, available at http://www.iasb.org/News/Press+Releases/Trustees+Announce+Strategy+to+Enhance+Governance+-+Report+on+Conclusions+at+Trustees++Meeting.htm (the ``IASC
Foundation November 6 Press Release'').
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As described in the Proposing Release, the Commission participates
in the development of IFRS primarily through its participation in
IOSCO, in which it takes an active role in reviewing and contributing
to comments on exposure drafts of standards issued by the IASB and in
contributing to its working groups. The Commission staff, as an IOSCO
representative, serves as a non-voting observer at International
Financial Reporting Interpretations Committee (``IFRIC'') meetings.\19\
The Commission also is an observer of the IASB Standards Advisory
Council, whose responsibilities include consulting with the IASB as to
technical issues on the IASB's agenda and project priorities. Most
commenters that addressed the role of the Commission with respect to
the IASB felt that the Commission should continue to participate in the
IASB and IFRIC's due process.\20\ Many felt that continued interaction
with the IASB through IOSCO was appropriate.\21\
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\19\ IFRIC interprets IFRS and reviews accounting issues that
are likely to receive divergent or unacceptable treatment in the
absence of authoritative guidance, with a view to reaching consensus
on the appropriate accounting treatment. The IFRIC is currently
comprised of twelve voting members, and the IASC Foundation has
recently approved an increase to fourteen voting members. All IFRIC
members are appointed by the IASC Foundation Trustees for renewable
terms of three years. IFRIC Interpretations are ratified by the IASB
prior to becoming effective.
\20\ See, for example, letters from Deloitte Touche Tohmatsu
(``Deloitte''), Institute of International Finance, London
Investment Banking Association (``LIBA''), PricewaterhouseCoopers
LLP (``PwC'') and the Swedish Export Credit Corporation (``SEK'').
\21\ See, for example, letters from UBS and PwC.
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One commenter noted that in July 2006, following the reaffirmation
of the IASB and the FASB of their commitment to convergence, the IASB
announced that it would not require the application of new standards
before January 1, 2009.\22\ The establishment of that lead time for the
application of major new standards was intended to allow increased
opportunity for consultation, to set a clear target date for adoption,
and to provide stability in the IFRS platform of standards for issuers
that had already adopted IFRS. The commenter expressed concern that the
2009 effective date would delay improvement in the quality of financial
statements and disclosures, and argued that our acceptance of IFRS
financial statements without reconciliation should not occur until
after the IASB lifted its ``moratorium'' on new standards.\23\ We note,
however, that the IASB continues to issue new standards even if it does
not require their application before January 1, 2009, and that
voluntary early adoption of new standards prior to their mandatory
effective date generally is allowed.
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\22\ The press release in which the IASB made this announcement
is available at: http://www.iasb.org/News/Press+Releases/IASB+takes+steps+to+assist+adoption+of+IFRSs+and+reinforce+consultation+No+new+IFRSs+effective+until.htm.
\23\ See letter from CFA Institute.
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2. Funding
Several comment letters, including those from financial statement
users and investors, raised the independence of IASB funding as an
issue.\24\ Most of these commenters were concerned that the current
voluntary nature of contributions might impact at least the appearance
of the IASB's independence as well as the quality and timeliness of its
standards.\25\ A few commenters pointed out that the concentration of
private contributions was a concern that led to the FASB's current
funding mechanism.\26\
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\24\ See, for example, letters from California Public Employees'
Retirement System, CFA Institute, and Goldman Sachs.
\25\ See, for example, letters from Colgate-Palmolive Company
and Investors Technical Advisory Committee (``ITAC'').
\26\ See, for example, letters from Council of Institutional
Investors (``CII''), Lawrence A. Cunningham, and Gaylen R. Hansen.
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We support a strong, independent IASB, and as we noted in the
Proposing Release, there are initiatives underway to address its
funding structure. We believe promotion of these efforts is a more
efficient and productive course of action than continuing to require a
U.S. GAAP reconciliation for financial statements prepared in
accordance with IFRS as issued by the IASB. Currently the operations of
the IASC Foundation are financed by a combination of voluntary, private
contributions and levied funds. Trustees of the IASC Foundation have
indicated that a long-term objective of its funding plan is to move
away from relying on voluntary, private contributions. In June 2006,
the IASC Foundation Trustees agreed on four elements that should govern
the establishment of a funding approach that would enable the IASC
Foundation to remain a stand-alone, private sector organization with
the necessary resources to conduct its work in a timely fashion.\27\
The Trustees continue to make progress in obtaining stable funding that
satisfies those elements. Commenters have indicated that such a change
would be beneficial to the stability of the organization, as it would
spread the costs more equitably.\28\
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\27\ The Trustees determined that ``characteristics of the new
scheme for 2008 would be:
Broad-based: Fewer than 200 companies and organizations
participate in the current financing system. A sustainable long-term
financing system must expand the base of support to include major
participants in the world's capital markets, including official
institutions, in order to ensure diversification of sources.
Compelling: Any system must carry with it enough
pressure to make free riding very difficult. This could be
accomplished through a variety of means, including official support
from the relevant regulatory authorities and formal approval by the
collecting organizations.
Open-ended: The financial commitments should be open-
ended and not contingent on any particular action that would
infringe on the independence of the IASC Foundation and the
International Accounting Standards Board.
Country-specific: The funding burden should be shared
by the major economies of the world on a proportionate basis, using
Gross Domestic Product as the determining factor of measurement.
Each country should meet its designated target in a manner
consistent with the principles above.''
See http://www.iasb.org/About+Us/About+the+Foundation/Future+Funding.htm.
\28\ See the letter from KPMG IFRG Limited (``KPMG'').
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In light of the comments received and its own considerations, the
Commission has taken note of the IASC Foundation's funding progress as
most recently announced following an October 31, 2007 IASC Foundation
Trustee meeting.\29\ The Commission is encouraged by the progress in
diversifying the sources of the IASC Foundation's funding among and
within jurisdictions, as well as by the number of jurisdictions (such
as Australia, the Netherlands, New Zealand and the United Kingdom) that
have moved away from a voluntary funding scheme either to a levy or
national payment.
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\29\ See the IASC Foundation November 6 Press Release.
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B. The Convergence Process
As discussed in the Proposing Release, continued progress towards
convergence between U.S. GAAP and IFRS as issued by the IASB is another
consideration in our acceptance of IFRS financial statements without a
U.S. GAAP reconciliation. We believe that investors can understand and
work with both IFRS and U.S. GAAP and that these two systems can co-
exist in the U.S. public capital markets in the manner described in
this rulemaking, even though convergence between IFRS and U.S. GAAP is
not complete and there are differences between reported results under
IFRS and U.S. GAAP. As we
[[Page 990]]
stated in the Proposing Release, we do not believe that eliminating the
reconciliation should be contingent upon achieving a particular degree
of convergence. Rather, the robustness of the convergence process over
time, among other factors, is of greater importance.
The majority of commenters agreed that attaining a single set of
high-quality global accounting standards was a worthwhile goal, with
several agreeing that a specific level of convergence was not required
to eliminate the reconciliation requirement.\30\ In highlighting that
acceptance of IFRS financial statements without a U.S. GAAP
reconciliation should not be contingent on achieving a particular level
of convergence, one commenter noted, ``[e]ven today users cannot assume
that the U.S. GAAP reconciliation always ensures direct comparability
with U.S. GAAP financial statements of other entities.'' \31\
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\30\ See, for example, letters from the American Insurance
Group, Inc. (``AIG''), Ernst & Young LLP (``Ernst & Young''), PwC,
American Accounting Association--Financial Accounting Standards
Committee.
\31\ See letter from KPMG.
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We received a variety of viewpoints about the level of convergence
between U.S. GAAP and IFRS as issued by the IASB and about the
potential effect of eliminating the reconciliation requirement on the
convergence process. Respondents in favor of the amendments generally
felt that acceptance of IFRS financial statements \32\ without a
reconciliation to U.S. GAAP would be perceived as an indication of the
adequacy of convergence and the convergence process to date.\33\ Many
of those not in favor of the amendments believed that convergence to
date was insufficient to merit the removal of the reconciliation
requirement at this time,\34\ or that acceptance of IFRS financial
statements without reconciliation would impede progress on further
convergence.\35\ Some commenters who took the latter view cited the
presence of substantial differences in important items in the
reconciliation as evidence that the convergence process is not
sufficiently complete, and gave examples of several items that are
disclosed in the reconciliation of which they would be unaware if they
had to rely on IFRS financial statements alone.\36\ Several commenters
suggested that if we accept IFRS financial statements without
reconciliation, users of financial statements would benefit if issuers
continued to provide qualitative disclosure of the nature of the
differences between IFRS and the unreported U.S. GAAP results.\37\
Other commenters representing users of financial statements, though,
noted that the reconciling information is not very useful to them in
evaluating IFRS financial statements,\38\ and many foreign issuers
commented that they rarely receive questions from securities analysts
and others relating to their U.S. GAAP reconciliations.\39\ Many
commenters believed that market forces and demand for comparable
information in global capital markets will continue to provide
sufficient incentive for further convergence of U.S. GAAP and IFRS as
issued by the IASB.\40\
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\32\ The phrase ``IFRS financial statements'' as used in this
release refers to financial statements prepared in accordance with
IFRS as issued by the IASB, unless otherwise specified.
\33\ See, for example, letters from Institute of Chartered
Accountants in England and Wales (``ICAEW''), Siemens
Aktiengesellschaft (``Siemens''), KPMG, Goldman Sachs, and
Federation of European Accountants (``FEE'').
\34\ See, for example, letters from New York State Society of
Certified Public Accountants (``NYSSCPA''), Maverick Capital
(``Maverick''), and ITAC.
\35\ See, for example, letters from CFA Institute, ITAC,
NYSSCPA, R.G. Associates, and Terry Warfield (``Warfield'').
\36\ See, for example, letters from the CFA Institute, Maverick,
and R.G. Associates.
\37\ See, for example, letters from AIG, BP plc (``BP''), and
Fitch Ratings.
\38\ See, for example, letters from Corporate Reporting Users'
Forum (``CRUF''), Goldman Sachs, and Merrill Lynch & Company.
\39\ See, for example, letters from Novartis and Nokia.
\40\ See, for example, letters from British Bankers'
Association, Microsoft Corporation (``Microsoft''), Ernst & Young,
PwC, Prudential plc (``Prudential''), and Fitch Ratings.
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IFRS as issued by the IASB and U.S. GAAP are both sets of high-
quality accounting standards that are similar to one another in many
respects, and the convergence efforts to date have progressed in
eliminating many differences. We recognize, however, that there are
still a number of differences between U.S. GAAP and IFRS as issued by
the IASB, and that there remain specific accounting subjects that IFRS
has yet to address fully. One goal of the convergence effort underway
with the FASB and IASB is to remove the remaining differences and to
avoid creating significant new differences as standard setters continue
to address existing and emerging accounting issues.
These rule amendments are based on many factors, including the
progress of the IASB and the FASB towards convergence, the joint
commitment that both boards have expressed to achieving further
convergence of accounting standards in the future, and our belief that
investors and capital markets are best served with high-quality
accounting standards. Our focus is on whether IFRS is a set of high-
quality accounting standards established through a robust process, the
application of which yields information investors can understand and
work with despite any differences with U.S. GAAP.
We anticipate that the process towards convergence will continue,
because capital markets will provide an ongoing incentive for a common
set of high-quality globally accepted accounting standards, regardless
of the existence of an IFRS to U.S. GAAP reconciliation requirement.
The IASB and the FASB are now developing standards in areas where
improvement is warranted. These circumstances exist regardless of
whether the U.S. GAAP reconciliation requirement is in place. The IASB
and the FASB have, in 2002 and 2006, issued Memoranda of Understanding
that acknowledge their joint commitment to developing high-quality
global standards, the establishment of which remains a long-term
strategic priority for both Boards. In November 2007, the Trustees of
the IASC Foundation reiterated their support for continuing the
convergence work program described in these Memoranda, noting that
future work is largely focused on areas in which the objective is to
develop new world-class international standards.\41\
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\41\ See the IASC Foundation November 6 Press Release.
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It also is important to note that some reconciling differences
between IFRS and U.S. GAAP will continue to exist independent of the
U.S. GAAP reconciliation and the convergence process. Due to their
sources, these differences between U.S. GAAP and IFRS will remain
regardless of the level of future convergence that can be attained.
These differences include the effects of legacy transactions, such as
business combinations, that occurred before U.S. GAAP and IFRS became
more converged, and of self-selected differences that arise as a
function of differing accounting elections (e.g. hedge accounting) that
foreign private issuers make under IFRS and U.S. GAAP.
C. Investor Understanding and Education
In the Proposing Release we posed several questions about the
ability of investors to understand and use financial statements
prepared in accordance with IFRS as issued by the IASB without a U.S.
GAAP reconciliation, and whether that ability would depend on the size
or nature of
[[Page 991]]
the investor, the value of the investment, or other considerations.
Commenters noted that investors vary considerably in their ability
to understand and use IFRS financial statements and that the same is
true of their ability to understand and use financial statements
prepared using U.S. GAAP.\42\ However, many commenters were encouraged
by the apparent lack of difficulty with transition to IFRS in the EU
from many different country-specific GAAPs.\43\ One respondent took an
opposing view and asserted that the present lack of investor
understanding of IFRS should be a factor in deciding whether to
eliminate the reconciliation requirement.\44\ That commenter believed
that eliminating the reconciliation will require more work (and
possibly self-education) by investors to understand IFRS financial
statements, which may result in investment decisions becoming more
costly.\45\ Another commenter indicated its belief that currently there
is a lack of IFRS-based educational programs.\46\
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\42\ See, for example, letters from BDO Global Coordination B.V.
(``BDO''), ICAEW, Merkl, and Shell International B.V. (``Shell'').
\43\ See, for example, letters from British Bankers'
Association, LIBA, International Swaps and Derivatives Association
(``ISDA''), and Financial Reporting Council.
\44\ See letter from ITAC.
\45\ Id.
\46\ See letter from CFA Institute.
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As is also the case with U.S. GAAP, we understand investors and
other users of financial statements do not all possess the same level
of understanding of IFRS or the resources that would facilitate gaining
such an understanding. We anticipate, however, that by encouraging the
use of IFRS as issued by the IASB, these amendments will help investors
to understand international investment opportunities more clearly and
with greater comparability in the long-term than if they had to
continue to rely on a multiplicity of national accounting standards.
The disclosures provided pursuant to the U.S. GAAP reconciliation are
not an exact substitute for an issuer preparing its financial
statements in U.S. GAAP. While some commenters have indicated that the
U.S. GAAP reconciliation is useful, it is not the equivalent of U.S.
GAAP financial statements. Investors currently must make use of IFRS
financial statements and financial statements under various national
GAAPs, even when accompanied by a U.S. GAAP reconciliation. We are
encouraged by comments from other institutional investors indicating
their degree of comfort and familiarity with IFRS financial
statements.\47\
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\47\ See, for example, letter from CRUF.
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The present use of IFRS financial statements described above does
not diminish the importance of recognizing that some investors are not
as familiar with using IFRS financial statements as they are with using
U.S. GAAP financial statements or the information provided in the U.S.
GAAP reconciliation. These investors may need to obtain training or
education in IFRS before they are comfortable working without the U.S.
GAAP reconciliation. In this regard, we note the amendments we are
adopting will affect a small number of issuers relative to the overall
size of the U.S. public capital markets. In addition, we are allowing
only financial statements prepared in accordance with IFRS as issued by
the IASB to be filed without a U.S. GAAP reconciliation, so concern
over having to learn multiple jurisdictional variations of IFRS is not
a factor. More broadly, as companies increasingly move to IFRS,
investors that have gained familiarity with IFRS should see an
increasing return on their investment in education. A number of
accounting firms and other organizations currently provide information
about IFRS as issued by the IASB on their web sites free of charge. As
more countries adopt IFRS as the basis of accounting for their listed
companies, we anticipate that investors who are not yet familiar with
IFRS will have the opportunity to gain such familiarity.
D. Consistent and Faithful Application of IFRS in Practice
The degree of consistency and faithfulness with which IFRS is
applied is another consideration in our acceptance of IFRS financial
statements without reconciliation to U.S. GAAP. The Commission staff
has gained an increasing understanding of the application of IFRS
standards through its regular review of the periodic reports of
publicly registered companies, a number of which prepare their
financial statements in accordance with IFRS.\48\ The Commission staff
will continue to review and comment on IFRS financial statements and
disclosure as part of its normal review function.\49\
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\48\ The Staff of the Commission's Division of Corporation
Finance has published its observations on the review of IFRS
financial statements included in the annual reports of more than 100
foreign private issuers. Those observations are available at http://www.sec.gov/divisions/corpfin/ifrs_staffobservations.htm.
\49\ Pursuant to Section 408 of the Sarbanes-Oxley Act of 2002,
the Commission is required to review disclosures made by reporting
issuers with securities listed on a national securities exchange or
traded on an automated quotation facility of a national securities
association on a regular and systematic basis for the protection of
investors. Such review shall include a review of the issuer's
financial statements.
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Commenters had a range of views with regard to our request for
comments on the application of IFRS as issued by the IASB. Some
commenters who favored the amendments highlighted the fact that IFRS
has been applied for more than two years by thousands of companies
throughout the world, including approximately seven thousand in the EU,
and that investors are already employing information from IFRS
financial statements to make investment decisions.\50\ In contrast,
some commenters who were not supportive of the proposal noted that the
U.S. GAAP reconciliation offers auditors a quality control mechanism
that identifies IFRS application issues, and referred to the staff's
``Observations in the Review of IFRS Financial Statements'' as evidence
that supports their concerns about the consistent application of IFRS
by reporting issuers.\51\ One such commenter also felt that it would be
difficult to audit for compliance with IFRS as issued by the IASB
because of the current state of IFRS-based training for auditors.\52\
Auditors, however, generally commented that they do have sufficient
experience and familiarity with IFRS to be able to opine on IFRS
financial statements, and that the elimination of the U.S. GAAP
reconciliation would provide an incentive to develop IFRS capabilities
faster than if the U.S. GAAP reconciliation were retained.\53\ Some
respondents believed that latitude in the application of IFRS results
in inconsistent reporting,\54\ while several supporters of the proposal
believed application of IFRS did not vary between companies that are
registered under the Exchange Act and those that are not.\55\ One firm,
while acknowledging diversity in the application of IFRS, felt that
such diversity should diminish with time as application and
interpretive issues are identified and addressed.\56\
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\50\ See, for example, letters from Deutsche Bank, Ernst &
Young, HSBC Holdings plc (``HSBC''), SEK, and Siemens.
\51\ See, for example, letters from ITAC, R.G. Associates, CFA
Institute.
\52\ See letter from CFA Institute.
\53\ See, for example, letter from Grant Thornton LLP (``Grant
Thornton'').
\54\ See, for example, letters from Robert Mladek, and Fund for
Stockowners Rights.
\55\ See, for example, letters from HSBC, Cleary Gottlieb Steen
& Hamilton (``Cleary''), Syngenta AG (``Syngenta'').
\56\ See letter from Deloitte.
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As described in the Proposing Release, the Commission has a long
[[Page 992]]
history of supporting the work of the IASB and its predecessor the
International Accounting Standards Committee in developing high-quality
global accounting standards. In addition to understanding the
standards, the Commission staff has developed a growing familiarity
with their application. The Commission staff has reviewed and commented
upon the filings of foreign private issuers that prepare their
financial statements using IFRS. The staff has indicated that issues
that it has observed in its ordinary review of IFRS financial
statements do not appear to be more pervasive or significant than those
it has identified in U.S. GAAP financial statements. We anticipate that
the increasing use of IFRS as issued by the IASB will lead to even
greater consistency of application, as well as to increased training
opportunities for preparers, auditors, and investors.
E. Regulatory Processes and Infrastructure to Promote Consistent and
Faithful Application of IFRS
In the Proposing Release, we discussed the cooperative
infrastructure that regulators have put in place to identify and avoid
inconsistent or inaccurate applications of IFRS globally so as to
foster the consistent and faithful application of IFRS around the
world. This infrastructure includes IOSCO, in which the Commission
participates, which has established a database among member regulators
for sharing regulators' decisions on the application of IFRS.\57\ The
Commission and the Committee of European Securities Regulators
(``CESR''), which the European Commission has charged with evaluating
the implementation of IFRS in the EU, have established a work plan in
which they agree to consult with one another with the goal of avoiding
conflicting conclusions regarding the application and enforcement of
IFRS.\58\
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\57\ See IOSCO's press release regarding its IFRS database at
http://www.iosco.org/news/pdf/IOSCONEWS92.pdf.
\58\ The press release announcing the SEC-CESR work plan, and
the text of the work plan, are available at http://www.sec.gov/news/press/2006/2006-130.htm.
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In the Proposing Release, we asked for feedback regarding our work
with other regulators to provide for the enforcement of IFRS as issued
by the IASB. Many commenters did not express concern with the current
processes and infrastructure that have been established between
regulators to promote consistent and faithful application of IFRS. Most
commenters responding on this topic believed that the infrastructure is
in place to identify and avoid inconsistent and inaccurate applications
of IFRS globally.\59\ Some of these commenters noted the Commission's
involvement and leadership role in IOSCO and encouraged the Commission
to continue to work through IOSCO to coordinate with other regulators
in bringing matters to the IASB and to IFRIC.\60\ Several of these
commenters also supported the Commission's continued involvement in
information sharing arrangements with other regulators and the
interaction with CESR.\61\ Some commenters who did not support the
proposal believed that the lack of a global enforcement mechanism means
that the necessary controls to successfully implement global standards
are currently lacking.\62\ The Commission believes the current system
can be effective, and will continue its work in this area to support
multilateral and bilateral efforts, including its participation in
IOSCO and its collaboration with CESR and other regulators as
appropriate.
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\59\ See, for example, letters from HSBC, LIBA, and SIFMA.
\60\ See, for example, letters from Business Europe, BP, HSBC,
and UBS.
\61\ See, for example, letters from International Finance, LIBA,
PwC, and Securities Industry and Financial Markets Association
(``SIFMA'').
\62\ See, for example, letters from CFA Institute, and Brent
Kobayashi.
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III. Discussion of the Amendments
We are adopting the amendments substantially as proposed. We have,
however, in response to comments, made some modification in certain
areas, as discussed below.
A. Eligibility and Implementation
1. Foreign Private Issuer Status
The amendments the Commission is adopting will apply only to
foreign private issuers that file on Form 20-F, regardless of whether
the issuer complies with IFRS as issued by the IASB voluntarily or in
accordance with the requirements of the issuer's home country regulator
or exchange on which its securities are listed.
A large number of comment letters addressed eligibility
requirements and commenters almost unanimously supported the
applicability of the proposed amendments to all foreign private
issuers.\63\ Some commenters indicated that other types of issuers also
should be permitted to file IFRS financial statements without a U.S.
GAAP reconciliation, for example reporting U.S. subsidiaries of foreign
private issuers that use IFRS to prepare their consolidated financial
statements \64\ or reporting foreign issuers that did not fall within
the definition of foreign private issuer under Rule 3b-4 under the
Exchange Act.\65\ We note that the scope of our proposal was limited to
foreign private issuers, for which the Commission has an established
disclosure regime distinct from that applicable to companies that are
not foreign private issuers. The question of which disclosure regime an
entity should report under was beyond the scope of the proposal, and
thus we are not extending the application of the adopted amendments to
entities that do not satisfy the definition of foreign private issuer
under Rule 3b-4, or foreign private issuers that do not file their
annual report on Form 20-F. We are examining the possibility of the
broader use of IFRS by entities that are not foreign private issuers in
the Concept Release on Allowing U.S. Issuers to Prepare Financial
Statements in Accordance with International Financial Reporting
Standards.\66\
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\63\ See, for example, letters from Grant Thornton, Microsoft,
and Sullivan & Cromwell LLP (``Sullivan & Cromwell'').
\64\ See, for example, letter from Financial Security Assurance
Holdings Ltd.
\65\ See memorandum from the Executive Staff on a meeting with
representatives of INVESCO plc.
\66\ Release No. 33-8831 (August 7, 2007) [72 FR 45600 (August
14, 2007)], available on the Commission Web site at http://www.sec.gov/rules/concept/2007/33-8831.pdf.
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We requested comment as to whether we should place limitations on
the eligibility of a foreign private issuer to file financial
statements prepared in accordance with IFRS as issued by the IASB
without a U.S. GAAP reconciliation. We also asked whether our
acceptance of IFRS financial statements without a U.S. GAAP
reconciliation should be phased in based on, for example, issuer size
or other criteria. Most commenters opposed any limitations on the
application of any final rules, and did not see any benefit to a
transition approach that phases in registrants.\67\ One commenter
pointed out that appropriate application of IFRS would not be dependent
on an issuer's size,\68\ while others stated that smaller companies
face a greater relative burden in preparing a U.S. GAAP
reconciliation.\69\ One commenter also opposed a phase-in based on
issuers' experience with IFRS, as it would be difficult to establish
meaningful criteria to evaluate that experience.\70\ We are not
adopting any issuer limitations or phase-in for the application of the
[[Page 993]]
adopted amendments, as we believe that to do so would not effectively
encourage the use by foreign private issuers of IFRS as issued by the
IASB and may create inappropriate disparity in our treatment of foreign
private issuers.
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\67\ See, for example, letters from Cleary, Deloitte, Fitch
Ratings, PwC, and Sullivan & Cromwell.
\68\ See letter from Fitch Ratings.
\69\ See, for example, letters from Cleary, Deloitte, Grant
Thornton, and Sullivan & Cromwell.
\70\ See letter from Grant Thornton.
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2. IFRS as Issued by the IASB
We are adopting as proposed the amendments to Items 17 and 18 of
Form 20-F. Under the amendments, a foreign private issuer is eligible
to omit the reconciliation to U.S. GAAP if it states, unreservedly and
explicitly in an appropriate note to the financial statements, that its
financial statements are in compliance with IFRS as issued by the
IASB.\71\ Also, the independent auditor must opine in its report on
whether those financial statements comply with IFRS as issued by the
IASB. As described in the Proposing Release, the auditor's report can
include this language in addition to any opinion relating to compliance
with standards required by the home country.
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\71\ The amendments would not encompass use of the IASB's
proposed IFRS for Small and Medium-sized Entities (``IFRS for
SMEs''), because those proposed standards relate only to smaller
issuers that do not have debt or equity securities listed on a
public market. More information on IFRS for SMEs is available on the
IASB Web site at http://www.iasb.org/Current+Projects/IASB+Projects/Small+and+Medium-sized+Entities/Small+and+Medium-sized+Entities.htm.
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The majority of commenters believed that auditors should be able to
provide audit opinions that financial statements were fully compliant
with IFRS as issued by the IASB.\72\ Several commenters indicated that
they were not aware of any reason why the auditor and the issuer would
not be able to provide the dual statement of compliance with both IFRS
as issued by the IASB and a jurisdictional variation of IFRS in cases
where accounting policy choices ensure compliance with both IFRS as
issued by the IASB and the jurisdictional variation of IFRS.\73\ One
commenter, however, believed that the additional opinion in the
auditor's report relating to compliance with IFRS as issued by the IASB
would be both duplicative and unnecessary, as the auditor would already
be expected to issue a qualified opinion if it found deviations from
IFRS as issued by the IASB given an issuer's unreserved statement of
compliance.\74\ We believe that in cases where there is no discrepancy
between IFRS as issued by the IASB and a jurisdictional variation, the
issuer and the auditor should be able to provide the dual statements
without undue difficulty.
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\72\ See, for example, letters from Galileo Global Advisors LLC,
Grant Thornton, Microsoft, PwC, and UBS.
\73\ See, for example, letters from PwC and UBS.
\74\ See letter from CESR.
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A foreign private issuer will continue to be required to provide a
reconciliation to U.S. GAAP under these amendments if its financial
statements include deviations from IFRS as issued by the IASB, if it
does not state unreservedly and explicitly that its financial
statements are in compliance with IFRS as issued by the IASB, if the
auditor does not opine on compliance with IFRS as issued by the IASB,
or if the auditor's report contains any qualification relating to
compliance with IFRS as issued by the IASB. A foreign private issuer
using a jurisdictional or other variation of IFRS will be able to rely
on the amendments if that issuer also is able to state compliance with
both IFRS as issued by the IASB and a jurisdictional variation of IFRS
(and does so state), and its auditor opines that the financial
statements comply with both IFRS as issued by the IASB and the
jurisdictional variation, as long as the statement relating to the
former is unreserved and explicit.
Many commenters supported the objective of encouraging the
development of a single set of high-quality international accounting
standards, but suggested that we also accept without a U.S. GAAP
reconciliation financial statements prepared in accordance with a
jurisdictional variation of IFRS, and in particular IFRS as adopted by
the EU.\75\ Some of these and other commenters thought it would be
appropriate also to permit a reconciliation from a jurisdictional
variation of IFRS to IFRS as issued by the IASB. Further, some
commenters suggested the Commission also permit a reconciliation from
any home country GAAP to IFRS as issued by the IASB. Commenters did not
suggest that accepting financial statements that comply with IFRS as
issued by the IASB from foreign private issuers was dependent on
implementing any of these additional suggested approaches. We are not
extending the proposal to these variations because we believe that
allowing any of these approaches would not as effectively foster the
development and use of a single set of high-quality global accounting
standards.
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\75\ Many commenters noted that issuers listed in the EU are
required to prepare their statutory financial statements using IFRS
as adopted by the EU. Commenters noted that presently the only
difference between IFRS as issued by the IASB and IFRS as adopted by
the EU relates to IAS 39, ``Financial Instruments: Recognition and
Measurement,'' whereby IFRS as adopted by the EU offers greater
flexibility with respect to hedge accounting for certain financial
instruments than does IFRS as issued by the IASB. We understand that
few companies make use of this ability to ``carve-out'' these
provisions of IAS 39 from IFRS as issued by the IASB. As the
European Commission noted in its comment letter, ``[f]or the vast
majority of EU issuers listed in the U.S., this carve-out has no
practical significance and as such their financial statements
prepared under IFRS as adopted by the EU would be identical to those
prepared under IFRS as published by the IASB.'' As a practical
matter, this difference applies only to foreign financial
institutions, several of which have commented that they do not avail
themselves of the approach afforded by the EU-endorsed standard (see
letters from Deutsche Bank, HSBC, Lloyds), and that therefore they
would be able to assert compliance with both IFRS as endorsed by the
EU and IFRS as issued by the IASB. Other commenters either did not
address the issue or did not express concern about their ability to
assert dual compliance at the present time.
Issuers expressed concern, however, that they may not be able to
express dual compliance in the future if the timing of the EU's
endorsement of new standards, or an EU decision not to endorse a
standard, were to create differences between EU IFRS and IFRS as
issued by the IASB such that compliance with EU IFRS necessarily
precluded compliance with IFRS as issued by the IASB.
See Section III.A.3. below for a discussion of transition
provisions applicable to European companies that make use of the
EU's carve-out from IAS 39.
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In the Proposing Release, the phrase we used to describe the
authoritative text of IFRS was ``the approved English language version
of IFRS as published by the IASB.'' The final amendments refer to the
same authoritative text of IFRS as it is provided for by the IASC
Foundation Constitution, although we are using the phrase ``IFRS as
issued by the IASB'' to describe it. As one commenter pointed out,
according to the IASC Foundation Constitution, ``the authoritative text
of any Exposure Draft or International Accounting Standard or
International Financial Reporting Standards or Draft or final
Interpretation shall be that published by the IASB in the English
language'' and, for this reason, there is no need to make reference to
language when describing the authoritative text.\76\ Further, because
the standards are issued by the Board and published by the IASC
Foundation, it is to standards ``issued'' that we refer.
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\76\ See letter from KPMG.
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3. Implementation
In the Proposing Release we sought input on what commenters thought
might be an appropriate compliance date if the Commission were to adopt
the proposed amendments, as well as on issues relating to the timing of
implementation for any adopted amendments.
Of the commenters who provided feedback relating to implementation
and timing, a majority of those who supported acceptance of IFRS
financial statements without reconciliation
[[Page 994]]
indicated that the amendments should be effective for filings covering
the 2008 financial year, with some of those commenters indicating that
such timing would allow investors and other affected parties more time
to familiarize themselves with IFRS.\77\ A significant portion of
commenters that supported the proposed rules felt that the amendments
should be effective at the earliest date possible.\78\
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\77\ See, for example, letter from Syngenta.
\78\ See, for example, letters from Citigroup, Financial
Reporting Counsel, and PwC.
---------------------------------------------------------------------------
Commenters did not indicate that the number of issuers that prepare
their financial statements in accordance with IFRS should be a factor
in determining the implementation of any adopted rules, and some stated
that acceptance of IFRS financial statements without a U.S. GAAP
reconciliation would encourage other issuers to adopt IFRS, which may
assist in promoting the achievement of a single set of high-quality
internationally accepted accounting standards.\79\ Most commenters
responding to our question as to whether the timing of any rule should
be based on further experience and knowledge of IFRS stated that these
should not be factors in determining the implementation timing,\80\
with some noting that there was already sufficient experience in the
application of IFRS to warrant immediate effectiveness of the
amendments.\81\ Some commenters, including some from the investor
community, however, felt that elimination of the reconciliation may be
premature, or thought deferral of adopting the amendments would be
appropriate until more experience was gained with IFRS even if they
supported the idea of accepting IFRS without reconciliation as a move
towards the use of a single set of high-quality international
accounting standards.\82\ Those that thought taking action at this time
was premature cited the ``readiness'' concerns described in Part II
above; namely concerns regarding IASC Foundation's governance and
funding, the state of and prospects for convergence of IFRS and U.S.
GAAP, investor education, regulators' mechanisms for interaction, and
so forth. The Commission's consideration of those comments is noted in
Part II with respect to its decision to adopt rule amendments at this
time.
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\79\ See, for example, letters from BP, British Bankers'
Association, and UBS.
\80\ See, for example, letters from Deutsche Bank, Fitch
Ratings, and ICAEW.
\81\ See, for example, letter from Deloitte.
\82\ See, for example, letters from CFA Institute, William
Craven, Gaylen R. Hansen, and ITAC.
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The Commission has concluded that the amendments to accept
financial statements from foreign private issuers prepared in
accordance with IFRS as issued by the IASB will be applicable to annual
financial statements for financial years ending after November 15,
2007, and to interim periods within those years, that are contained in
filings made after the effective date of these rule amendments.
In deciding to make the rule amendments available for financial
statements that cover the 2007 financial year for many foreign private
issuers, the Commission considered the fact that it was not awaiting
any particular event to support its policy decision and, further, by
making the rule amendments available for the 2007 financial year for
many foreign private issuers, the Commission's objectives in
implementing this policy decision would begin to be realized that much
sooner.
The Commission notes that there may be foreign private issuers that
are existing Commission registrants who--pursuant to policy decisions
the European Union made in its role as an ``early adopter'' of IFRS--
have already been preparing their financial statements by applying the
EU's ``carve out'' from IAS 39 with respect to hedge accounting for
certain financial instruments (the ``IAS 39 carve out''), as described
above in Section III.A.2.\83\ Given the timing of this decision,
registrants who may have taken advantage of the IAS 39 carve out would
have done so without the knowledge that its use would be at odds with
the IFRS reporting alternative that the Commission is adopting today.
Accordingly, the Commission is making available temporary transition
relief to these existing registrants. Specifically, for only their
first two financial years that end after November 15, 2007, the
Commission will accept from existing SEC registrants from the EU that
have already utilized the IAS 39 carve out in financial statements
previously filed with the Commission financial statements that do not
include a reconciliation to U.S. GAAP, if those financial statements
otherwise comply with IFRS as issued by the IASB and contain a
reconciliation to IFRS as issued by the IASB. This reconciliation to
IFRS as issued by the IASB is to contain information relating to
financial statement line items and footnote disclosure based on full
compliance with IFRS as issued by the IASB. It is to be prepared and
disclosed in the same manner that foreign private issuers presently
provide reconciliations of their financial statements to U.S. GAAP
under Item 17 and Item 18 of Form 20-F. All financial statements of
foreign private issuers that used the IAS 39 carve out for periods
prior to the financial year that ends after November 15, 2007 must
continue to be reconciled to U.S. GAAP. At the end of this transition
period, these registrants will have the same financial statement
reporting choices as that of any foreign private issuer (e.g., if they
continue to use the IAS 39 carve out as described in Section III.A.2.,
above, they will remain subject to the U.S. GAAP reconciliation
requirements of Items 17 and 18). The Commission has adopted an
amendment to Items 17 and 18 of Form 20-F to accommodate this
transition provision.
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\83\ See http://eur-lex.europa.eu/LexUriServ/site/en/oj/2004/l_363/l_36320041209en00010065.pdf.
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The Commission observes that the IAS 39 carve out relates to hedge
accounting for certain financial instruments. The Commission and its
staff have had several opportunities to consult and discuss with
different constituencies regarding the accounting for derivative and
hedging transactions. The Commission will make its staff available to
the staffs of the IASB, FASB and European Commission to identify any
ways to address this area.
B. Amendments To Effect Acceptance of IFRS Financial Statements Without
Reconciliation to U.S. GAAP
1. General
The basic financial statement requirements for foreign private
issuers are described in Items 17 and 18 of Form 20-F. Under Item
17(c), a foreign private issuer must either prepare its financial
statements and schedules in accordance with U.S. GAAP or, if the
financial statements and schedules are prepared using another basis of
accounting, include a reconciliation to U.S. GAAP as described under
Item 17(c)(2). This reconciliation includes a narrative discussion of
reconciling differences,\84\ a reconciliation of net income for each
year and any interim periods presented,\85\ a reconciliation of major
balance sheet captions for each year and any interim periods,\86\ and a
reconciliation of cash flows for each year and any interim periods.\87\
The Commission is adopting as proposed amendments to Item 17(c) so that
a reconciliation will no longer be required from foreign private
issuers that prepare
[[Page 995]]
financial statements that comply with IFRS as issued by the IASB.
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\84\ See Item 17(c)(1) of Form 20-F.
\85\ See Item 17(c)(2)(i) of Form 20-F.
\86\ See Item 17(c)(2)(ii) of Form 20-F.
\87\ See Item 17(c)(2)(iii) of Form 20-F, containing the
exception relating to IAS 7 ``Cash Flow Statements.''
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Several subparagraphs of Item 17(c)(2) relate to reconciling
disclosures that rely on certain International Accounting Standards
(``IAS'') and were available to foreign private issuers that use home
country GAAP or IFRS. We proposed to delete Items 17(c)(2)(iv)(B) and
(C), which relate to reconciling disclosures from issuers that rely on
IAS 21, ``The Effects of Changes in Foreign Exchange Rates.'' Because
some commenters recommended that the IAS 21 accommodation could
continue to be useful to foreign private issuers that may operate in a
hyperinflationary economy, we are retaining that provision.\88\ We are
eliminating Item 17(c)(2)(viii), which relates to reconciling
disclosures to be provided by issuers that use IAS 22, ``Business
Combinations,'' as IAS 22 has been superseded by IFRS 3, ``Business
Combinations.'' Because IAS 22 may no longer be used by an issuer
preparing IFRS financial statements, we also are deleting Instruction 6
to Item 17 as proposed.
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\88\ See, for example, letters from Deloitte and Shell.
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A reconciliation to U.S. GAAP under Item 18 of Form 20-F requires
that an issuer provide all information required by U.S. GAAP and
Regulation S-X, in addition to the reconciling information for line
items specified in Item 17(c). Because our acceptance of financial
statements prepared using IFRS as issued by the IASB without a U.S.
GAAP reconciliation is intended to apply equally to an Item 18
reconciliation, we are revising Item 18(b) as proposed to indicate that
U.S. GAAP and Regulation S-X disclosures will not be required if the
issuer files financial statements using IFRS as issued by the IASB.
2. Interim Period Financial Statements
We are adopting as proposed that a foreign private issuer that is
eligible to omit a U.S. GAAP reconciliation from its audited annual
financial statements also will be able to omit a reconciliation from
its unaudited interim period financial statements which, to the extent
such financial statements are required,\89\ also will have to be
prepared in accordance with IFRS as issued by the IASB. Based on the
responses that we received to questions posed in the Proposing Release
relating to the ability of issuers to prepare interim period financial
statements that are in accordance with IFRS as issued by the IASB,\90\
we believe that the preparation of interim period financial statements
in accordance with the provisions of IFRS as issued by the IASB that
pertain to interim financial reporting will not create difficulties for
issuers, and that issuers that have changed to IFRS as issued by the
IASB for their annual financial statements and prepare interim
financial statements will do so in accordance with IFRS as issued by
the IASB.
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\89\ See Item 8.A.5 of Form 20-F for requirements relating to
interim period financial statements.
\90\ See, for example, letters from BP, Deutsche Bank, Shell,
and UBS.
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a. Financial Information in Securities Act Registration Statements and
Prospectuses and Initial Exchange Act Registration Statements Used Less
Than Nine Months After the Financial Year End
In registration statements and prospectuses under the Securities
Act and initial registration statements under the Exchange Act, if the
document is dated less than nine months after the end of the last
audited financial year, foreign private issuers are not required to
include interim period financial information. If a foreign private
issuer has published interim period financial information, however,
Item 8.A.5 of Form 20-F requires these registration statements and
prospectuses to include that information.\91\ The intent of this
requirement is to make information available in U.S. offering documents
as current as information that is available elsewhere.
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\91\ Under Item 512(a)(4) of Regulation S-K [17 CFR
22.512(a)(4)], a foreign private issuer that registers securities on
a shelf registration statement also is required to undertake to
include any financial statements required by Item 8.A of Form 20-F
at the start of any delayed offering or throughout a continuous
offering.
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The instructions to Item 8.A.5 require that an issuer which
provides published interim financial information describe any material
variations between the accounting principles used and U.S. GAAP and
quantify any material variations that have not been quantified in the
annual financial statements. We are adopting as proposed an instruction
to Item 8.A.5 of Form 20-F to clarify that interim period financial
information that is made public by a foreign private issuer need not be
reconciled to U.S. GAAP if the basis of accounting used in the audited
annual financial statements and the published interim information is
IFRS as issued by the IASB.
b. Financial Statements in Securities Act Registration Statements and
Prospectuses and Initial Exchange Act Registration Statements Used More
Than Nine Months After the Financial Year End
In registration statements and prospectuses under the Securities
Act and initial registration statements under the Exchange 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 period financial statements covering at least the
first six months of the financial year and the comparative period for
the prior financial year.\92\ These unaudited financial statements must
be prepared using the same basis of accounting as the audited financial
statements contained or incorporated by reference in the document and
include or incorporate by reference a reconciliation to U.S. GAAP.\93\
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\92\ See Item 8.A.5 of Form 20-F and Item 512(a)(4) of
Regulation S-K.
\93\ See Items 17(c) and 18 of Form 20-F.
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We proposed a new instruction to Item 8.A.5 to clarify that an
issuer would not need to provide that reconciliation if it prepares its
interim financial statements using IFRS as issued by the IASB. Under
the proposed amendment, an issuer relying on the new instruction to
provide IFRS financial statements for an interim period without
reconciliation would continue to be required to comply with Article 10
of Regulation S-X with regard to the minimum content of the financial
statements for interim periods, when that information is required under
Item 8.A.5 of Form 20-F.
In the Proposing Release we enumerated several differences between
the requirements of Article 10 of Regulation S-X and IAS 34, ``Interim
Financial Reporting,'' which prescribes the minimum content of an
interim financial report and the principles for recognition and
measurement in interim period financial statements. These differences
relate primarily to the detail required for major headings and
subtotals used in the financial statements, statements regarding the
sufficiency of the interim disclosures, minimum contingent liability
disclosures, and footnote disclosure of summarized data for equity
investees.
Many commenters did not view differences between IAS 34 and Article
10 as significant \94\ and felt that IAS 34
[[Page 996]]
information was sufficient without needing to require compliance with
Article 10 when preparing IFRS financial statements for interim
periods.\95\ Accordingly, under the rules we are adopting a foreign
private issuer that relies on the new instruction to provide IFRS
financial statements for an interim period without reconciliation to
U.S. GAAP will not be required to comply with Article 10 of Regulation
S-X for interim period financial statements provided pursuant to Item
8.A.5 of Form 20-F, if it complies with and explicitly states
compliance with IAS 34.
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\94\ See, for example, letters from BP, British Bankers
Association, Ernst & Young, and Royal Bank of Scotland Group plc.
\95\ See, for example, letters from AXA, Deloitte, KAI-KASB, and
Group of 100.
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c. Transition Period Interim Financial Statements in Securities Act
Registration Statements and Prospectuses and Initial Exchange Act
Registration Statements
Eligible foreign private issuers will be able to omit the U.S. GAAP
reconciliation from their unaudited financial statements relating to
interim periods only if the audited annual financial statements
included or incorporated by reference for all required periods are
prepared in accordance with IFRS as issued by the IASB, as described in
Section III.A.2. above. If the audited annual financial statements are
not so prepared, then in order to be able to omit the U.S. GAAP
reconciliation from required interim period financial statements, an
issuer would amend prior filings in order to appropriately revise the
audited financial statements.\96\
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\96\ For example, an issuer that previously had filed an annual
report on Form 20-F containing financial statements which were not
prepared in accordance with IFRS as issued by the IASB, as described
in Section III.A.2. above, could file an amendment to that annual
report which included financial statements that were so prepared.
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C. Related Accounting and Disclosure Issues
1. Selected Financial Data
Under Item 3.A. of Form 20-F, issuers must provide five years of
selected financial data. We proposed to revise the instruction to Item
3.A. to clarify that selected financial data based on the U.S. GAAP
reconciliation is required only if the issuer prepares its primary
financial statements using a basis of accounting other than IFRS as
issued by the IASB.
Almost all commenters that addressed the issue believed that U.S.
GAAP selected financial data should not be required if an issuer
prepares its primary financial statements in accordance with IFRS as
issued by the IASB.\97\ One commenter noted that efforts to keep the
previously filed selected U.S. GAAP financial information current, for
example due to retrospective effects of changes of accounting methods
or discontinued operations, would not be cost-effective.\98\
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\97\ See, for example, letters from BP, DaimlerChrysler,
Deloitte, and KAI-KASB.
\98\ See letter from PwC.
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We are amending Item 3.A. of Form 20-F as proposed to clarify that
selected financial data based on the U.S. GAAP reconciliation is
required only if the issuer prepares its primary financial statements
using a basis of accounting other than IFRS as issued by the IASB.
2. Other Form 20-F Disclosure
a. Reference to U.S. GAAP Pronouncements in Form 20-F
Several non-financial statement disclosure items in Form 20-F refer
to specific U.S. GAAP pronouncements.\99\ We proposed to add an
Instruction to Item 5 and Item 11 stating that an IFRS filer that will
not be required to provide a U.S. GAAP reconciliation will continue to
respond to those items of Form 20-F that make reference to U.S. GAAP
pronouncements. Under the proposed instruction, in providing that
disclosure the issuer would apply the appropriate corresponding IFRS
pronouncements that embody the principles contained in the referenced
U.S. GAAP pronouncement.
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\99\ See, for example, Item 5 (``Operating and Financial Review
and Prospects''), which contains references to FASB Interpretations
No. 45 ``Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others'' and No. 46 ``Consolidation of Variable Interest Entities,''
and Item 11, which contains reference to multiple FASs.
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A number of commenters suggested that individual issuers may reach
different determinations as to which IFRS pronouncement to look to in
response to Form 20-F item requirements that refer to U.S. GAAP
provisions. To facilitate the use of Form 20-F by IFRS users, those
commenters recommended that we revise the non-financial statement
disclosure requirements to itemize the specific IFRS pronouncements
that correspond to the referenced U.S. GAAP pronouncements.\100\
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\100\ See, for example, letters from Accounting Standards
Committee of Germany and Germany Accounting Standards Board, and
Center for Audit Quality (``CAQ'').
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In evaluating these comments, we concluded that in responding to
the non-financial statement disclosure requirements of Form 20-F,
issuers should continue to meet the objective of the stated disclosure
regardless of the basis on which the financial statements are prepared.
We believe issuers should not have undue difficulty in determining the
objective of those disclosure requirements. We therefore are adopting
instructions to Item 5 and Item 11 to indicate that issuers preparing
their financial statements in accordance with IFRS as issued by the
IASB should provide, in responding to paragraphs of those items that
refer to specific pronouncements of U.S. GAAP, disclosure that
satisfies the objective of the item's disclosure requirements. If
information called for by the non-financial statement requirements of
Form 20-F duplicates information that is contained in the IFRS
financial statements, an issuer need not repeat such information but
may cross-reference to the appropriate footnote in the audited
financial statements. We will continue to evaluate whether specific
changes to the non-financial statement disclosure items of Form 20-F
would be beneficial.
b. Disclosure From Oil and Gas Companies
We proposed to amend Item 18 of Form 20-F to expressly require that
any issuer that provides disclosure under FAS 69, ``Disclosures about
Oil and Gas Producing Activities,'' continue to provide that disclosure
even if the issuer is preparing financial statements in accordance with
IFRS as issued by the IASB without a reconciliation to U.S. GAAP.\101\
We are adopting this amendment as proposed to continue to require FAS
69 disclosure. Most commenters responding to our question on this
matter supported our proposal to continue to require FAS 69 disclosure,
which they felt was useful to investors and analysts.\102\ Some issuers
indicated, however, that FAS 69 disclosure should cease to be required
once the IASB issues disclosure requirements for oil and gas related
activities.\103\ We will continue to consider appropriate revisions to
our requirements in this area in light of future developments.
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\101\ Disclosure provided pursuant to FAS 69 is supplementary
information that is provided with the financial statements.
\102\ See, for example, letters from Ernst &Young and Deloitte.
\103\ See, for example, letters from BP and Shell.
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c. Market Risk Disclosure and the Safe Harbor Provisions
We recognize that IFRS filers have expressed particular concerns
related to the applicability of the safe harbor for forward-looking
statements provided under Section 27A of the Securities Act \104\ and
Section 21E of the Exchange
[[Page 997]]
Act.\105\ Those safe harbor provisions expressly exclude any
information ``included in a financial statement prepared in accordance
with generally accepted accounting principles.'' \106\ Because forward-
looking market risk disclosure required by IFRS 7, ``Financial
Instruments: Disclosure,'' will appear in the footnotes to audited IFRS
financial statements, it is not covered by the safe harbor provisions.
In contrast, market risk disclosure provided pursuant to Item 11 of
Form 20-F is not included as part of the financial statements in a
filing and is expressly subject to the safe harbor provisions.
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\104\ 15 U.S.C. 77z-2.
\105\ 5 U.S.C. 78u-5.
\106\ See Securities Act Section 27A(b)(2)(A) and Exchange Act
Section 21E(b)(2)(A).
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In the Proposing Release, while we did not propose any changes, we
did solicit feedback on the non-availability of the safe harbor
provisions to financial statement information, including disclosure
required by IFRS 7. In response, a number of commenters indicated that
the Commission should address the implications of the safe harbor
provisions and financial statement disclosure, including forward-
looking information called for by IFRS 7.\107\ This is an issue that
exists currently even with a U.S. GAAP reconciliation, and therefore is
distinct from our acceptance of IFRS financial statements without a
U.S. GAAP reconciliation and affects foreign private issuers
generally.\108\ We therefore believe the question warrants further
consideration and, if appropriate, we may address it through a separate
rulemaking initiative.
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\107\ See, for example, letters from American Bar Association,
CAQ, and PwC.
\108\ Some foreign private issuers have early adopted IFRS 7 in
their financial statements relating to their 2006 financial years.
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3. IFRS Treatment of Certain Areas
In the Proposing Release we noted that although IFRS as issued by
the IASB constitutes a comprehensive basis of accounting that may be
used by foreign private issuers in the preparation of their financial
statements contained in Commission filings, there are certain areas in
which the IASB has yet to develop standards or in which IFRS permits
disparate options. As discussed in the Proposing Release, IFRS does not
have a specific standard or interpretation on accounting treatment for
common control mergers, recapitalization transactions, reorganizations,
acquisitions of minority shares not resulting in a change of control
and similar transactions.\109\ While IFRS does include a standard on
financial statement presentation, it lacks specific conventions as to
the form and content of the income statement.\110\ We did not receive
extensive comments in these areas. Other examples given in the
Proposing Release include accounting for insurance contracts and
extractive activities.
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\109\ The IASB and the FASB are expected to issue a final
standard for the accounting for business combinations and non-
controlling interests. This joint project is expected to converge
numerous areas of application and reduce certain alternative
treatments currently available under IFRS, but will not address all
areas listed herein.
\110\ Early in 2008, the IASB and the FASB are expected to
publish a discussion document relating to financial statement
presentation, including the presentation of information on the face
of the financial statements.
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IFRS 4, ``Insurance Contracts,'' provides some requirements in
accounting for issued insurance contracts and held reinsurance
contracts. As IFRS 4 was the first part of a two-phase project, the
standard generally permits a company to continue to apply its home
country accounting principles for insurance contracts, though it
imposes certain accounting requirements in order to eliminate certain
inconsistencies in application, and establishes many disclosure
requirements. The IASB has a project to further address the accounting
for insurance contracts and has issued a discussion paper on its
preliminary views on such a standard.\111\
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\111\ The IASB currently has projects underway addressing
accounting for insurance contracts and extractive activities. See
the IASB work plan for further detail at http://www.iasb.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm.
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IFRS 6, ``Exploration for and Evaluation of Mineral Resources,''
provides some requirements in accounting for exploration and evaluation
activities of oil and gas and mining companies. For limited areas of
accounting for extractive activities, IFRS 6 establishes guidelines
under which preparers can continue to apply home country accounting
principles.
In the Proposing Release we solicited comment as to whether there
are any accounting subject areas that the IASB should address before we
accept IFRS financial statements without reconciliation, and whether
investors can understand and use IFRS financial statements which
include activities in areas for which IFRS does not have a specific
standard. Some commenters noted that IFRS is not alone in having gaps
in accounting for certain areas, and gave as examples the lack of
standards for property, plant and equipment, revenue recognition,
consolidation and joint venture accounting under U.S. GAAP.\112\
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\112\ See, for example, letter from Kurt S. Schulzke.
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Several commenters indicated that, where gaps might exist in IFRS,
preparers may look to accounting guidance issued by other standards,
such as U.S. GAAP, pursuant to IAS 8, ``Accounting Policies, Changes in
Accounting Estimates and Errors.'' \113\ In areas for which an IFRS
does not exist, IAS 8 requires preparers to use judgment in developing
accounting policies such that financial information is provided that,
among other things, is relevant to the needs of users and the financial
statements reliably reflect the economic substance of transactions. In
applying such judgment, preparers must consider other guidance found in
IFRS and, if no analogous guidance is found, the definitions, criteria
and concepts in the IFRS conceptual framework. Finally, IAS 8 allows
preparers to consider pronouncements of other standard-setting bodies
to the extent that such guidance does not conflict with the concepts
underlying IFRS. In areas that are not addressed by IFRS, we expect
companies, consistent with IAS 1 and IAS 8, to provide full and
transparent disclosure in the financial statements and operating and
financial review and prospects disclosure \114\ about the accounting
policies selected and the effects of those policies on the IFRS
financial statements.\115\
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\113\ See, for example, letters from Diageo plc (``Diageo'') and
Ernst & Young.
\114\ See Item 5 of Form 20-F.
\115\ For example, the embedded deposit component of certain
types of insurance contracts written by an insurance company might
be unbundled as a liability, or might not be unbundled and thus
included in premium revenues and policy benefit expenses. Similarly,
exploration and evaluation costs of a company in the extractive
industries might be expensed as incurred, or capitalized as assets
and subsequently depreciated. Similarly, common control mergers,
reorganizations or recapitalizations might be reported at the
historical cost basis of the entit(ies) involved or at a new basis
in whole or in part.
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Accounting for insurance contracts was the area most frequently
cited by commenters as lacking complete standards, and some letters
addressed extractive activities as well.\116\ However, most of the
commenters believed that, while IFRS 4 has not addressed many
recognition and measurement items for insurance contracts, the rule
amendments to allow the filing of IFRS financial statements without
reconciliation to U.S. GAAP should not be delayed and noted that
European investors are currently using financial statements prepared
under IFRS by
[[Page 998]]
insurance companies to make financial decisions.\117\ One commenter
noted that even though the implementation of an insurance standard may
occur after the Commission's acceptance of IFRS financial statements
without reconciliation to U.S. GAAP, global practices in this area are
sufficiently developed to not require reconciliation.\118\ Another
commenter indicated that IFRS 4 does provide minimum requirements for
insurance contracts accounting and requires extensive disclosure of the
accounting policies used and other matters so that investors can inform
themselves. The commenter noted that in some areas these disclosures
are more extensive than those called for under U.S. GAAP.\119\ Another
commenter indicated that although IFRS provides more options in the
selection of accounting policies in some areas compared to U.S. GAAP,
it also provides sufficient transparency of the options chosen such
that the U.S. GAAP reconciliation does not provide added benefit.\120\
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\116\ See, for example, letters from CFA Institute and Fitch
Ratings.
\117\ See, for example, letters from Allianz, Prudential, and
PwC.
\118\ See letter from AIG.
\119\ See letter from ING.
\120\ See letter from PwC.
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In a few cases, commenters recommended that some or all insurance
companies be excluded from the scope of the proposed amendments or that
additional disclosure requirements be imposed because IFRS 4 may not
provide the same level of transparency to investors as other IFRS
applicable to other sectors of the financial services industry.\121\
Another commenter said that once there is a robust IFRS on insurance,
the lack of convergence should not further delay the elimination of the
reconciliation.\122\
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\121\ See, for example, letters from ACLIG, American Academy of
Actuaries, and GNAIE.
\122\ See letter from Fitch Ratings.
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The IASB continues to make progress towards developing standards
under IFRS for both insurance and extractive activities. As we accept
and support the use of IFRS as issued by the IASB as a comprehensive
basis of accounting for the preparation of financial statements
included in filings with the Commission by foreign private issuers, we
do not believe that the IFRS standards in these or other discrete areas
should delay our full acceptance of IFRS as issued by the IASB without
a U.S. GAAP reconciliation.
4. Other Considerations Relating to IFRS and U.S. GAAP Guidance
As discussed in the Proposing Release and in Section III.C.3. of
this release, the Commission recognizes that an issuer that will not be
required to reconcile its IFRS financial statements to U.S. GAAP may,
nevertheless, pursuant to the application of IAS 8 look for guidance
from Commission sources, such as rules and regulations, and including
Accounting Series Releases (``ASRs'') and Financial Reporting Releases
(``FRRs'').\123\ In addition, such an issuer may look to the guidance
that the Commission staff provides in Staff Accounting Bulletins
(``SABs''), and, if the company is engaged in certain lines of
business, various Industry Guides.\124\
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\123\ FRRs contain the Commission's views and interpretations
relating to financial reporting. Prior to 1982, the Commission
published its views and interpretations relating to financial
reporting in Accounting Series Releases (ASRs). In FRR 1, Adoption
of the Financial Reporting Release Series and Codification of
Currently Relevant ASRs, the Commission codified certain previously
issued ASRs on financial reporting matters.
\124\ Staff Accounting Bulletins reflect the Commission staff's
views regarding accounting-related disclosure practices. They
represent interpretations and policies followed by the Division of
Corporation Finance and the Office of the Chief Accountant in
administering the disclosure requirements of the federal securities
laws. 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. SABs and Industry Guides are not rules, regulations, or
statements of the Commission. The Commission has neither approved
nor disapproved these interpretations.
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As described in the Proposing Release, we believe that a company
that is no longer required to reconcile its IFRS financial statements
to U.S. GAAP under the adopted amendments, and its auditor, must
continue to follow any Commission guidance that relates to auditing
issues.\125\
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\125\ In addition, foreign private issuers are required to have
audits conducted in accordance with the Standards of the PCAOB
(U.S.) regardless of the comprehensive basis of accounting they use
to prepare their financial statements.
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5. First-Time Adopters of IFRS
General Instruction G to Form 20-F provides for an accommodation
that permits a foreign private issuer in its first year of reporting
under ``IFRS as published by the IASB'' 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 in its registration statements or annual report
filed with the Commission.\126\ The amendments to accept financial
statements prepared in accordance with IFRS as issued by the IASB that
we are adopting today will apply to, among others, foreign private
issuers that are able to rely on the accommodation to first-time
adopters of IFRS contained in General Instruction G. As a conforming
amendment, we are changing all references to ``IFRS as published by the
IASB'' contained in General Instruction G to ``IFRS as issued by the
IASB,'' which has the same definition.
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\126\ See the 2005 Adopting Release.
---------------------------------------------------------------------------
We proposed to amend General Instruction G to provide consistency
with the proposed acceptance of financial statements prepared in
accordance with IFRS as issued by the IASB without a U.S. GAAP
reconciliation. Commenters were supportive of the conforming amendments
as proposed, which we are adopting. Specifically, we are revising
paragraph (a) of General Instruction G, ``Omission of Certain Required
Financial Statements,'' to provide for this. We also are revising
paragraph (d) of General Instruction G, ``Information on the Company,''
to refer to ``a U.S. GAAP reconciliation'' rather than ``the U.S. GAAP
reconciliation'' to avoid any inference that a reconciliation would be
required. In addition, we are revising paragraph (e) to eliminate the
reference to the U.S. GAAP reconciliation, which will no longer be
required.
Contained in paragraph (f) of General Instruction G are three
options by which an issuer relying on the two-year accommodation could
satisfy the interim financial statement requirements of Item 8.A.5 of
Form 20-F in a transitional registration statement. One of these
options allows for two years of audited financial statements and
interim financial statements prepared in accordance with IFRS as issued
by the IASB and reconciled to U.S. GAAP as required by Item 17(c) or 18
of Form 20-F. We proposed to eliminate the reconciliation requirement
from this option in a manner consistent with the proposed amendments to
Items 17 and 18. We did not receive extensive comment on this aspect of
the proposal, and are eliminating the reconciliation requirement from
this option as proposed. We are retaining the other options as they
currently stand, and note that few if any issuers appeared to use the
option requiring condensed U.S. GAAP financial information as a bridge
between three years of previous GAAP financial statements and two years
of IFRS interim information. We also note that issuers may continue to
contact the staff if they are unable to comply with one of the options
but have comparable information available.\127\
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\127\ See the Instruction to General Instruction G(f) of Form
20-F.
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We are adopting as proposed the revisions to paragraph (h) of
General Instruction G to eliminate the U.S.
[[Page 999]]
GAAP reconciliation requirement for the two most recent financial years
for which financial statements prepared in accordance with IFRS as
issued by the IASB are filed. We also are adopting the conforming
amendment to Instruction 2.b of General Instruction G(h) to specify
that disclosure on operating and financial review and prospects
provided in response to Item 5 of Form 20-F need not refer to a
reconciliation to U.S. GAAP. That revision is intended to clarify that
disclosure should not refer to any U.S. GAAP reconciling information
prepared for previous years.
As we noted in the Proposing Release, the accommodation to first-
time adopters of IFRS contained in General Instruction G was scheduled
to expire after the first financial year starting on or after January
1, 2007. That timing was intended to comport with the requirements of
the EU Regulation relating to the transition to IFRS of European
companies, although the accommodation is available to an eligible
first-time adopter of IFRS from any jurisdiction. As many other
countries are expected to adopt IFRS in the coming years, we proposed
to extend the accommodation contained in General Instruction G to Form
20-F for five years to cover financial statements for the 2012
financial year or earlier that are included in annual reports or
registration statements. We also solicited comment as to whether
extending the accommodation for a longer or indefinite period would be
appropriate.
All commenters addressing this matter supported extension of the
accommodation contained in General Instruction G.\128\ Rather than the
five-year extension as proposed, most commenters believed that the
accommodation should be extended indefinitely to provide an ongoing
incentive for the adoption of IFRS as issued by the IASB in filings
with the Commission.\129\ We agree with this view, and therefore are
extending the accommodation to first-time adopters of IFRS as issued by
the IASB contained in General Instruction G for an indefinite period.
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\128\ See, for example, letters from CAQ and Deloitte.
\129\ See, for example, letters from BDO, CAQ, Deloitte, Ernst &
Young, Grant Thornton, ICAEW, PwC, and Shell.
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One accounting firm commented that temporary or permanent
recognition or measurement differences between IFRS as issued by the
IASB and local variations of IFRS may create difficulties in the
ability of an issuer to rely on IFRS 1, ``First-time Adoption of
International Financial Reporting Standards.'' \130\ The firm indicated
that similar difficulties may arise if an entity that prepares its
financial statements in accordance with a local GAAP that has converged
with IFRS over time has not gone through the adoption process of IFRS 1
with appropriate transition adjustments. We recognize that a specific
issuer may need to make a determination as to when it may rely on IFRS
1 as a first-time adopter of IFRS. We believe that an issuer may rely
on the provisions of General Instruction G if and only if that issuer
has not previously stated its reliance on IFRS 1. Further, an issuer
may only rely on the provisions of General Instruction G once.
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\130\ See letter from Ernst & Young.
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Paragraph (i) of General Instruction G contains a special
instruction that requires European issuers that prepare their financial
statements using IFRS as adopted by the EU to reconcile their financial
statements to IFRS as issued by the IASB to qualify for the
accommodation. A U.S. GAAP reconciliation also is required. This
paragraph presently applies only to issuers incorporated in an EU
Member State, and would cease to be applicable after the 2007 financial
year, at which time the mandatory switch to IFRS under the EU
Regulation will be complete. Because the provisions will no longer be
applicable after that time, we are deleting General Instruction G(i) of
Form 20-F.\131\
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\131\ The transition provisions discussed in Section III.A.3.
relating to IFRS as adopted by the EU are available only for
existing registrants, all of whom have already been first-time
adopters of IFRS.
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6. Check Boxes on the Cover Page of Form 20-F
We proposed adding check boxes to the cover page of Form 20-F in
which a filer would indicate whether the financial statements included
in the filing have been prepared using U.S. GAAP, IFRS as issued by the
IASB, or another basis of accounting. If, in response to this check
box, an issuer has indicated that it uses a basis of accounting other
than U.S. GAAP or IFRS as issued by the IASB, the issuer would then
indicate in response to a subsequent check box whether it follows Item
17 or 18 to prepare its U.S. GAAP reconciliation.
We also proposed to revise the cover page of Form 20-F to require
that issuers provide contact information for a person to whom
Commission or staff enquiries may be directed.\132\ This information
would include the name of an individual at the company or its legal
counsel and the telephone, e-mail, and/or facsimile number, or other
means by which that person can be contacted. Information provided on
the Form 20-F in response to the proposed check boxes and the company
contact information will constitute required disclosure that is subject
to all applicable federal securities laws.
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\132\ An example of this enquiry would be a staff comment
letter. Identifying the person on the cover page would not make that
person an agent for service of process.
---------------------------------------------------------------------------
We did not receive extensive comment on these proposed revisions to
Form 20-F. One commenter thought that the naming of individuals on the
cover page would be viewed as sensitive because of potential exposure
to litigation, and suggested that we obtain contact information by non-
public means.\133\ Because identification on the cover page does not
expose that individual to additional liability or responsibility for
the contents of the filing, we are adopting the amendments as
proposed.\134\ We also note that forms for domestic issuers already
require contact information. Consistent with the usage throughout the
amendments we are adopting today, however, the reference in the check
boxes on the Form 20-F cover page has been changed to ``IFRS as issued
by the IASB'' rather than the proposed ``IFRS as published by the
IASB.'' \135\
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\133\ See letter from Fried, Frank, Harris, Shriver & Jacobson
(London), LLP.
\134\ We will consider the possibility of including this
information as an EDGAR header.
\135\ EU companies using the transition provisions discussed in
Section III.A.3. should check the ``IFRS as issued by the IASB''
box.
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D. Regulation S-X
Regulation S-X contains, among other things, the form and content
requirements for financial statements included in filings made with the
Commission. It also includes many provisions that do not relate to U.S.
GAAP, for example, requirements for auditor qualifications and reports.
Regulation S-X will continue to apply to the filings of all foreign
private issuers, including those who file financial statements prepared
using IFRS as issued by the IASB without reconciliation to U.S.
GAAP.\136\
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\136\ Foreign private issuers that file financial statements
prepared in accordance with IFRS as issued by the IASB will comply
with IASB requirements for form and content within the financial
statements, rather than with the specific presentation and
disclosure provisions in Articles 4, 5, 6, 7, 9, and 10 of
Regulation S-X.
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1. Application of the Amendments to Rules 3-05, 3-09, and 3-16
Under Rules 3-05, 3-09 and 3-16 of Regulation S-X, an issuer, in
certain
[[Page 1000]]
circumstances, must include the financial statements of another entity
in its filings.\137\ We did not propose any changes to Rules 3-05, 3-
09, and 3-16 of Regulation S-X, although the amendments that we are
adopting to accept IFRS financial statements without a U.S. GAAP
reconciliation will apply equally in their application. In response to
our questions, respondents found the description in the Proposing
Release of how the new amendments would apply to the preparation of
financial statements provided under Rules 3-05, 3-09, and 3-16 to be
sufficiently clear. We have summarized below the guidance provided in
the Proposing Release.
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\137\ Rule 3-05 specifies the requirements for financial
statements of businesses acquired or to be acquired. Rule 3-09
specifies the requirements for financial statements of
unconsolidated majority-owned subsidiaries and 50 percent or less
owned investments accounted for by the equity method. Both Rule 3-05
and 3-09 require financial statements when the applicable entity is
significant to the issuer.
Rule 3-16 specifies the requirement for financial statements of
affiliates whose securities collateralize an issue registered or
being registered. The requirement to provide separate financial
statements under Rule 3-16 is based upon whether or not the
securities are a substantial portion (as defined) of the collateral
for the class of securities registered or being registered.
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a. Significance Testing
Requirements for significance testing are governed by the financial
statements of the issuer.\138\ Generally, a foreign private issuer that
prepares its own financial statements using IFRS as issued by the IASB
also would perform the significance tests under Rules 3-05, 3-09, and
3-16 using IFRS as issued by the IASB, regardless of the basis of
accounting used by the other entity. If the significance thresholds
under Rule 3-05, 3-09, or 3-16 are met, then the issuer must provide on
a separate basis audited annual financial statements of the subject
entity.
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\138\ An entity is significant to the issuer if the issuer's
investment in the entity exceeds 20% of the issuer's total assets,
the entity's income (as defined) exceeds 20% of the issuer's
corresponding income, or (for Rule 3-05 only) the entity's total
assets exceed 20% of the issuer's total assets.
---------------------------------------------------------------------------
Some commenters pointed out that significance testing under Rule 1-
02(w) has historically been performed using U.S. GAAP amounts and,
notwithstanding the amendments we are adopting today, an issuer would
still need to prepare a U.S. GAAP reconciliation for the purpose of
significance testing even if such a reconciliation was no longer
required to be disclosed.\139\ In order to clarify our intent and to
implement fully our acceptance from foreign private issuers of
financial statements prepared in accordance with IFRS as issued by the
IASB, we are revising Rule 1-02(w) to specify significance testing
using amounts determined under IFRS as issued by the IASB when the
issuer's financial statements are prepared in accordance with IFRS as
issued by the IASB.
---------------------------------------------------------------------------
\139\ See, for example, letter from CAQ.
---------------------------------------------------------------------------
b. Separate Historical Financial Statements of Another Entity Provided
Under Rule 3-05 or 3-09
Generally, the historical financial statement requirements for a
foreign acquired business or investee under Rule 3-05 or 3-09 are
governed by the status of that entity, and do not impose a higher
presentation burden on a non-issuer entity than on an issuer. In
applying the amendments, if the entity's audited financial statements
are in accordance with IFRS as issued by the IASB, those financial
statements will not be required to be reconciled to U.S. GAAP. For
example, under Rule 3-05 both foreign private issuers and U.S.
companies that acquire a ``significant'' foreign business will be
permitted, under the adopted rules, to include the acquiree's financial
statements prepared in accordance with IFRS as issued by the IASB
without reconciliation to U.S. GAAP, in accordance with U.S. GAAP, or
in accordance with another comprehensive basis of accounting reconciled
to U.S. GAAP. The same is true for the financial statements of a
``significant'' foreign investee under Rule 3-09.
An issuer that includes financial statements for a foreign entity
under Rule 3-05 or Rule 3-09 currently is permitted to omit the
reconciliation to U.S. GAAP for that entity, regardless of the
comprehensive basis of accounting in which that entity's financial
statements are presented, if the significance of that entity, as
defined in Rule 1-02(w) of Regulation S-X, does not exceed 30 percent
of the registrant.\140\ Although we are not amending Rules 3-05 or 3-
09, we are revising Items 17(c)(2)(v) and (vi) of Form 20-F as proposed
to clarify, respectively, that if the financial statements of a foreign
entity filed under Rule 3-05 or 3-09 are presented in accordance with
IFRS as issued by the IASB, those financial statements may omit the
reconciling information specified under Item 17(c)(2)(i)-(iii)
regardless of the significance of the entity.
---------------------------------------------------------------------------
\140\ See Item 17(c)(2)(v) and (vi) of Form 20-F.
---------------------------------------------------------------------------
2. Pro Forma Financial Statements Provided Under Article 11
Article 11 of Regulation S-X requires issuers to prepare unaudited
pro forma financial information that is intended to give effect as if a
particular transaction, such as a significant recent or probable
business combination, had occurred at the beginning of the financial
period. Following the adoption of the amendments described in this
release, requirements for pro forma financial information under Article
11 continue to be governed by the financial statements of the issuer
rather than of the acquiree or other entity, as the pro forma results
must be presented using the same basis of accounting as the issuer.
Similarly, the rules that we are adopting do not impose a higher
presentation burden on pro forma financial information than would be
imposed on the historical financial statements of the issuer.
As proposed, we are not amending Article 11, although the
amendments that we are adopting will affect the application of Article
11. Accordingly, a foreign private issuer using IFRS as issued by the
IASB as its basis of accounting will not be required to reconcile to
U.S. GAAP its pro forma financial information. Therefore, an issuer
using IFRS as issued by the IASB will prepare the pro forma financial
information by presenting its IFRS results and converting the financial
statements of the business acquired (or to be acquired) into IFRS as
issued by the IASB.
3. Financial Statements Provided Under Rule 3-10
Rule 3-10 of Regulation S-X specifies financial statement
requirements for issuers of guaranteed securities and guarantors.\141\
Generally, under this rule both the issuer of the guaranteed security
and the guarantor must follow the financial statement requirements of a
registrant. If both entities are reporting foreign private issuers
filing on Form 20-F, we will accept financial statements prepared in
accordance with IFRS as issued by the IASB without reconciliation from
each one under the rules we are adopting.\142\
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\141\ A guarantee of a registered security is itself a security,
so a guarantor of a registered security is itself considered an
issuer of a security. See Securities Act Section 2(a)(1).
\142\ In this situation, when an issuer of a guaranteed security
and a guarantor each file complete audited financial statements, the
separate financial statements of each entity also may be on a
different basis of accounting and, if not prepared under U.S. GAAP
or IFRS as published by the IASB, must be reconciled to U.S. GAAP.
---------------------------------------------------------------------------
Rule 3-10 permits modified reporting by subsidiary issuers of
guaranteed
[[Page 1001]]
securities and subsidiary guarantors. Separate financial statements
need not be filed for subsidiaries meeting the applicable conditions
contained in Rules 3-10(b) through 3-10(f). Instead, condensed
consolidating financial information is presented in the parent
company's reports in an additional audited footnote to the financial
statements. In applying modified reporting under Rule 3-10, however,
the reconciliation requirement would be based on the consolidated
financial statements of the parent company, as under current rules. A
parent issuer or guarantor that presents consolidated financial
statements in accordance with IFRS as issued by the IASB would present
the condensed consolidating financial information on the basis of IFRS
as issued by the IASB, without reconciliation to U.S. GAAP. As noted in
the Proposing Release, we do not believe that any substantive revision
to Rule 3-10 is necessary to implement the acceptance of financial
statements prepared using IFRS as issued by the IASB without
reconciliation.
As a conforming amendment, we did propose to revise the reference
to the reconciliation to U.S. GAAP of the condensed consolidating
financial information contained in Rule 3-10 to clarify that we would
accept the condensed consolidating financial information without a U.S.
GAAP reconciliation if it is prepared using IFRS as issued by the IASB.
Commenters generally agreed that this change was sufficient, and we are
adopting it as proposed.\143\
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\143\ See, for example, letters from Ernst & Young and UBS.
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4. Conforming Amendment to Rule 4-01
Rule 4-01 of Regulation S-X sets out the general requirements for
financial statements included in Commission filings and requires that
foreign private issuers include an Item 18 reconciliation if they use a
basis of accounting other than U.S. GAAP, except as otherwise stated in
the applicable form.\144\ In order to implement fully the proposed
acceptance of financial statements prepared using IFRS as issued by the
IASB and to avoid ambiguity for issuers, we proposed to revise Rule 4-
01 to clarify that financial statements of foreign private issuers may
be prepared using IFRS as issued by the IASB without reconciliation to
U.S. GAAP. Commenters generally agreed that this approach was
sufficient, and we are adopting the revision to Rule 4-01 as proposed.
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\144\ As noted above, Item 17 reconciliation is permitted in
various circumstances.
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E. Application of the Amendments to Other Forms, Rules and Schedules
1. Conforming Amendments to Securities Act Forms F-4 and S-4
In order to implement fully our acceptance of financial statements
prepared in accordance with IFRS as issued by the IASB without
reconciliation to U.S. GAAP,\145\ we proposed to make certain
conforming amendments to references to the U.S. GAAP reconciliation
that are contained in Securities Act Forms F-4 and S-4.\146\
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\145\ Form 20-F serves as the combined registration statement
and annual report for foreign private issuers under the Exchange
Act, and also sets forth the disclosure requirements for
registration statements filed by foreign private issuers under the
Securities Act.
\146\ Form F-4 is the registration statement for securities of
foreign private issuers in certain business combinations, and Form
S-4 is the registration statement for securities of domestic issuers
issued in business combinations.
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Based on the comments received, our acceptance of IFRS financial
statements from foreign private issuers in both Exchange Act and
Securities Act filings appears to be well understood. Many of the
commenters that responded to the questions we posed indicated that the
proposed changes were sufficiently clear, and did not believe that any
other rules or forms would need to be specifically amended to permit
the filing of IFRS financial statements without a reconciliation to
U.S. GAAP.\147\ A few commenters thought that various other forms,
rules and regulations would require modification, and set forth the
changes they thought would be necessary in their comment letters.\148\
After considering the suggestions, we continue to believe that the
proposed revisions to other rules and forms were sufficiently clear,
and therefore we do not believe additional revisions are necessary and
are adopting the revisions proposed.
---------------------------------------------------------------------------
\147\ See, for example, letters from UBS and Deutsche Bank.
\148\ See, for example, letters from Ernst & Young and Cleary.
---------------------------------------------------------------------------
We therefore are adopting as proposed the revisions to the
references to the U.S. GAAP reconciliation contained in Items 10, 12
and 17 of Form F-4 to make that form consistent with the amendments we
are adopting to Items 17(c) and 18(b) of Form 20-F to indicate that the
referenced U.S. GAAP reconciliation would be required only for
financial statements prepared using a basis of accounting other than
U.S. GAAP or IFRS as issued by the IASB. We also are adopting as
proposed the analogous revision to the reference to the U.S. GAAP
reconciliation contained in the instruction to Item 17 of Form S-4.
2. Conforming Amendment to Rule 701
Rule 701 under the Securities Act provides an exemption from
registration for offers and sales made under certain compensatory
benefit plans. The exemption generally is not available to issuers that
have a reporting obligation under the Exchange Act and does not involve
the filing of any information with the Commission. However, an issuer
conducting an offering under Rule 701 must deliver to investors certain
information, including financial statements, if more than $5 million in
securities are sold over a 12-month period. For foreign private
issuers, financial statements provided under Rule 701 must include a
reconciliation under Item 17 of Form 20-F if they are not prepared in
accordance with U.S. GAAP. To implement fully our acceptance of IFRS
financial statements without reconciliation to U.S. GAAP, we proposed
to amend Rule 701 to clarify that a foreign private issuer that
conducts an offering under Rule 701 and prepares its financial
statements using IFRS as issued by the IASB should not be required to
present a U.S. GAAP reconciliation. Commenters were supportive of the
revision to Rule 701 as a means of facilitating stock ownership and
compensatory plans for employees of foreign private issuers,\149\ which
we are adopting as proposed.
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\149\ See, for example, letter from Cleary.
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3. Schedule TO and Schedule 13E-3
Schedule TO, the tender offer statement under the Exchange Act, and
Schedule 13E-3, the transaction statement under Section 13(e) of the
Exchange Act, both contain a reference to U.S. GAAP reconciliation in
accordance with Item 17 of Form 20-F.
Respondents who commented on the issue, including accounting firms
and foreign private issuers, generally felt that changes to Schedule TO
and Schedule 13E-3 were not necessary where changes to Item 17 of Form
20-F were made.\150\ Other accounting firms and law firms suggested
additional specific revisions to those schedules to clarify that no
reconciliation or discussion of differences from U.S. GAAP would be
necessary if financial statements that complied with IFRS as issued by
the IASB were included.\151\
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\150\ See, for example, letters from PwC, Deloitte, Deutsche
Bank, and UBS.
\151\ See, for example, letters from Cleary and Ernst & Young.
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The amendments we are adopting to Form 20-F to implement our
acceptance
[[Page 1002]]
of IFRS financial statements without reconciliation to U.S. GAAP are
intended to apply to all Securities Act and Exchange Act filings that
reference the U.S. GAAP reconciliation requirement contained in Item 17
or Item 18 of Form 20-F. We therefore are not adopting any revision to
Schedule TO or Schedule 13E-3.
4. Small Business Issuers
Under rules currently in effect, a Canadian foreign private issuer
that qualifies as a small business issuer under Regulation S-B may
elect to provide disclosure in its registration statements and annual
reports, in compliance with forms based on Regulation S-B rather than
on Form 20-F.\152\ Regulation S-B describes the financial statement
requirements for a small business issuer, which must be prepared in
accordance with U.S. GAAP or, if filed by a foreign private issuer that
also is a small business issuer, reconciled to U.S. GAAP in accordance
with the requirements of Items 17 or 18 of Form 20-F, as
appropriate.\153\
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\152\ 17 CFR 228. A ``small business issuer'' is defined in Item
10 of Regulation S-B (17 CFR 228.10) as a company that (i) has
revenues of less than $25,000,000; (ii) is a U.S. or Canadian
issuer; and (iii) is not an investment company and is not an asset-
backed issuer; and (iv) if a majority owned subsidiary, the parent
corporation is also a small business issuer. An entity that meets
all of these criteria is not a small business issuer if it has a
public float (defined as the aggregate market value of the issuer's
outstanding voting and non-voting common equity held by non-
affiliates) of $25,000,000 or greater.
\153\ See Notes 1 and 2 to Item 310 of Regulation S-B.
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We recently adopted amendments under which disclosure requirements
for smaller companies previously contained in Regulation S-B are
integrated into Regulation S-K \154\ and smaller reporting companies
that file annual reports on Form 20-F or a Securities Act registration
statement based on Form 20-F will be able to file financial statements
prepared using U.S. GAAP, IFRS as issued by the IASB without a U.S.
GAAP reconciliation, or another comprehensive basis of accounting with
a U.S. GAAP reconciliation. If that issuer chooses to file a
registration statement or annual report on a domestic form based on
Regulation S-K, financial statements prepared using U.S. GAAP would be
required. Because we adopted these amendments for smaller company
regulatory simplification, we are not making any revisions to
Regulation S-B as part of our final rules to accept IFRS financial
statements from foreign private issuers.
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\154\ See ``Smaller Reporting Company Regulatory Relief and
Simplification,'' Release No. 33-8819 (July 5, 2007), available at
http://www.sec.gov/rules/proposed/2007/33-8819.pdf.
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In the Proposing Release we solicited comment asking whether we
should permit the use in Form 1-A of financial statements prepared in
accordance with IFRS as issued by the IASB without a
reconciliation.\155\ Presently, a Canadian issuer that files a Form 1-A
may use unaudited financial statements reconciled to U.S. GAAP. We
received several comment letters noting that it would be appropriate to
make such an amendment to Form 1-A once Canada officially adopts
IFRS,\156\ with one commenter indicating that requiring a
reconciliation could make a Regulation A offering cost prohibitive for
a Canadian issuer that did not use U.S. GAAP.\157\ Some issuers
supported immediate revision to Form 1-A in this way as a means of
furthering our acceptance of IFRS.\158\ While we fully support the use
of financial statements prepared in accordance with IFRS as issued by
the IASB in filings with the Commission by foreign private issuers, we
are not at this time revising Form 1-A as it appears that Canadian
issuers filing on that form would not be able to avail themselves of
the adopted amendments until Canadian accounting standards setters
permit the use of IFRS, as discussed below in Section III.F.
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\155\ Form 1-A is the Securities Act form for offerings made
under Regulation A, a conditional exemption from Securities Act
registration for securities offerings not exceeding $5 million.
Regulation A may be used by eligible U.S. or Canadian issuers that
do not have a reporting obligation under the Exchange Act.
\156\ See, for example, letter from CAQ.
\157\ See letter from CAQ.
\158\ See, for example, letters from BP and Deloitte.
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F. Application to Filings Under the Multijurisdictional Disclosure
System
Certain Canadian foreign private issuers file registration
statements and annual reports under the Multijurisdictional Disclosure
System (``MJDS''), which permits eligible Canadian companies to use
their disclosure documents prepared in accordance with Canadian
requirements in filings with the Commission. Certain filings under the
MJDS are not required to contain a reconciliation to U.S. GAAP.\159\ A
U.S. GAAP reconciliation is required, however, in registration
statements and annual reports on Form 40-F \160\ and registration
statements on Form F-10,\161\ each when used for common equity
securities, securities convertible into common equity securities and
other securities not rated investment grade. Canadian issuers that
participate in the MJDS generally use either Canadian GAAP, with a U.S.
GAAP reconciliation when required, or U.S. GAAP in their filings with
the Commission.
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\159\ A U.S. GAAP reconciliation is not required under Form F-7
relating to rights offers, Forms F-8 and F-80 for exchange offers
and business combinations, Form F-9 relating to investment-grade
securities, and Form 40-F when used as an annual report relating to
an issuer's Section 15(d) reporting obligations for any of the these
offerings or a Section 13(a) reporting obligation relating to
investment-grade securities.
\160\ 17 CFR 249.240f.
\161\ 17 CFR 239.40.
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Canadian accounting standards setters have indicated that they
expect to permit the use of IFRS as issued by the IASB as the basis of
accounting for all Canadian public companies. The date for application
of IFRS in Canada has not yet been confirmed, but is expected to be
2011.\162\ A number of commenters therefore have felt that it would be
too early to describe acceptance of IFRS by a Canadian company before
Canadian requirements allow the use of IFRS.\163\ Canadian issuers
supported the acceptance of IFRS financial statements without
reconciliation, and urged that it should apply equally to MJDS
filers.\164\
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\162\ See letter from Canadian Accounting Standards Board.
\163\ See, for example, letters from PwC and Ernst & Young.
\164\ See letter from Manulife Financial.
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We are not adopting any revisions to the MJDS forms. As described
in the Proposing Release, we do not believe any amendments to Forms 40-
F and F-10 would be necessary to permit an MJDS issuer to file
financial statements prepared in accordance with IFRS as issued by the
IASB without reconciliation. Some commenters shared this view, as Forms
40-F and F-10 already contain a cross-reference to the U.S. GAAP
reconciliation requirement under Items 17 and 18 of Form 20-F which are
being amended.\165\
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\165\ See, for example, letter from Deloitte.
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G. Periodic Reporting Deadlines for Foreign Private Issuers
In the Proposing Release we solicited comment on periodic reporting
due dates for foreign private issuers, including whether it would be
appropriate to shorten the current six-month deadline for annual
reports on Form 20-F if a reconciliation were not required. We received
significant feedback from commenters raising a number of considerations
applicable to reporting deadlines for foreign private issuers that are
independent of the reconciliation requirement, including annual report
deadlines in home jurisdictions and time needed for
[[Page 1003]]
language translation, among others.\166\ Most commenters indicated that
in no event should the Form 20-F deadline be earlier than in an
issuer's home jurisdiction, and ideally the Form 20-F should be due
after the home country filing deadline.\167\ A number of commenters
support consideration of deadlines for Form 20-F in a separate
rulemaking.\168\ Given the many considerations that may affect our
consideration of periodic reporting deadlines, which may apply to
foreign private issuers generally, we believe it is appropriate to
consider the issue in a separate rulemaking initiative so as to obtain
broader public input.
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\166\ See, for example, letters from HSBC, ING, and Sullivan &
Cromwell.
\167\ See, for example, letters from European Association of
Listed Companies and Union of Issues Quoted in Europe, UNIQUE, New
York City Bar, and ING.
\168\ See, for example, letters from Ernst & Young, and LIBA.
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H. Quality Control Issues
As part of the quality control standards of the PCAOB, Appendix K
applies to PCAOB-registered firms that are associated with
international firms and establishes procedures to enhance the quality
of SEC filings by registrants whose financial statements are audited by
foreign associated firms.\169\ Appendix K procedures require that the
international organization or individual foreign associated firm of
PCAOB-registered firms adopt policies and procedures that address the
review of filings by persons knowledgeable about U.S. GAAP, U.S.
generally accepted auditing standards, and independence matters. We did
not propose and are not adopting any amendments to our rules that
relate to the continued need for compliance with standards of the
PCAOB, including Appendix K. However, in the Proposing Release we did
provide commenters the opportunity to address compliance with PCAOB
standards, including Appendix K, in the context of the proposed
acceptance of IFRS financial statements without a U.S. GAAP
reconciliation. In particular, we asked whether we should be concerned
about PCAOB-registered firm requirements to have persons knowledgeable
in U.S. auditing and independence standards review IFRS financial
statements filed with the Commission.
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\169\ The text of Appendix K is available at: http://www.pcaobus.org/Standards/Interim_Standards/Quality_Control_Standards/SECPS_1000.08_Appendicies_bookmarks.pdf#nameddest=k.
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Several commenters, including those from registered public
accounting firms, pointed out that since the Appendix K procedures were
adopted in 1999 the concerns that it sought to address have been
mitigated by developments in the global financial reporting
environment.\170\ Because of these changes, they believed that it is no
longer necessary for the Appendix K procedures to require the
involvement of a filing reviewer. Commenters also pointed out that if
U.S. GAAP information were no longer required, then a primary focus of
Appendix K filing reviews would no longer apply.\171\ However, some
commenters believe that Appendix K procedures would still be useful
because U.S. auditing standards, independence rules, and SEC rules
still would apply.\172\ We understand that the PCAOB is aware of this
matter.\173\
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\170\ See, for example, letters from CAQ, KPMG, PwC, and
Deloitte.
\171\ See, for example, letter from KPMG.
\172\ See, for example, letters from ICAEW and Syngenta.
\173\ The audit implications of IFRS financial statements in SEC
filings was a matter on the agenda of the PCAOB Standing Advisory
Group Meeting on October 18, 2007. See http://www.pcaobus.org/News_and_Events/Events/2007/10-18.aspx. A PCAOB briefing paper on the
subject is available at: http://www.pcaobus.org/Standards/Standing_Advisory_Group/Meetings/2007/10-18/IFRS_Briefing_Paper.pdf.
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IV. Paperwork Reduction Act
A. Background
The final amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\174\ We are submitting the amendments to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\175\ The titles for the affected collections of information are:
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\174\ 44 U.S.C. 3501 et seq.
\175\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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(1) ``Form 20-F'' (OMB Control No. 3235-0288);
(2) ``Form F-1'' (OMB Control No. 3235-0258);
(3) ``Form F-4'' (OMB Control No. 3235-0325);
(4) ``Form S-4'' (OMB Control No. 3235-0324); and
(5) ``Rule 701'' (OMB Control No. 3235-0522).
These forms were adopted pursuant to the Exchange Act and the
Securities Act and set forth the disclosure requirements for annual
reports and registration statements filed by foreign private issuers.
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 amendments will allow a foreign private issuer that prepares
its financial statements in accordance with IFRS as issued by the IASB
to file those financial statements in its registration statements and
periodic reports filed with the Commission without reconciliation to
U.S. GAAP. These amendments are collections of information for purposes
of the Paperwork Reduction Act. For purposes of this Paperwork
Reduction Analysis, these amendments will result in a decrease in the
hour and cost burden calculations. We believe these amendments will
eliminate potential burdens and costs for foreign issuers that use
IFRS. The disclosure will be mandatory. There will be no mandatory
retention period for the information disclosed, and responses to the
disclosure requirements will not be kept confidential.
We are adopting the amendments substantially as proposed, and do
not believe any differences between the proposed and adopted amendments
will impact our burden estimates for purposes of the Paperwork
Reduction Act. We solicited comments on the Paperwork Reduction
Analysis included in the Proposing Release. The few commenters who
addressed the issue thought, based on their experience in preparing
their U.S. GAAP reconciliation, that we had underestimated the number
of hours by which registrant burdens would be reduced if the amendments
were adopted.\176\ We note, however, that the time required to prepare
a U.S. GAAP reconciliation may vary greatly between issuers. We are not
changing our estimates of the percentage of incremental decrease in the
burden resulting from our amendments. Our Paperwork Reduction Analysis
for Form F-1 and Rule 701 is unchanged from the Proposing Release.
However, we are revising our estimates for Forms 20-F, F-4, and S-4.
For Form 20-F, we have revised our estimate of the number of filers
affected by the amendments from 110 to 140. For Form F-4, the total
burden hour estimates were revised from 24,503 hours to 24,599 hours
subsequent to the issuance of the Proposing Release. We are revising
our analysis for Form F-4 accordingly, although we are not changing our
estimate of the percentage of incremental decrease in burden that we
expect to result from the adopted
[[Page 1004]]
amendments. For Form S-4, we are revising the analysis to reflect an
assumption that 25% of the burden to prepare financial statements for
that form is borne by the registrant and 75% is borne by outside
professionals retained by the registrant at an average cost of $400 per
hour.
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\176\ See, for example, letters from Diageo and Syngenta.
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For purposes of the Paperwork Reduction Act, we estimate that the
incremental decrease in the paperwork burden for all foreign private
issuers that use IFRS and issuers that acquire foreign private issuers
that use IFRS will be approximately 4,945 hours of company time and
approximately $5,934,000 for the services of outside professionals. We
estimated the average number of hours 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.\177\ Our estimates of the
number of affected foreign private issuers are based on the number of
recent filings received from issuers that we believe may be immediately
eligible to rely on the adopted amendments.
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\177\ In connection with other recent rulemakings, we have had
discussions with several private law firms to estimate an hourly
rate of $400 as the cost to companies for the services of outside
professionals retained to assist in the preparation of these
disclosures. For Securities Act registration statements, we also
consider additional reviews of the disclosure by underwriter's
counsel and underwriters.
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B. Burden and Cost Estimates Related to the Accommodation
1. Form 20-F
We estimate that currently foreign private issuers file 942 Form
20-Fs each year. We assume that 25% of the burden required to produce
the Form 20-Fs is borne internally by foreign private issuers,
resulting in 619,601 annual burden hours borne by foreign private
issuers out of a total of 2,478,404 annual burden hours. Thus, we
estimate that 2,631 total burden hours per response currently are
required to prepare the Form 20-F. We further assume that 75% of the
burden to produce the Form 20-Fs is carried by outside professionals
retained by foreign private issuers at an average cost of $400 per
hour, for a total cost of $743,520,600.
We estimate that approximately 140 companies that file Form 20-F
may be currently impacted by the amendment.\178\ We expect that the
amendment would cause those foreign private issuers to have fewer
burden hours. We estimate that for each of the companies affected by
the proposal, there would occur a decrease of 5% (132 hours) in the
number of burden hours required to prepare their Form 20-F, for a total
decrease of 18,480 hours. We expect that 25% of these decreased burden
hours (4,620 hours) will be saved by foreign private issuers. We
further expect that 75% of these decreased burden hours (13,860 hours)
will be saved by outside firms, at an average cost of $400 per hour,
for a total of $5,544,000 in decreased costs to the respondents of the
information collection.
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\178\ We are using this figure for purposes of the Paperwork
Reduction Analysis based on the number of Form 20-Fs that were filed
with IFRS financial statements during the last twelve months. As
additional jurisdictions adopt IFRS as their basis of accounting in
the future, the number of issuers that use IFRS is expected to
increase.
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Thus, we estimate that the amendment to Form 20-F will decrease the
annual burden borne by foreign private issuers in the preparation of
Form 20-F from 619,601 hours to 614,981 hours. We further estimate that
the amendment will decrease the total annual burden associated with
Form 20-F preparation to 2,459,924 burden hours, which will decrease
the average number of burden hours per response to 2,611. We further
estimate that the amendment will decrease the total annual costs
attributed to the preparation of Form 20-F by outside firms to
$737,977,200.
2. Form F-1
We estimate that currently foreign private issuers file 42
registration statements on Form F-1 each year. We assume that 25% of
the burden required to produce a Form F-1 is borne by foreign private
issuers, resulting in 18,999 annual burden hours incurred by foreign
private issuers out of a total of 75,996 annual burden hours. Thus, we
estimate that 1,809 total burden hours per response currently are
required to prepare a registration statement on Form F-1. We further
assume that 75% of the burden to produce a Form F-1 is carried by
outside professionals retained by foreign private issuers at an average
cost of $400 per hour, for a total cost of $22,798,800.
We estimate that currently approximately five companies that file
registration statements on Form F-1 will be impacted by the
amendment.\179\ We expect that the proposed amendment will cause those
foreign private issuers to have fewer burden hours. We estimate that
each company affected by the amendment would have a 5% decrease (90.45
hours) in the number of burden hours required to prepare their
registration statements on Form F-1, for a total decrease of 452 hours.
We expect that 25% of these decreased burden hours (113 hours) will be
saved by foreign private issuers. We further expect that 75% of the
decreased burden hours (339 hours) will be saved by outside firms, at
an average cost of $400 per hour, for a total of $135,600 in decreased
costs to the respondents of the information collection.
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\179\ This figure is based on our estimate of the number of Form
F-1s that were filed with IFRS financial statements during the 2006
calendar year.
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Thus, we estimate that the amendment to Form 20-F will decrease the
annual burden incurred by foreign private issuers in the preparation of
Form F-1 from 18,999 hours to 18,886 hours. We further estimate that
the amendment will decrease the total annual burden associated with
Form F-1 preparation to 75,544 burden hours, which will decrease the
average number of burden hours per response to 1,799. We further
estimate that the amendment will decrease the total annual costs
attributed to the preparation of Form F-1 by outside firms to
$22,663,200.
3. Form F-4
We estimate that currently foreign private issuers file 68
registration statements on Form F-4 each year. We assume that 25% of
the burden required to produce a Form F-4 is borne internally by
foreign private issuers, resulting in 24,599 annual burden hours
incurred by foreign private issuers out of a total of 98,396 annual
burden hours. Thus, we estimate that 1,447 total burden hours per
response currently are required to prepare a registration statement on
Form F-4. We further assume that 75% of the burden to produce a Form F-
4 is carried by outside professionals retained by foreign private
issuers at an average cost of $400 per hour, for a total cost of
$29,518,800.
We estimate that currently approximately 5 companies that file
registration statements on Form F-4 will be impacted by the
amendment.\180\ We expect that the amendment will cause those foreign
private issuers to have fewer burden hours. We estimate that each of
the affected companies will have a decrease of 5% (72 hours) in the
number of burden hours required to prepare their registration
statements on Form F-4, for a total decrease of 360 hours. We expect
that 25% of these decreased burden hours (90 hours) will be saved by
foreign private issuers. We further expect that 75% of the decreased
[[Page 1005]]
burden hours (270 hours) will be saved by outside firms at an average
cost of $400 per hour, for a total of $108,000 in decreased costs to
the respondents of the information collection.
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\180\ This figure is based on our estimate of the number of Form
F-4s that were filed with IFRS financial statements during the 2006
calendar year.
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Thus, we estimate that the amendment to Form 20-F will decrease the
annual burden incurred by foreign private issuers in the preparation of
Form F-4 from 24,599 hours to 24,509 hours. We further estimate that
the amendment will decrease the total annual burden associated with
Form F-4 preparation to 98,036 burden hours, which will decrease the
average number of burden hours per response to 1,441. We further
estimate that the amendment will decrease the total annual costs
attributed to the preparation of Form F-4 by outside firms to
$29,410,800.
4. Form S-4
When a domestic issuer files a registration statement on Form S-4
for the acquisition of a foreign business, the domestic issuer may be
required to include the financial statements of the acquired business
in the Form S-4. If those financial statements are prepared using a
basis of accounting other than U.S. GAAP, the domestic issuer must
provide a reconciliation to U.S. GAAP, unless a U.S. GAAP
reconciliation is unavailable or not obtainable without unreasonable
cost or expense.
We estimate that issuers file 619 registration statements on Form
S-4 each year. We estimate that 4,065 total burden hours per response
currently are required to prepare a registration statement on Form S-4.
We assume that 25% of the burden required to prepare the financial
statements for use in a Form S-4 is borne by the registrant, resulting
in 629,059 annual burden hours incurred by registrants out of a total
of 2,516,236 annual burden hours. We further assume that 75% of the
burden to produce financial statements for a Form S-4 is carried by
outside professionals retained by the issuer at an average cost of $400
per hour for a total cost of $754,871,000.
We estimate that currently approximately 6 registration statements
filed on Form S-4 will contain the financial statements of a foreign
target that will be impacted by the amendment.\181\ We expect that the
amendment will cause registrants that file Form S-4 registration
statements to have fewer burden hours. We estimate that for each of
these registrants, there will be a decrease of 2% (81 hours) in the
number of burden hours required to prepare their registration
statements on Form S-4, for a total decrease of 486 hours.\182\ We
expect that 25% of these decreased burden hours (122 hours) will be
saved by issuers. We further expect that 75% of the decreased burden
hours (364 hours) will be saved by outside professionals at an average
cost of $400 per hour for a total of $145,600 in decreased costs to the
respondents of the information collection.
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\181\ This figure is based on our estimate of the number of Form
S-4s that were filed during the 2006 calendar year that contained
IFRS financial statements.
\182\ We estimate the burden decrease for purposes of this
Paperwork Reduction Analysis would be less for Form S-4 than for
other forms described in this section because, in the case of Form
S-4, the registrant is obtaining the U.S. GAAP reconciliation from
the foreign private issuer. Further, the registrant is not required
to provide the reconciliation if it is unavailable or unobtainable
without unreasonable cost or expense.
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Thus, we estimate that the amendment will decrease the annual
burden incurred by issuers in the preparation of Form S-4 from 629,059
hours to 628,937 hours. We further estimate that the amendment will
decrease the total annual burden associated with Form S-4 preparation
to 2,515,748 burden hours, which will decrease the average number of
burden hours per response to 4,064. We further estimate that the
amendment will decrease the total annual costs attributed to the
preparation of Form S-4 by outside firms to $754,725,400.
5. Rule 701
Rule 701 provides an exemption from registration for offers and
sales of securities pursuant to certain compensatory benefit plans and
contracts relating to compensation. Issuers conducting employee benefit
plan offerings in excess of $5 million in reliance on Rule 701 are
required to provide employees covered by the plan with certain
disclosures, including financial statement disclosures. This disclosure
is a collection of information.
We estimate that currently 300 issuers provide information under
Rule 701, and that the estimated number of burden hours per respondent
is two. Therefore, we estimate an aggregate of 600 burden hours per
year. We believe that the reduction in burden hours caused by the rules
will be insignificant. Therefore, we do not believe the rules will
alter current burden estimates associated with Rule 701.
V. Cost-Benefit Analysis
The adopted amendments provide foreign private issuers the option
of not including a U.S. GAAP reconciliation in their Commission filings
if their financial statements comply with IFRS as issued by the IASB.
We are not amending the current reconciliation requirements for foreign
private issuers that prepare their financial statements using a basis
of accounting other than IFRS as issued by the IASB.
The amendments apply to a foreign private issuer's financial
statements contained in annual reports and registration statements on
Form 20-F as well as to financial statements included in Securities Act
registration statements filed by foreign private issuers or, when
applicable, included in a registration statement or reported pursuant
to Rules 3-05, 3-09 or 3-16 of Regulation S-X. We also are adopting a
conforming amendment to Rule 701, which provides an exemption from
Securities Act registration for securities offered in certain employee
benefit plans, to clarify that a foreign private issuer conducting an
offering in excess of $5 million in reliance on that rule may furnish
investors with financial statements prepared using IFRS as issued by
the IASB without reconciliation.
The amendments are available to any foreign private issuer that
files financial statements that comply with IFRS as issued by the IASB,
whether voluntarily or in accordance with the requirements of the
issuer's home country regulator or exchange on which its securities are
listed.
We recognize that the acceptance of financial statements that
comply with IFRS as issued by the IASB without reconciliation does not
affect all foreign private issuers equally, as there are some issuers
that will continue to find it more attractive to reconcile their
financial statements to U.S. GAAP or to continue to prepare financial
statements in U.S. GAAP. Approximately 140 of approximately 1,100
foreign private issuers currently file financial statements in which
they represent in the footnotes to the financial statements that the
financial statements either comply with IFRS as issued by the IASB or a
jurisdictional variation of IFRS where such jurisdictional variation
may not prevent compliance with IFRS as issued by the IASB. If these
issuers are able to state, and their auditors are able to opine, that
the financial statements comply with IFRS as issued by the IASB, then
these issuers will be able to file their IFRS financial statements
without reconciliation to U.S. GAAP. In coming years, as more countries
adopt IFRS as their basis of accounting or permit companies to use IFRS
as issued by the IASB as their basis of accounting, we believe that the
number of foreign private issuers that will be eligible to rely on the
adopted amendments will increase. For instance, approximately 80
[[Page 1006]]
foreign private issuers from Israel \183\ and approximately 500 from
Canada \184\ file financial statements with the Commission and both of
these countries have announced moves to IFRS reporting. Additionally,
foreign private issuers incorporated in other jurisdictions would be
able to take advantage of the adopted amendments by preparing financial
statements in accordance with IFRS as issued by the IASB for purposes
of Commission filings. Finally, approximately 40 additional foreign
private issuers that are incorporated in jurisdictions that have moved
to IFRS historically have included in their filings with the Commission
financial statements prepared using U.S. GAAP. Some of these issuers
also may be in a position to file financial statements that comply with
IFRS as issued by the IASB without a U.S. GAAP reconciliation under the
amendments.\185\
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\183\ Israel Accounting Standard No. 29 ``Adoption of
International Financial Reporting Standards,'' stipulating that
Israeli public companies that prepare their primary financial
statements in accordance with Israeli GAAP are obliged to adopt IFRS
unreservedly for years starting on January 1, 2008.
\184\ See ``Implementation Plan for Incorporating International
Financial Reporting Standards into Canadian GAAP,'' available at
http://www.acsbcanada.org/client_asset/document/3/2/7/3/5/document_8B452E12-FAF5-7113-C4CB8F89B38BC6F8.pdf?sfgdata=4.
\185\ The figures contained in this paragraph are per staff
estimates based on the jurisdiction of the filers.
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Although few commenters provided quantitative data to support their
views,\186\ the Commission has revised the proposed amendments in
response to the concerns that the commenters expressed. The Commission
expects that the adopted amendments will result in the following
benefits and costs to investors.
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\186\ See, for example, letters from Diageo and Syngenta.
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A. Expected Benefits
Our acceptance of financial statements prepared using IFRS as
issued by the IASB is expected to help foster the use of IFRS as issued
by the IASB as a way of moving to a single set of globally accepted
accounting standards, which we believe will have positive effects on
investors. Financial statements prepared using a common, high-quality
set of accounting standards are expected to help investors better
understand and compare investment opportunities as compared to
financial statements prepared under differing sets of national
accounting standards. Without a common standard, global investors are
likely to incur the extra costs of time and effort to understand
financial statements reported using different bases of accounting so
that they can compare opportunities. While financial statements filed
with the Commission and prepared under a set of home country accounting
standards have included a reconciliation to U.S. GAAP, this
reconciliation is not a complete substitute for comparing financial
statements prepared using U.S. GAAP.
The benefits of a single set of globally accepted, high-quality
accounting standards that improve financial statement comparability may
be diminished if there is a wide latitude in application of IFRS that
results in inconsistent reporting. This latitude potentially harms
investors' ability to compare financial statements across companies and
potentially allows more opportunity for obfuscatory reporting as noted
by one commenter.\187\ As noted in Section II., the Commission and its
staff continue to be involved in efforts to promote consistent and
faithful application of IFRS. We believe, based on the staff's review
of IFRS financial statements, that financial statements prepared in
accordance with IFRS as issued by the IASB are of sufficient quality.
Investors therefore should be able to understand and work with them, a
situation which will contribute to the use of globally accepted
accounting standards, likely resulting in a more efficient allocation
of capital.
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\187\ See letter from Maverick.
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The amendments are expected to increase the likelihood of realizing
the net benefits to investors of the use of globally accepted
accounting standards. This benefit is due to potential network effects
of the proposed amendments: the more issuers that use IFRS as issued by
the IASB, the greater the incentive for other issuers to do so. The
utility for investors of a set of accounting standards increases as the
number of issuers using it increases. For example, a foreign private
issuer may be concerned about public perception costs, as it may be
perceived as being the outlier if companies with which it competes for
capital report using a different basis of accounting. The perception
costs of being an outlier in such a case are likely to be smaller if a
critical mass of issuers with whom the issuer competes for capital
(such as those in its industry sector) report pursuant to the same set
of standards, such as IFRS as issued by the IASB. In such situations,
the use of IFRS as issued by the IASB is expected to make it more
efficient for investors to analyze an issuer's financial results in
comparison with the results of others with whom that issuer competes
for capital. At the same time, the issuers reporting in home country
GAAP may experience higher perception costs if a critical mass of
comparable issuers adopts IFRS as issued by the IASB.
We believe that issuers will be affected by the amendments in a
number of ways, including needing fewer resources to prepare Commission
filings.\188\ Issuers that commented on our estimates of the cost of
reconciliation believe we underestimated these costs suggesting that
accepting IFRS financial statements without a U.S. GAAP reconciliation
will result in greater than expected savings to issuers.\189\ Investors
will benefit to the extent that an issuer relying on the amendments can
reallocate its cost savings from not preparing a reconciliation to U.S.
GAAP or possibly a second set of financial statements in U.S. GAAP to
higher earning opportunities and not suffer an even greater increase in
its cost of capital relative to the cost of reconciling to U.S. GAAP.
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\188\ For purposes of the Paperwork Reduction Analysis, as
described above, we have estimated that the incremental decrease in
the paperwork burden for all foreign private issuers that currently
use IFRS and issuers that acquire foreign private issuers that
currently use IFRS would be approximately 3,943 hours of company
time and approximately $4,731,120 for the services of outside
professionals. For purposes of these calculations, we estimated the
average number of hours each entity spends completing the forms and
the average hourly rate for outside professionals, including 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. The impact on an individual
issuer may vary, based on its specific circumstances.
\189\ See, for example, letters from Diageo and Syngenta.
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The amendments are expected to facilitate capital formation by
foreign companies in the United States capital markets. Our amendments
to accept IFRS financial statements without reconciliation to U.S. GAAP
are expected to reduce regulatory burdens for foreign private issuers
that rely on them, thereby lowering the information disclosure
preparation cost of raising capital in the United States for those
issuers. We believe that foreign private issuers therefore may be more
likely to enter or remain in the U.S. capital markets. To the extent
our acceptance of IFRS financial statements without reconciliation
encourages foreign private issuers to enter or remain in the U.S.
capital markets, investors also will benefit from the protections of
the U.S. regulatory and disclosure system relative to the protections
they may receive if purchasing those securities overseas and the ease
of investing in these opportunities in the United States.
[[Page 1007]]
The expected benefits of a single set of high quality accounting
standards may be mitigated if the standards were not to continue to be
of a high quality. Investors may face uncertainty about the future
quality of IFRS. Factors that could affect the quality of IFRS are both
institutional with respect to the IASC Foundation including its
governance and funding, as discussed in Section II. above, as well as
operational with respect to the actual standard setting process. We
recognize that our relationship with the IASB is less direct than our
relationship with the FASB and that there are more and varied
constituents of the IASB than of the FASB. The result may be that our
view will be one of many views that the IASB receives from around the
world and considers when developing future standards. We continue to
support the IASC Foundation's objectives for its work to achieve a
stable and independent funding structure.
B. Expected Costs
Under the amendments, the minimum required financial information
that investors in the U.S. capital markets receive from any foreign
private issuer will differ from what it was previously. The extent to
which an investor receives less information for a particular foreign
private issuer who reports under the amendments will depend upon how
the issuer previously reported its financial statements. For instance,
if the foreign private issuer currently files financial statements
prepared in U.S. GAAP and transitions to reporting in IFRS, then this
may or may not represent a loss of required information in absolute
terms. Whether there is an absolute loss of information will depend
upon whether IFRS financial statements yielded more or less information
about a particular issuer than the U.S. GAAP financial statements
yielded. On the other hand, if the foreign private issuer currently
prepares its financial statements in IFRS and includes reconciling
information to U.S. GAAP, then a loss of information will result as the
reconciling information is omitted. A potential cost could be incurred
if an investor loses information contained in the reconciliation that
the investor would use to understand differences in certain financial
results under IFRS and U.S. GAAP for a particular issuer. The
usefulness of this omitted information depends on the extent to which
the investor uses the information provided by the reconciliation to
U.S. GAAP. Some investors, including investors who appear to be
familiar with IFRS, currently make use of the information provided in
the U.S. GAAP reconciliation by quantifying or estimating differences
in certain financial results under IFRS and U.S. GAAP and comparing
results in certain line items such as net income of foreign private
issuers with those of domestic issuers.\190\ Alternatively, other
investors are familiar with IFRS as a basis of accounting and therefore
may make limited use of the reconciliation from IFRS to U.S. GAAP.\191\
Because investors may be differently situated in the market and have
varying levels of familiarity with IFRS and with the information
provided in the U.S. GAAP reconciliation, investors may not all bear
the cost from the amendments equally and some commenters recognized
this.\192\ The use that a particular investor may make of the
reconciliation will depend on many factors including the size and
nature of the investor and the industry to which the issuer in question
belongs.
---------------------------------------------------------------------------
\190\ See, for example, letters from ITAC, Maverick, R.G.
Associates, and Standard & Poor's.
\191\ See, for example, letter from CRUF.
\192\ See, for example, letters from CFA Institute and ITAC.
---------------------------------------------------------------------------
Additionally, under the amendments, the comparability of IFRS and
U.S. GAAP results may change. To the extent that an issuer elected IFRS
accounting policies that were consistent with U.S. GAAP solely to avoid
having to disclose a U.S. GAAP reconciling item, future accounting
policy elections may not be influenced by this incentive. This may
result in future IFRS financial information from that issuer differing
from U.S. GAAP. Eligible foreign private issuers who register their
securities after this rulemaking is effective will not be influenced by
this incentive.
The amendments may lead to some costs to both investors and to
issuers. If the investor community prefers the information communicated
by a U.S. GAAP reconciliation, a foreign private issuer that uses IFRS
as issued by the IASB to prepare financial statements may face a
reduced following in the marketplace. Investors that are not
sufficiently familiar with IFRS accounting standards may prefer a U.S.
GAAP reconciliation. In addition, unfamiliarity with IFRS as issued by
the IASB may have an adverse effect on investors' confidence in the
reported results which may lead them to insist on a risk premium.
The reconciliation may highlight the areas in which IFRS and U.S.
GAAP are not converged, thus providing a possible benchmark to gauge
convergence, although the efficacy of this benchmark could be affected
by many other factors, and convergence may not eliminate all
differences. With respect to IFRS financial statements, there are
generally three sources for differences identified in the
reconciliation to U.S. GAAP:
Legacy differences arising from transactions that occurred
before U.S. GAAP and IFRS became more converged;
Self-selected differences that arise as a function of
differing accounting elections that foreign private issuers make in
accounting for the same area under IFRS and U.S. GAAP; and
Regenerating differences that continue to recur each year
in areas in which the standards are not converged.
With the differing reasons for reconciling items, we do not believe
that the reconciliation solely or primarily provides investors or the
IASB and FASB with an understanding of areas that are not yet
converged.
There may be differing incentives for the convergence of IFRS and
U.S. GAAP to continue. We believe, however, that the needs of the
marketplace will support the IASB and the FASB working together to
develop the best international standards to be used in the U.S. and
internationally regardless of our regulatory requirement to reconcile
financial statements. The current convergence work program includes
topics such as revenue recognition, financial statement presentation,
and leases. These are topics on which both the IASB and the FASB seek
to develop better standards (rather than using the existing U.S. GAAP
or IFRS standards). We believe that investors and issuers seek
comparable information in global capital markets thereby providing an
incentive for continued convergence of U.S. GAAP and IFRS.
This rulemaking also may create costs to investors in domestic
issuers required by the Commission's rules to prepare their financial
statements under U.S. GAAP. The desire of potential investors for
comparability of financial information among companies that report in
IFRS and domestic issuers that report in U.S. GAAP may create an
incentive for domestic issuers to provide financial information
prepared under IFRS as issued by the IASB in addition to U.S. GAAP
financial statements. If domestic issuers make this choice, their
investors bear additional preparation cost, while benefiting from
additional information provided. Domestic issuers currently compete
internationally for capital with companies who provide financial
information prepared under IFRS. In spite of this international
competition for capital, we do not believe it is currently a widespread
practice for
[[Page 1008]]
domestic issuers to provide financial information under IFRS.
VI. Regulatory Flexibility Act Certification
Under Section 605(b) of the Regulatory Flexibility Act,\193\ the
Commission certified that the proposed amendments to Form 20-F under
the Exchange Act, Forms F-4 and S-4 and Rule 701 under the Securities
Act and Regulation S-X contained in this release, if adopted, would not
have a significant economic impact on a substantial number of small
entities. It included this certification in Part VII of the Proposing
Release. While the Commission encouraged written comments regarding
this certification, none of the commenters responded to this request.
---------------------------------------------------------------------------
\193\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
VII. Consideration of Impact on the Economy, Burden on Competition and
Promotion of Efficiency, Competition and Capital Formation Analysis
Section 2(b) of the Securities Act \194\ and Section 3(f) of the
Exchange Act\195\ 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. When adopting
rules under the Exchange Act, Section 23(a)(2) of the Exchange Act
\196\ requires us 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.
---------------------------------------------------------------------------
\194\ 15 U.S.C. 77b(b).
\195\ 15 U.S.C. 78c(f).
\196\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
In the Proposing Release we considered the proposed amendments in
light of the standards set forth in the above statutory sections. We
solicited comment on whether, if adopted, the proposed rule amendments
would result in any anti-competitive effects or promote efficiency,
competition and capital formation. We further encouraged commenters to
provide empirical data or other facts to support their views on any
anti-competitive effects or any burdens on efficiency, competition or
capital formation that might result from adoption of the proposed
amendments.
We did not receive any comments or any empirical data in this
regard concerning the proposed amendments. Accordingly, since the
adopted rules are substantially similar to the proposed rules, we
continue to believe the new rules will contribute to efficiency,
competition and capital formation. The purpose of the amendments to
Form 20-F under the Exchange Act, Forms F-4 and S-4 and Rule 701 under
the Securities Act, and Regulation S-X is to allow foreign private
issuers that prepare financial statements that comply with IFRS as
issued by the IASB to include those financial statements in their
annual reports and registration statements filed with the Commission
without reconciliation to U.S. GAAP. These amendments are designed to
increase efficiency, competition and capital formation by helping to
move towards a set of globally accepted accounting standards, as well
as by alleviating the burden and cost that eligible companies would
face if required to prepare a U.S. GAAP reconciliation for inclusion in
annual reports and registration statements filed with us. Due to the
cost to issuers of preparing the reconciliation to U.S. GAAP from IFRS,
we believe that the amendments are likely to promote efficiency by
eliminating financial disclosure that is costly to produce. We believe
that investors would have adequate information on which to base their
investment decisions and that capital may be allocated on a more
efficient basis.
The amendments are expected to facilitate capital formation by
foreign companies in the U.S. capital markets by reducing regulatory
compliance burdens for foreign private issuers that rely on them.
Reduced compliance burdens are expected to lower the cost of preparing
disclosure for purposes of raising capital in the United States for
those issuers.
The amendments also may have other impacts on efficiency and
capital formation, which may not be felt equally by all market
participants. For example, the amendments may have a more favorable
competitive impact on foreign private issuers from jurisdictions in
which the use of IFRS is already required or permitted. Issuers from
such jurisdictions may be able to benefit from the amendments more
quickly than issuers from jurisdictions that do not permit the use of
IFRS. Also, some foreign private issuers may be concerned about the
public perception costs of not including a U.S. GAAP reconciliation,
particularly if they compete for capital with other foreign companies
that provide a reconciliation or that prepare financial statements that
comply with U.S. GAAP.
The amendments also are expected to have effects on efficiency and
capital formation to the extent that investors need to increase their
familiarity with IFRS in order to compare investment opportunities
without reference to a U.S. GAAP reconciliation. If investors prefer
the information provided in a U.S. GAAP reconciliation, a foreign
private issuer that uses IFRS as issued by the IASB without
reconciliation may face adverse competitive effects in the capital
markets. For example, investor unfamiliarity with IFRS may adversely
affect investor confidence in issuers that prepare IFRS financial
statements without reconciliation to U.S. GAAP. This may lead investors
to insist on a risk premium in those companies, which would affect
their competitiveness in the capital markets. Also, if investors must
incur costs in order to understand IFRS financial statements without a
U.S. GAAP reconciliation, there may be an incentive for intermediary
parties to provide U.S. GAAP reconciliation services.
VIII. Statutory Basis and Text of Final Amendments
We are adopting the amendments to Exchange Act Form 20-F,
Regulation S-X Rules 1-02, 3-10 and 4-01, Securities Act Forms F-4 and
S-4, and Securities Act Rule 701 pursuant to Sections 6, 7, 10, and 19
of the Securities Act of 1933 as amended, Sections 3, 12, 13, 15, 23
and 36 of the Securities Exchange Act of 1934, and Sections 3(c)(2) and
108(c) of the Sarbanes Oxley Act of 2002.
Text of Amendments
List of Subjects in 17 CFR Parts 210, 230, 239 and 249
Accounting, Reporting and recordkeeping requirements, Securities.
0
In accordance with the foregoing, Title 17, Chapter II of the Code of
Federal Regulations is amended as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
0
1. The authority citation for part 210 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5,
78w(a), 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 80a-31, 80a-
37(a), 80b-3, 80b-11, 7202, 7218 and 7262, unless otherwise noted.
[[Page 1009]]
0
2. Section 210.1-02 is amended by adding a note following paragraph
(w)(3) before the computational note to read as follows.
Sec. 210.1-02 Definitions of terms used in Regulation S-X (17 CFR
Part 210).
* * * * *
(w) * * *
(3) * * *
Note to paragraph (w): A registrant that files its financial
statements in accordance with or provides a reconciliation to U.S.
Generally Accepted Accounting Principles shall make the prescribed
tests using amounts determined under U.S. Generally Accepted
Accounting Principles. A foreign private issuer that files its
financial statements in accordance with IFRS as issued by the IASB
shall make the prescribed tests using amounts determined under IFRS
as issued by the IASB.
* * * * *
0
3. Section 210.3-10 is amended by:
0
a. Revising the introductory text of paragraph (i), and
0
b. Revising paragraph (i)(12).
The revisions read as follows.
Sec. 210.3-10 Financial statements of guarantors and issuers of
guaranteed securities registered or being registered.
* * * * *
(i) Instructions for preparation of condensed consolidating
financial information required by paragraphs (c), (d), (e) and (f) of
this section.
* * * * *
(12) Where the parent company's consolidated financial statements
are prepared on a comprehensive basis other than U.S. Generally
Accepted Accounting Principles or International Financial Reporting
Standards as issued by the International Accounting Standards Board,
reconcile the information in each column to U.S. Generally Accepted
Accounting Principles to the extent necessary to allow investors to
evaluate the sufficiency of the guarantees. The reconciliation may be
limited to the information specified by Item 17 of Form 20-F (Sec.
249.220f of this chapter). The reconciling information need not
duplicate information included elsewhere in the reconciliation of the
consolidated financial statements.
0
4. Amend Sec. 210.4-01 by revising paragraph (a)(2) to read as
follows:
Sec. 210.4-01 Form, order and terminology.
(a) * * *
(2) In all filings of foreign private issuers (see Sec. 230.405 of
this chapter), except as stated otherwise in the applicable form, the
financial statements may be prepared according to a comprehensive set
of accounting principles, other than those generally accepted in the
United States or International Financial Reporting Standards as issued
by the International Accounting Standards Board, if a reconciliation to
U.S. Generally Accepted Accounting Principles and the provisions of
Regulation S-X of the type specified in Item 18 of Form 20-F (Sec.
249.220f of this chapter) is also filed as part of the financial
statements. Alternatively, the financial statements may be prepared
according to U.S. Generally Accepted Accounting Principles or
International Financial Reporting Standards as issued by the
International Accounting Standards Board.
* * * * *
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
5. The authority citation for Part 230 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, 80a-37, 7202
and 7218, unless otherwise noted.
* * * * *
0
6. Amend Sec. 230.701 by revising paragraph (e)(4) to read as follows:
Sec. 230.701 Exemption for offers and sales of securities pursuant to
certain compensatory benefit plans and contracts relating to
compensation.
* * * * *
(e) * * *
(4) Financial statements required to be furnished by Part F/S of
Form 1-A (Regulation A Offering Statement) (Sec. 239.90 of this
chapter) under Regulation A (Sec. Sec. 230.251 through 230.263).
Foreign private issuers as defined in Rule 405 must provide a
reconciliation to generally accepted accounting principles in the
United States (U.S. GAAP) if their financial statements are not
prepared in accordance with U.S. GAAP or International Financial
Reporting Standards as issued by the International Accounting Standards
Board (Item 17 of Form 20-F (Sec. 249.220f of this chapter)). The
financial statements required by this section must be as of a date no
more than 180 days before the sale of securities in reliance on this
exemption.
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
7. The authority citation for part 239 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll, 78mm, 80a-
2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29,
80a-30, 80a-37, 7202 and 7218, unless otherwise noted.
* * * * *
0
8. Amend Form S-4 (referenced in Sec. 239.25) by revising instruction
2 to Item 17 to read as follows:
Note: The text of Form S-4 does not and this amendment will not
appear in the Code of Federal Regulations.
FORM S-4
* * * * *
Item 17. Information with Respect to Companies other than S-3
Companies.
* * * * *
Instructions:
* * * * *
2. If the financial statements required by this paragraph are
prepared on the basis of a comprehensive body of accounting
principles other than U.S. GAAP or International Financial Reporting
Standards as issued by the International Accounting Standards Board,
provide a reconciliation to U.S. GAAP in accordance with Item 17 of
Form 20-F (Sec. 249.220f of this chapter) unless a reconciliation
is unavailable or not obtainable without unreasonable cost or
expense. At a minimum, provide a narrative description of all
material variations in accounting principles, practices and methods
used in preparing the non-U.S. GAAP financial statements from those
accepted in the U.S. when the financial statements are prepared on a
basis other than U.S. GAAP.
* * * * *
0
9. Amend Form F-4 (referenced in Sec. 239.34) by:
0
a. Revising Item 10(c)(2);
0
b. Revising Item 10(c)(3);
0
c. Revising Item 12(b)(2)(iii) and (iv); and
0
d. Revising the Instruction to Item 17(b)(5) and (b)(6).
The revisions read as follows.
Note: The text of Form F-4 does not and this amendment will not
appear in the Code of Federal Regulations.
FORM F-4
* * * * *
Item 10. Information With Respect to F-3 Companies.
* * * * *
(c) * * *
(2) Restated financial statements prepared in accordance with
or, if prepared using a basis of accounting other than International
Financial Reporting Standards (``IFRS'') as issued by the
International Accounting Standards Board (``IASB''), reconciled to
U.S. GAAP and Regulation S-X if there has been a change in
accounting principles or a correction of an error where such change
or correction requires a material retroactive restatement of
financial statements;
(3) Restated financial statements prepared in accordance with
or, if prepared using a
[[Page 1010]]
basis of accounting other than IFRS as issued by the IASB,
reconciled to U.S. GAAP and Regulation S-X where one or more
business combinations accounted for by the pooling of interest
method of accounting have been consummated subsequent to the most
recent fiscal year and the acquired businesses, considered in the
aggregate, are significant pursuant to Rule 11-01(b) of Regulation
S-X (Sec. 210.11-01(b) of this chapter); or
* * * * *
Item 12. Information With Respect to F-3 Registrants.
* * * * *
(b) * * *
(2) * * *
(iii) Restated financial statements prepared in accordance with
or, if prepared using a basis of accounting other than IFRS as
issued by the IASB, reconciled to U.S. GAAP and Regulation S-X if
there has been a change in accounting principles or a correction of
an error where such change or correction requires a material
retroactive restatement of financial statements;
(iv) Restated financial statements prepared in accordance with
or, if prepared using a basis of accounting other than IFRS as
issued by the IASB, reconciled to U.S. GAAP and Regulation S-X where
one or more business combinations accounted for by the pooling of
interest method of accounting have been consummated subsequent to
the most recent fiscal year and the acquired businesses, considered
in the aggregate, are significant pursuant to Rule 11-01(b) of
Regulation S-X; and
* * * * *
Item 17. Information With Respect to Foreign Companies Other
Than F-3 Companies.
* * * * *
Instruction to paragraph (b)(5) and (b)(6): If the financial
statements required by paragraphs (b)(5) and (b)(6) are prepared on
the basis of a comprehensive body of accounting principles other
than U.S. GAAP or IFRS as issued by the IASB, provide a
reconciliation to U.S. GAAP in accordance with Item 17 of Form 20-F
(Sec. 249.220f of this chapter) unless a reconciliation is
unavailable or not obtainable without unreasonable cost or expense.
At a minimum, provide a narrative description of all material
variations in accounting principles, practices and methods used in
preparing the non-U.S. GAAP financial statements from those accepted
in the U.S. when the financial statements are prepared on a basis
other than U.S. GAAP.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
10. The authority citation for part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq., 7202, 7218, 7233, 7241, 7262,
7264, and 7265; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
11. Amend Form 20-F (referenced in Sec. 249.220f) as follows:
0
a. Add issuer contact information to the cover page below the address
line;
0
b. Add a check box to the cover page indicating the basis of accounting
used to prepare the financial statements below the accelerated filer
line;
0
c. Revise the check box on the cover page indicating whether Item 17 or
Item 18 was used below the new check box indicating the basis of
accounting;
0
d. Revise General Instruction G.(a);
0
e. Remove General Instruction G.(b)(1)(A) and G.(b)(2)(A);
0
f. Redesignate General Instructions G.(b)(1)(B) and (G).(b)(1)(C) as
General Instructions (G).(b)(1)(A) and G.(b)(1)(B) and redesignate
General Instructions (G).(b)(2)(B) and (G).(b)(2)(C) as General
Instructions (G).(b)(2)(A) and G.(b)(2)(B);
0
g. Revise General Instructions G.(d) and (e);
0
h. Revise General Instructions G.(f)(2)(B)(ii) and G.(f)(2)(B)(iii);
0
i. Revise General Instruction G.(h)(2);
0
j. Revise Instruction 2.b. to General Instruction G.(h);
0
k. Remove General Instruction G.(i);
0
l. Revise Item 3.A, Instruction 2;
0
m. Add Instruction 5 to Item 5;
0
n. Add a sentence to the end of Instruction 3 in Item 8.A.5;
0
o. Add Instruction 4 to Item 8.A.5;
0
p. Add an Instruction to Item 11 before Instruction to Item 11(a);
0
q. Revise the introductory text of Item 17(c);
0
r. Add a sentence at the end of Items 17(c)(2)(v) and (c)(2)(vi);
0
s. Remove Item 17(c)(2)(viii);
0
t. Remove Item 17, Instruction 6;
0
u. Add a Special Instruction to the end of Item 17;
0
v. Revise Item 18(b);
0
w. Revise the Instruction to Item 18; and
0
x. Add a Special Instruction to the end of Item 18.
The additions and revisions 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
* * * * *
(Name, Telephone, E-mail and/or Facsimile number and Address of
Company Contact Person)
* * * * *
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this
filing:
U.S. GAAP ------. International Financial Reporting Standards as
issued by the International Accounting Standards Board ------. Other
------.
If ``Other'' has been checked in response to the previous
question, indicate by check mark which financial statement item the
registrant has elected to follow.
Item 17 ------. Item 18 ------.
* * * * *
GENERAL INSTRUCTIONS
* * * * *
G. First-Time Application of International Financial Reporting
Standards
(a) Omission of Certain Required Financial Statements. An issuer
that changes the body of accounting principles used in preparing its
financial statements presented pursuant to Item 8.A.2 (``Item
8.A.2'') to International Financial Reporting Standards (``IFRS'')
issued by the International Accounting Standards Board (``IASB'')
may omit the earliest of three years of audited financial statements
required by Item 8.A.2 if the issuer satisfies the conditions set
forth in this Instruction G. 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.
* * * * *
(d) Information on the Company. The reference in Item 4.B to the
``body of accounting principles used in preparing the financial
statements,'' means IFRS as issued by the IASB and not the basis of
accounting that was previously used (``Previous GAAP'') or
accounting principles used only to prepare a U.S. GAAP
reconciliation.
(e) Operating and Financial Review and Prospects. The issuer
shall present the information provided pursuant to Item 5. The
discussion should focus on the financial statements for the two most
recent financial years prepared in accordance with IFRS as issued by
the IASB. No part of the discussion should relate to financial
statements prepared in accordance with Previous GAAP.
(f) Financial Information.
* * * * *
(2) * * *
(B) * * *
(ii) Two financial years of audited financial statements and
interim financial statements (which may be unaudited) for the
current and comparable prior year period, prepared in accordance
with IFRS as issued by the IASB;
(iii) Three financial years of audited financial statements
prepared in accordance with Previous GAAP; interim statements (which
may be unaudited) for the current and comparable prior year period
prepared in accordance with IFRS as issued by the IASB; and
condensed financial information prepared in accordance with U.S.
GAAP for the most recent financial year and the current and
comparable prior year interim period (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).
* * * * *
(h) Financial Statements.
* * * * *
(2) U.S. GAAP Information. The U.S. GAAP reconciliation
referenced in Item 17(c) or 18 shall not be required for periods
presented in accordance with IFRS as issued by the IASB.
Instructions:
* * * * *
2. * * *
b. Present or incorporate by reference operating and financial
review and prospects information pursuant to Item 5 that focuses
[[Page 1011]]
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 should not refer to a
reconciliation to U.S. GAAP. No part of the discussion should relate
to financial statements prepared in accordance with IFRS.
* * * * *
Item 3. Key Information
* * * * *
Instructions to Item 3.A:
* * * * *
2. You may present the selected financial data on the basis of
the accounting principles used in your primary financial statements.
If you use a basis of accounting other than IFRS as issued by the
IASB, however, you also must include in this summary any
reconciliations of the data to U.S. generally accepted accounting
principles and Regulation S-X, pursuant to Item 17 or 18 of this
Form. For financial statements prepared using a basis of accounting
other than IFRS as issued by the IASB, you only have to provide
selected financial data on a basis reconciled to U.S. generally
accepted accounting principles for (i) those periods for which you
were required to reconcile the primary annual financial statements
in a filing under the Securities Act or the Exchange Act, and (ii)
any interim periods.
* * * * *
Item 5. Operating and Financial Review and Prospects
* * * * *
Instructions to Item 5:
* * * * *
5. An issuer filing financial statements that comply with IFRS
as issued by the IASB should, in providing information in response
to paragraphs of this Item 5 that refer to pronouncements of the
FASB, provide disclosure that satisfies the objective of the Item 5
disclosure requirements. In responding to this Item 5, an issuer
need not repeat information contained in financial statements that
comply with IFRS as issued by the IASB.
* * * * *
Item 8. Financial Information
* * * * *
Instructions to Item 8.A.5:
* * * * *
3. * * *
(a) * * *
(b) * * *
A registrant filing financial information that complies with
IFRS as issued by the IASB is not required to provide the
information described in paragraphs 3(a) and (b) to this Instruction
to Item 8.A.5. if that registrant prepares its annual financial
statements in accordance with IFRS as issued by the IASB.
4. A registrant that files interim period financial statements
pursuant to Item 8.A.5 is not required to comply with Article 10 of
Regulation S-X if that registrant prepares its annual financial
statements in accordance with IFRS as issued by the IASB, prepares
its interim period financial statements in compliance with IAS 34
``Interim Financial Reporting,'' and explicitly states its
compliance with IAS 34 in the notes to the interim financial
statements.
* * * * *
Item 11. Quantitative and Qualitative Disclosures About Market
Risk.
* * * * *
Instruction to Item 11: An issuer filing financial statements
that comply with IFRS as issued by the IASB should, in providing
information in response to paragraphs of this Item 11 that refer to
pronouncements of the FASB, provide disclosure that satisfies the
objective of the Item 11 disclosure requirements. In responding to
this Item 11, an issuer need not repeat information contained in
financial statements that comply with IFRS as issued by the IASB.
* * * * *
Item 17. Financial Statements.
* * * * *
(c) The financial statements and schedules required by paragraph
(a) above may be prepared according to U.S. generally accepted
accounting principles or IFRS as issued by the IASB. If the
financial statements comply with IFRS as issued by the IASB, such
compliance must be unreservedly and explicitly stated in the notes
to the financial statements and the auditor's report must include an
opinion on whether the financial statements comply with IFRS as
issued by the IASB. If the notes and auditor's report of an issuer
do not contain the information in the preceding sentence, then the
U.S. GAAP reconciliation information described in paragraphs (c)(1)
and (c)(2) must be provided. Alternatively, such financial
statements and schedules may be prepared according to a
comprehensive body of accounting principles other than those
generally accepted in the United States or IFRS as issued by the
IASB if the following are disclosed:
* * * * *
(c)(2)(v) * * * Issuers that prepare financial statements using
IFRS as issued by the IASB that are furnished pursuant to Sec.
210.3-05 may omit the disclosures specified by paragraphs (c)(2)(i),
(c)(2)(ii), and (c)(2)(iii) of this Item regardless of the size of
the business acquired or to be acquired.
(c)(2)(vi) * * * Issuers that prepare financial statements using
IFRS as issued by the IASB that are furnished pursuant to Sec.
210.3-09 may omit the disclosures specified by paragraphs (c)(2)(i),
(c)(2)(ii), and (c)(2)(iii) of this Item regardless of the size of
the investee.
* * * * *
Special Instruction for Certain European Issuers:
An issuer incorporated in a Member State of the European Union
that has complied with the carve out to IAS 39 ``Financial
Instruments: Recognition and Measurement,'' as adopted by the
European Union, in financial statements previously filed with the
Commission, may file financial statements for its first two
financial years that end after November 15, 2007 without reconciling
to U.S. GAAP if that issuer's financial statements otherwise comply
with IFRS as issued by the IASB and the issuer provides an audited
reconciliation to IFRS as issued by the IASB. This reconciliation to
IFRS as issued by the IASB is to contain information relating to
financial statement line items and footnote disclosure based on full
compliance with IFRS as issued by the IASB, and is to be prepared
and disclosed in the same manner that an issuer would provide a
reconciliation to U.S. GAAP, following the requirements in Item
17(c)(2). All financial statements of such an issuer for periods
prior to the financial year that ends after November 15, 2007 must
continue to be reconciled to U.S. GAAP. For financial years
following the two financial years ending after November 15, 2007,
such an issuer will be required to include reconciliations to U.S.
GAAP unless the issuer complies with the requirements in Item 17(c).
Item 18. Financial Statements.
* * * * *
(b) If the financial statements are prepared using a basis of
accounting other than IFRS as issued by the IASB, all other
information required by U.S. generally accepted accounting
principles and Regulation S-X unless such requirements specifically
do not apply to the registrant as a foreign issuer. However,
information may be omitted (i) for any period in which net income
has not been presented on a basis reconciled to United States
generally accepted accounting principles, or (ii) if the financial
statements are furnished pursuant to Sec. 210.3-05 or less-than-
majority owned investee pursuant to Sec. 210.3-09 of this chapter.
Instructions to Item 18:
1. All of the instructions to Item 17 also apply to this Item,
except Instruction 3 to Item 17, which does not apply.
2. An issuer that is required to provide disclosure under FASB
Statement of Accounting Standards No. 69, ``Disclosures about Oil
and Gas Producing Activities,'' shall do so regardless of the basis
of accounting on which it prepares its financial statements.
Special Instruction for Certain European Issuers:
An issuer incorporated in a Member State of the European Union
that has complied with the carve out to IAS 39 ``Financial
Instruments: Recognition and Measurement,'' as adopted by the
European Union, in financial statements previously filed with the
Commission, may file financial statements for its first two
financial years that end after November 15, 2007 without reconciling
to U.S. GAAP if that issuer's financial statements otherwise comply
with IFRS as issued by the IASB and the issuer provides an audited
reconciliation to IFRS as issued by the IASB. This reconciliation to
IFRS as issued by the IASB is to contain information relating to
financial statement line items and footnote disclosure based on full
compliance with IFRS as issued by the IASB, and is to be prepared
and disclosed in the same manner that an issuer would provide a
reconciliation to U.S. GAAP, following the requirements in Item 18.
All financial statements of such an issuer for periods prior to the
financial year that ends after November
[[Page 1012]]
15, 2007 must continue to be reconciled to U.S. GAAP. For financial
years following the two financial years ending after November 15,
2007, such an issuer will be required to include reconciliations to
U.S. GAAP unless the issuer complies with the requirements in Item
18(a).
Dated: December 21, 2007.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E7-25250 Filed 1-3-08; 8:45 am]
BILLING CODE 8011-01-P