[Federal Register Volume 75, Number 40 (Tuesday, March 2, 2010)]
[Notices]
[Pages 9494-9513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4171]



[[Page 9493]]

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Part II





Securities and Exchange Commission





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Commission Statement in Support of Convergence and Global Accounting 
Standards; Notice

  Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / 
Notices  

[[Page 9494]]



SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 33-9109; 34-61578]


Commission Statement in Support of Convergence and Global 
Accounting Standards

AGENCY: Securities and Exchange Commission.

ACTION: Commission statement.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is 
publishing this statement to provide an update regarding its 
consideration of global accounting standards, including its continued 
support for the convergence of U.S. Generally Accepted Accounting 
Principles (``U.S. GAAP'') and International Financial Reporting 
Standards (``IFRS'') and the implications of convergence with respect 
to the Commission's ongoing consideration of incorporating IFRS into 
the financial reporting system for U.S. issuers.

FOR FURTHER INFORMATION CONTACT: Eloise Quarles Bavaria, Special 
Counsel, Office of International Corporate Finance, Division of 
Corporation Finance, at (202) 551-3450, Jeffrey S. Cohan, Senior 
Special Counsel, Office of the Chief Accountant, at (202) 551-5300, or 
Nili Shah, Associate Chief Accountant, Office of the Chief Accountant, 
at (202) 551-5300, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:
    The Commission continues to believe that a single set of high-
quality globally accepted accounting standards will benefit U.S. 
investors and that this goal is consistent with our mission of 
protecting investors, maintaining fair, orderly, and efficient markets, 
and facilitating capital formation. As a step toward this goal, we 
continue to encourage the convergence of U.S. GAAP and IFRS and expect 
that the differences will become fewer and narrower, over time, as a 
result of the convergence project.
    The Commission last addressed this topic in November 2008 when it 
issued a proposed ``Roadmap'' for a possible path to a single set of 
globally accepted accounting standards.\1\ The Proposed Roadmap 
generated significant interest and thoughtful comment from investors, 
issuers, accounting firms, regulators, and others regarding factors 
that the Commission should consider as it moves forward in its 
evaluation of whether and how to incorporate IFRS into the financial 
reporting system for U.S. issuers. In addition to reaffirming the 
Commission's strong commitment to a single set of global standards, the 
recognition that IFRS is best-positioned to be able to serve the role 
as that set of standards for the U.S. market, and the convergence 
process ongoing between the Financial Accounting Standards Board 
(``FASB'') and the International Accounting Standards Board (``IASB''), 
this statement outlines certain of these factors that are of particular 
importance to the Commission as it continues to evaluate IFRS through 
2011.
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    \1\ See Roadmap for the Potential Use of Financial Statements 
Prepared in Accordance with International Financial Reporting 
Standards by U.S. Issuers, Release No. 33-8982 (November 14, 2008) 
[73 FR 70816 (November 21, 2008)] (``Proposed Roadmap'').
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    The Commission has directed its staff to develop and execute a work 
plan (the ``Work Plan'') to enhance both understanding of the 
Commission's purpose and public transparency in this area.\2\ Execution 
of the Work Plan, combined with the completion of the convergence 
projects of the FASB and the IASB according to their current work plan, 
will position the Commission in 2011 to make a determination regarding 
incorporating IFRS into the financial reporting system for U.S. 
issuers.
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    \2\ The Work Plan is included as an appendix to this statement. 
A summary of the key areas of the Work Plan is provided in section 
IV of this statement.
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I. Overview

A. History of the Commission's Steps To Foster a Single Set of High-
Quality Globally Accepted Accounting Standards

    The Commission has long promoted a single set of high-quality 
globally accepted accounting standards.\3\ This position advances the 
dual goals of improving financial reporting within the United States 
and reducing country-by-country disparity in financial reporting. This, 
in turn, would facilitate cross-border capital formation while also 
helping to provide investors with the comparable and material 
information they need to make informed decisions about investment 
opportunities. In 1988, the Commission issued a policy statement 
supporting the establishment of mutually acceptable international 
accounting standards, provided that investor protections were not 
compromised.\4\ The Commission cited the establishment of such 
standards as a critical goal to reduce regulatory impediments to cross-
border capital transactions that result from disparate national 
accounting standards.\5\
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    \3\ See, e.g., Integrated Disclosure System for Foreign Private 
Issuers, Release No. 33-6360 (November 20, 1981) [46 FR 58511 
(December 2, 1981)].
    \4\ See Regulation of the International Securities Markets, 
Release No. 33-6807 (November 14, 1988) [53 FR 46963 (November 21, 
1988)].
    \5\ Id.
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    In a 1997 report to Congress, the Commission encouraged the efforts 
of the International Accounting Standards Committee to develop a core 
set of accounting standards that could serve as a framework for 
financial reporting in cross-border offerings. In that report, the 
Commission also expressed its intent to remain active in the 
development of those standards.\6\ These standards are now known as 
IFRS, and the International Accounting Standards Committee was 
succeeded by the IASB.
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    \6\ See ``Pursuant to Section 509(5) of the National Securities 
Markets Improvement Act of 1996 Report on Promoting Global 
Preeminence of American Securities Markets'' (October 1997).
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    In 2000, the Commission issued a concept release on international 
accounting standards, seeking comment on the requisite elements to 
encourage convergence toward a global financial reporting framework 
that would not diminish the quality of domestic financial reporting.\7\ 
The 2000 Concept Release discussed generally the circumstances under 
which the Commission would consider accepting financial statements from 
foreign private issuers \8\ that are prepared using IFRS without a 
reconciliation to U.S. GAAP.\9\
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    \7\ See International Accounting Standards, No. 33-7801 
(February 16, 2000) [65 FR 8896 (February 23, 2000)] (``2000 Concept 
Release'').
    \8\ 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.
    \9\ In 2007, the Commission adopted rules permitting foreign 
private issuers to file financial statements using IFRS as issued by 
the IASB and to omit a reconciliation to U.S. GAAP. 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. 33-8879 (December 21, 2007) 
[73 FR 986 (January 4, 2008)] (``2007 Adopting Release'').
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    In the 2000 Concept Release, the Commission set out some 
fundamental attributes for a high-quality set of accounting standards 
that continue to be important today. These attributes require that the 
standards (a) be of sufficiently high quality to support the 
Commission's mission of protecting investors and facilitating capital 
formation, and (b) be supported by an

[[Page 9495]]

infrastructure that ensures that the standards are established by 
independent standard setters, and are rigorously and consistently 
interpreted and applied.
    After enactment of the Sarbanes-Oxley Act of 2002 (the ``Act''), 
the Commission reaffirmed its recognition of the financial accounting 
and reporting standards of the FASB as ``generally accepted'' for 
purposes of the federal securities laws.\10\ One of the criteria that 
Congress required the Commission to consider, when recognizing an 
accounting standard setter, was whether that standard setter considers 
``international convergence on high-quality accounting standards as 
necessary or appropriate in the public interest and for the protection 
of investors.'' \11\
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    \10\ See Policy Statement: Reaffirming the Status of the FASB as 
a Designated Private-Sector Standard Setter, Release No. 33-8221 
(April 25, 2003) [68 FR 23333 (May 1, 2003)] (``2003 Policy 
Statement'').
    \11\ See Section 19 of the Securities Act of 1933, as amended 
(15 U.S.C. 77a).
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    Also as required by Congress in the Act, in 2003, our staff issued 
a study on the adoption in the United States of a principles-based 
accounting system.\12\ That study stated that global accounting 
standardization through convergence would lead to the following 
benefits:
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    \12\ See ``Study Pursuant to Section 108(d) of the Sarbanes-
Oxley Act of 2002 on the Adoption by the United States Financial 
Reporting System of a Principles-Based Accounting System'' (July 25, 
2003) (``2003 Study'').
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     Greater comparability for investors across firms and 
industries on a global basis;
     reduced listing costs for companies with multiple 
listings;
     increased competition among exchanges;
     better global resource allocation and capital formation;
     lowered cost of capital; and
     a higher global economic growth rate.\13\
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    \13\ Id.
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    Beginning in 2002, the FASB and the IASB began a formal process to 
converge U.S. GAAP and IFRS. In 2002, the FASB and the IASB announced 
the issuance of a memorandum of understanding to collaborate on the 
development of common, high-quality standards with the ultimate goal of 
a single set of high-quality global accounting standards.\14\ In 2006, 
the FASB and the IASB issued an updated memorandum of understanding 
that set forth the scope of their joint work program to improve and 
promote convergence of their accounting standards.\15\ The 2006 
memorandum of understanding was updated in September 2008 to identify 
targets for completion of convergence projects that the FASB and the 
IASB believed were most critical.\16\ Throughout this process the 
Commission has monitored, and will continue to monitor, the activities 
of the FASB and the IASB and the progress in their efforts.
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    \14\ See ``Memorandum of Understanding, `The Norwalk 
Agreement,''' (September 18, 2002). (available at: http://www.fasb.org/news/memorandum.pdf)
    \15\ See ``Memorandum of Understanding between the FASB and the 
IASB'' (February 27, 2006). (available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156245558)
    \16\ See ``Completing the February 2006 Memorandum of 
Understanding: A progress report and timetable for completion'' 
(September 2008). (available at: http://www.fasb.org/intl/MOU_09-11-08.pdf)
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    In 2007, the Commission took two additional actions. First, it 
issued a concept release on whether U.S. issuers should be allowed to 
prepare financial statements in accordance with IFRS.\17\ Second, the 
Commission adopted rules that allow foreign private issuers to make 
filings with the Commission using financial statements prepared in 
accordance with IFRS, as issued by the IASB, and without reconciliation 
to U.S. GAAP.\18\
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    \17\ See Allowing U.S. Issuers to Prepare Financial Statements 
in Accordance with International Financial Reporting Standards, 
Release No. 33-8831 (August 7, 2007) [72 FR 45600 (August 14, 2007)] 
(``2007 Concept Release'').
    \18\ See 2007 Adopting Release.
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    Recently, the leaders of the Group of Twenty nations (``G-20'') 
requested that international accounting bodies redouble their efforts 
to achieve a single set of high-quality, global accounting standards 
through their independent standard-setting processes and complete their 
convergence project in June 2011.\19\ The FASB and IASB recently 
reaffirmed their commitment to improving and converging their 
respective accounting standards, and further committed to intensify 
their efforts to meet a 2011 timeline.\20\ Chairman Mary L. Schapiro 
also recently noted the Commission's commitment ``to the goal of a 
global set of high-quality accounting standards.'' \21\
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    \19\ See ``Leaders' Statement from the Pittsburgh Summit'' 
(September 24-25, 2009). (available at: https://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf)
    \20\ See ``FASB and IASB Reaffirm Commitment to Memorandum of 
Understanding: A Joint Statement of the FASB and IASB'' (November 5, 
2009). (available at: http://www.iasb.org/NR/rdonlyres/D56F53A2-1FFE-425B-824B-9092E8A2D545/0/JointCommunique_October2009FINAL4.pdf)
    \21\ See Speech by SEC Chairman Mary L. Schapiro: Remarks at 
IOSCO Technical Committee Conference (October 8, 2009).
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B. The Proposed Roadmap

    In November 2008, the Commission proposed a path to evaluating the 
further role of IFRS in the U.S. capital markets.\22\ The Proposed 
Roadmap sought comment on a number of suggested ``milestones'' that the 
Commission might consider.
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    \22\ See Proposed Roadmap. Unless otherwise noted, the phrase 
``IFRS'' refers to ``IFRS as issued by the IASB.''
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    The Proposed Roadmap contemplated that, subject to an assessment of 
the milestones and other considerations, and after consideration of 
public comment, the Commission could be in a position in 2011 to decide 
whether to require the use of IFRS by U.S. issuers beginning in 2014, 
potentially allowing earlier use by certain U.S. issuers beginning with 
filings for fiscal years ending on or after December 15, 2009.\23\
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    \23\ The Proposed Roadmap did not address the method the 
Commission might use to mandate IFRS for U.S. issuers. See Id.
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II. Public Feedback on the Commission's Proposed Roadmap

    We received over 200 comment letters on the Proposed Roadmap from a 
wide variety of market participants, including those representing 
investors, regulators, issuers, accounting, legal, and other 
professions, academia, standard setters, and international 
organizations.\24\ Commenters generally expressed widespread support 
for the ultimate goal of having a single set of high-quality globally 
accepted accounting standards.\25\ However, commenters differed in 
their views about the approach in the Proposed Roadmap to achieve 
further use of IFRS in the U.S. capital markets. Several commenters 
asserted that there are many transition questions and issues arising 
from the proposed approach that the Commission should consider 
further.\26\
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    \24\ Comment letters in response to the Proposed Roadmap are 
available on the Commission's Web site (at http://www.sec.gov/comments/s7-27-08/s72708.shtml). Comments are also available for Web 
site viewing and printing in the Commission's Public Reference Room, 
100 F Street, NE., Washington, DC 20549, on official business days 
between the hours of 10 a.m. and 3 p.m.
    \25\ See, e.g., Abbott Inc. (``Abbott''), Air Products and 
Chemicals, Inc., California Public Employees' Retirement System 
(``CalPERS''), CFA Institute (``CFA''), Council of Institutional 
Investors (``CII''), International Corporate Governance Network 
(``ICGN''), Institute of International Finance, Investors Technical 
Advisory Committee (``ITAC''), RiskMetrics Group, Inc. 
(``RiskMetrics''), and Standard & Poor's Ratings Services (``S&P'').
    \26\ See, e.g., AT&T Services, Inc., The Boeing Company 
(``Boeing''), and Chevron Corporation.
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A. Potential for High-Quality Globally Accepted Accounting Standards

    There was widespread support across all commenters for a single set 
of high-

[[Page 9496]]

quality globally accepted accounting standards.\27\ While commenters 
offered differing perspectives, some commenters identified the 
following potential benefits from a single set of global accounting 
standards:
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    \27\ See, e.g., Accretive Solutions, Alcoa Inc. (``Alcoa''), 
CalPERS, Center for Audit Quality, Cleary Gottlieb Steen & Hamilton 
LLP, General Mills, Inc., Institute of Management Accountants, State 
of New York Banking Department, PricewaterhouseCoopers LLP 
(``PwC''), and RiskMetrics,
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     Improved financial statement comparability among companies 
worldwide;
     streamlined accounting processes for multinational 
companies; and
     easier access to foreign capital and improved liquidity, 
leading to a reduced cost of capital.\28\
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    \28\ See, e.g., Liberty Global and Graybar Electric Company, 
Inc. (``Graybar'') comment letters for lists of potential benefits 
from the use of a single set of global standards.
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    The potential benefits identified by commenters generally are 
consistent with the perceived benefits discussed in the staff's 2003 
Study. Improved comparability was the most frequently cited potential 
benefit from the use of a single set of global accounting 
standards.\29\ However, some commenters, while expressing support for 
the concept of a single set of global accounting standards, expressed 
reservations regarding whether the adoption of global accounting 
standards is a feasible objective.\30\ Some of these concerns are 
discussed below.
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    \29\ See, e.g., American Institute of Certified Public 
Accountants (``AICPA''), Federation of European Accountants 
(``FEE''), and Institute of Chartered Accountants of Scotland.
    \30\ See, e.g., Liberty Global, The Lubrizol Corporation 
(``Lubrizol''), National Association of State Boards of Accountancy 
(``NASBA''), and Reznick Group, P.C.
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B. The Proposed Roadmap

    Opinions regarding the approach outlined in the Proposed Roadmap 
diverged. The key areas of concern expressed by the commenters include 
the readiness of IFRS to serve as the set of accounting standards for 
U.S. issuers, the need for continued convergence of IFRS and U.S. GAAP, 
and the timeframe set for, and potential costs of, transitioning U.S. 
GAAP to IFRS.\31\
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    \31\ See, e.g., Boeing, FPL Group, Inc., and Kohl's Corporation.
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    Opinions regarding the potential of IFRS, in its current state, to 
serve as the single set of global accounting standards varied broadly 
across and within categories of commenters. While larger, multinational 
firms and commenters from the accounting profession generally saw IFRS 
as best positioned for the role of the single set of global accounting 
standards,\32\ a number of other commenters expressed concerns 
regarding the capability of these standards, in their current state, to 
serve that role.\33\
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    \32\ See, e.g., AICPA, Alcoa, Association of Chartered Certified 
Accountants, California Society of Certified Public Accountants, 
Center for Audit Quality, IBM Corporation, and The Ohio Society of 
CPAs.
    \33\ See, e.g., Aerospace Industries Association and Committee 
of Annuity Insurers (``CAI'').
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    Many investors and investor groups that addressed this issue 
expressed the view that it was too early to judge the potential of IFRS 
to serve as the single set of global accounting standards.\34\ 
Commenters who expressed this view noted that:
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    \34\ See, e.g., CalPERS, CII, ICGN, ITAC, and S&P.
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     IFRS is not sufficiently developed or applied in practice 
to be adopted as a single set of global standards (e.g., either IFRS 
lacks guidance in certain significant areas, or the guidance it does 
contain appears to or may allow too much latitude to achieve more 
comparable financial reporting than U.S. GAAP);
     jurisdictional variants in the application of IFRS pose a 
significant challenge to the adoption of IFRS as a truly global 
reporting model; and
     the achievement of a genuine common global financial 
reporting model would require consistent application, auditing, and 
enforcement across countries.\35\
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    \35\ See, e.g., American Insurance Association, CAI, Center for 
Capital Markets Competitiveness, Dominion Resources Services, Hot 
Topic Inc., McDonald's Corporation (``McDonald's''), and National 
Association of Real Estate Investment Trusts.
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    In addition, some commenters expressed concern that a ``business 
case'' has not been sufficiently demonstrated to support moving from 
existing U.S. GAAP directly to IFRS. These commenters contend that 
existing U.S. GAAP is already widely accepted worldwide and is seen as 
high-quality, and that not all U.S. companies compete for capital 
globally or issue securities outside the U.S. market, so the primary 
effect of the Proposed Roadmap would be increased costs in return for 
minimal and largely conceptual benefits.\36\ Others noted that 
significant challenges likely would arise in having an international 
organization as the ultimate body that would set standards for U.S. 
issuers.\37\ Commenters in this area questioned whether this would be a 
wise policy, given the Commission's long-standing statutory role of 
setting and overseeing financial reporting standards for the United 
States.\38\
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    \36\ See, e.g., Darden Restaurant, Inc. (``Darden''), 
McDonald's, and PPL Corporation (``PPL'').
    \37\ See, e.g., CMS Energy Corporation and Consumers Energy 
Company, Darden, Lubrizol, and McDonald's.
    \38\ See, e.g., Darden, Intel Corporation (``Intel''), and 
MetLife, Inc.
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    In contrast to the varying perspectives on the potential use of 
IFRS to serve as the common set of global accounting standards, 
commenters were more consistent with respect to their concerns on the 
approach and schedule outlined in the Proposed Roadmap. Many 
commenters, particularly investors, believed that the Commission should 
articulate how it intended to mandate the use of IFRS in the United 
States before they would be willing to support such a move.\39\ Also, 
many commenters believed the proposal either underestimated or did not 
adequately address the many critical issues and costs (both 
quantitative and qualitative) that would be involved in meeting the 
transition timing suggested in the Proposed Roadmap. For example, while 
many commenters believed the proposal identified in concept many of the 
factors to be considered in choosing a particular path forward for the 
U.S. capital markets, they also believed that it did not sufficiently 
articulate a plan for identifying and addressing the specific issues 
and the criteria against which they would be judged.\40\ As a result, 
several commenters recommended that the Commission further develop a 
plan to determine the appropriate path forward, including the 
affirmative actions and specific steps that need to be taken.\41\
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    \39\ See, e.g., CalPERS and S&P.
    \40\ See, e.g., CFA, CII, JPMorgan Chase, and The New York State 
Society of Certified Public Accountants.
    \41\ See, e.g., CalPERS, ICGN, Intel, ITAC, Northrop Grumman 
Corporation (``Northrop Grumman''), and S&P.
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III. Approach Forward for the U.S. Capital Markets

    We continue to support the objective of financial reporting in the 
global markets pursuant to a single set of high-quality globally 
accepted accounting standards. As evidenced by the recent economic 
crisis, the activities and interests of investors, companies, and 
markets are increasingly global. This continued globalization of our 
markets reinforces the idea that the pursuit of this goal is consistent 
with our mission of protecting investors, maintaining fair, orderly, 
and efficient markets, and facilitating capital formation.
    Since the second half of 2007, the world economy has experienced 
economic conditions not seen since the Great Depression. What at one 
time was viewed by some as an isolated crisis in the subprime mortgage 
sector spread to

[[Page 9497]]

the global economy as a whole. The current environment has highlighted 
certain of the existing differences in the accounting standards used in 
the major capital markets. Some believe that these differences in 
accounting standards contributed to difficulty in the ability of 
investors and other stakeholders to assess the financial results of 
companies operating and competing in the global markets in determining 
how to allocate capital.\42\ As part of the G-20's efforts to address 
the economic crisis, it specifically requested that accounting bodies 
redouble their efforts to achieve a single set of high-quality, global 
accounting standards through their independent standard-setting 
processes and complete their convergence project by 2011.\43\
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    \42\ See ``Report of the Financial Crisis Advisory Group'' (July 
28, 2009). (available at: http://www.iasb.org/NR/rdonlyres/2D2862CC-BEFC-4A1E-8DDC-F159B78C2AA6/0/FCAGReportJuly2009.pdf)
    \43\ See ``Leaders' Statement from the Pittsburgh Summit'' 
(September 24-25, 2009). (available at: http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf)
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    The Commission's statutory mandate with respect to determining the 
accounting standards to be used in the United States requires it to 
promote full, fair, and reliable disclosure for the protection of U.S. 
investors.\44\ The U.S. capital markets are among the largest and most 
liquid in the world. We believe that the acceptance, comprehensiveness, 
reliability, and enforceability of U.S. GAAP are important reasons for 
the pre-eminence of our capital markets. U.S. GAAP is a well-
established basis for financial reporting that is applied by all U.S. 
issuers, many foreign companies and many U.S. private companies. 
Preparers and users of financial statements, such as investors and 
analysts, are familiar with U.S. GAAP. Thus, we acknowledge the 
magnitude of the task that would be involved to incorporate IFRS into 
our financial reporting environment for U.S. issuers. It is therefore 
important that, before we mandate any such change, careful 
consideration and deliberation, as well as a sufficient transition time 
for users and preparers of financial statements, occur to assure that 
such a change is in the best interest of U.S. investors and markets.
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    \44\ See 2003 Policy Statement.
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    We have considered carefully the input contained in the comment 
letters we received. We believe that a more comprehensive work plan is 
necessary to lay out transparently the work that must be done to 
support our decision on the appropriate course to incorporate IFRS into 
the U.S. financial reporting system for U.S. issuers, including the 
scope, timeframe, and methodology for any such transition. Toward this 
end, we have directed the staff of the Office of the Chief Accountant, 
with appropriate consultation with other Divisions and Offices of the 
Commission, to develop and carry out the Work Plan. The Work Plan 
accompanies this statement as an appendix.
    The Work Plan sets forth specific areas and factors for the staff 
to consider before potentially transitioning our current financial 
reporting system for U.S. issuers to a system incorporating IFRS. 
Specifically, the Work Plan addresses areas of concern that were 
highlighted by commenters, including:
     Sufficient development and application of IFRS for the 
U.S. domestic reporting system;
     The independence of standard setting for the benefit of 
investors;
     Investor understanding and education regarding IFRS;
     Examination of the U.S. regulatory environment that would 
be affected by a change in accounting standards;
     The impact on issuers, both large and small, including 
changes to accounting systems, changes to contractual arrangements, 
corporate governance considerations, and litigation contingencies; and
     Human capital readiness.
    The staff will provide public progress reports on the Work Plan 
beginning no later than October 2010 and frequently thereafter until 
the work is complete. The Work Plan is designed to provide the 
Commission the information it needs to evaluate the implications of 
incorporating IFRS into the U.S. domestic reporting system. Following 
successful completion of the Work Plan and the FASB-IASB convergence 
projects according to their current work plan, the Commission will be 
in a position in 2011 to determine whether to incorporate IFRS into the 
U.S. domestic reporting system.
    Commenters on the Proposed Roadmap expressed a view that U.S. 
issuers would need approximately four to five years to successfully 
implement a change in their financial reporting systems to incorporate 
IFRS.\45\ Therefore, assuming that the Commission determines in 2011 to 
incorporate IFRS into the U.S. domestic reporting system, we believe 
that the first time U.S. issuers would report under such a system would 
be approximately 2015 or 2016. We have asked the staff as part of the 
Work Plan to further evaluate this timeline.
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    \45\ See, e.g., Boeing, Northrop Grumman, PepsiCo, Inc., and tw 
telecom inc.
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IV. Summary of the Key Areas of the Work Plan

    The Commission staff will analyze each of the six areas identified 
in its Work Plan, as discussed further below. The first two areas 
consider characteristics of IFRS and its standard setting that would be 
the most relevant to a future determination by the Commission regarding 
whether to incorporate IFRS into the financial reporting system for 
U.S. issuers. The remaining four areas relate to transitional 
considerations that will enable the Staff to better evaluate the scope 
of, timing of, and approach to changes that would be necessary to 
effectively incorporate IFRS into the financial reporting system for 
U.S. issuers, should the Commission determine in the future to do so.
    While an ultimate determination of any specific methods (e.g., 
convergence, standard-by-standard adoption, wholesale adoption) or 
dates for the possible incorporation of IFRS into the financial 
reporting system for U.S. issuers is beyond the scope of the Work Plan, 
the information obtained through the Work Plan will facilitate future 
Commission consideration of those matters. The Work Plan provides 
additional detail about the analysis that the staff will perform in 
each of these six areas.

A. Sufficient Development and Application of IFRS for the U.S. Domestic 
Reporting System

    As described in the 2000 Concept Release, the Commission's efforts 
to support a globally accepted high-quality financial reporting 
framework have been guided by its mission of protecting investors, 
maintaining fair, orderly, and efficient capital markets, and 
facilitating capital formation.\46\ A necessary element for a set of 
global accounting standards to meet these objectives is that they must 
be high quality, consisting of a ``comprehensive set of neutral 
principles that require consistent, comparable, relevant and reliable 
information that is useful for investors, lenders and creditors, and 
others who make capital allocation decisions.'' \47\ The Commission 
continues to believe that high-quality global accounting standards 
``must be supported by an infrastructure that ensures that the 
standards are rigorously

[[Page 9498]]

interpreted and applied'' \48\ both within and outside the United 
States.
---------------------------------------------------------------------------

    \46\ See 2000 Concept Release.
    \47\ See 2000 Concept Release, at II.A.
    \48\ Id. See also 2007 Concept Release.
---------------------------------------------------------------------------

    The increasing acceptance and use of IFRS in major capital markets 
throughout the world over the past several years, and its anticipated 
use in other countries in the near future, demonstrate that IFRS has 
the greatest potential to provide a common platform for capital markets 
regulators. The IASB has made significant progress in developing high-
quality accounting standards, as noted in the 2007 Adopting 
Release.\49\ However, as the Commission noted in the Proposed Roadmap, 
there are areas where completion of the IASB's standard-setting 
initiatives, including those included in its convergence agenda with 
the FASB, should improve and further develop IFRS.\50\ The successful 
completion of these efforts would be a significant accomplishment 
toward improving financial reporting for investors worldwide. In 
addition, the Commission in the Proposed Roadmap stated that, in 
further considering IFRS, it would ``consider whether those accounting 
standards are of high quality and sufficiently comprehensive.'' \51\ As 
part of the staff's efforts under the Work Plan, the staff will 
evaluate the IASB's efforts to improve IFRS, including through those 
joint IASB-FASB projects scheduled to be completed in 2011.
---------------------------------------------------------------------------

    \49\ See 2007 Adopting Release.
    \50\ See Proposed Roadmap.
    \51\ Id.
---------------------------------------------------------------------------

1. Comprehensiveness
    In the Proposed Roadmap, the Commission stated that ``IFRS is not 
as developed as U.S. GAAP in certain areas.'' \52\ For example, IFRS 
does not provide broad guidance for certain topical areas, such as 
accounting for certain common control transactions, recapitalization 
transactions, reorganizations, and acquisitions of minority shares not 
resulting in a change of control and similar transactions.\53\ IFRS 
also lacks guidance for certain broad industries, including those the 
IASB is currently developing related to utilities, insurance, 
extractive activities, and investment companies.\54\ As part of the 
Work Plan, the staff will assess the overall level of comprehensiveness 
of IFRS.
---------------------------------------------------------------------------

    \52\ Id.
    \53\ Id.
    \54\ Id.
---------------------------------------------------------------------------

2. Auditability and Enforceability
    The Proposed Roadmap noted the challenges that can exist with 
IFRS's less prescriptive guidance. Commenters on the Proposed Roadmap 
raised several concerns regarding the auditability and enforceability 
of IFRS, including the risk of opportunistic accounting; diminished 
comparability; and the potential for accounting conclusions of 
preparers to be unfairly criticized by auditors, regulators, and 
investors.
    The auditability and enforceability of a set of accounting 
standards are essential aspects of investor protection. Under the Work 
Plan, the staff will analyze factors that may influence the 
auditability and enforceability of financial statements prepared under 
IFRS.
3. Consistent and High-Quality Application
    The Commission has based its continued strong support for a single 
set of high-quality globally accepted accounting standards, including 
the consideration of incorporating IFRS into its financial reporting 
system, on the premise that U.S. investors ultimately will benefit from 
the comparability of financial information from issuers on a worldwide 
basis. Consistent and high-quality implementation is necessary for 
investors to benefit from a set of high-quality global accounting 
standards.\55\ To assess the consistent and faithful application of 
IFRS, the staff will analyze the factors that may influence the degree 
of comparability of financial statements prepared under IFRS on a 
global basis and their consequences in practice. The staff also will 
assess the relative effect on comparability of financial reporting in 
the United States, if IFRS were incorporated into the financial 
reporting system for U.S. issuers.
---------------------------------------------------------------------------

    \55\ See, e.g., comment letters from Maverick Capital, CII, and 
CFA on the proposing release: 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)].
---------------------------------------------------------------------------

B. The Independence of Standard Setting for the Benefit of Investors

    Another important element for a set of high-quality global 
accounting standards is whether the accounting standard setter's 
funding and governance structure support the independent development of 
accounting standards for the ultimate benefit of investors. This is an 
area of significant concern to the investors and investor groups that 
commented on the Proposed Roadmap.\56\ The Work Plan includes an 
ongoing review of the functioning of the IASB's governance structure 
and developments to secure a stable, broad-based source of funding.\57\ 
This review will help the staff assess whether these factors promote 
standard setting that is accountable, independent, and free from undue 
influence that could affect the ability of U.S. investors to receive 
full, fair, and reliable disclosure. Full, fair, and reliable 
disclosure is essential to facilitate the meaningful comparison of 
financial information across national borders.
---------------------------------------------------------------------------

    \56\ See, e.g., comment letters from CalPERS and CFA.
    \57\ The IASB, an accounting standard-setting body based in 
London, was established to develop global standards for financial 
reporting. The IASB is overseen by the IFRS Foundation (formerly 
called the ``IASC Foundation''; this organization has been renamed 
as a result of recent amendments to its Constitution, effective 
March 1, 2010). The IFRS Foundation is responsible for the 
activities of the IASB. While national accounting standard setters 
traditionally have been accountable to a national securities 
regulator or other government authority, until 2009, the IFRS 
Foundation did not have a formal link with any national securities 
regulators. Recognizing that a relationship with national securities 
regulators would enhance the public accountability of the IFRS 
Foundation, its trustees agreed on amendments to its Constitution to 
establish a link between the IFRS Foundation and a Monitoring Board 
composed of public capital markets authorities, including the 
Commission, charged with the adoption or recognition of accounting 
standards used in their respective jurisdictions. For further 
information on the governance structure and operation of the IASB, 
see http://www.iasb.org.
---------------------------------------------------------------------------

C. Investor Understanding and Education Regarding IFRS

    The Commission's Proposed Roadmap reflects its belief that U.S. 
investors would benefit from the use of a single set of high-quality 
accounting standards that are used consistently in the global capital 
markets. In the Proposed Roadmap, the Commission stated that a single 
set of global accounting standards could enhance the ability of 
investors to compare financial information of U.S. companies with that 
of non-U.S. companies. Improved comparability was the most commonly 
cited reason commenters believed that U.S. capital markets would 
benefit from the use of a single set of global accounting 
standards.\58\ Because the benefits of adopting a single set of high-
quality globally accepted accounting standards would be realized only 
if investors understood and had confidence in the financial reporting 
system, the Commission believes that in order to assess incorporation 
of IFRS into the U.S. financial reporting system, further work is 
necessary to assess investor understanding and education regarding 
IFRS. The staff's performance of the steps in the Work Plan should 
provide the staff with insight into investors' understanding of IFRS 
and actions that

[[Page 9499]]

need to be taken to increase investors' understanding.
---------------------------------------------------------------------------

    \58\ See, e.g., AICPA, FEE, PPL, and TransCanada Corporation.
---------------------------------------------------------------------------

D. Examination of the U.S. Regulatory Environment That Would Be 
Affected by a Change in Accounting Standards

    The Commission acknowledges that the incorporation of IFRS into the 
financial reporting system for U.S. issuers could have far-reaching 
effects on financial reporting by U.S. issuers for other purposes. In 
addition to filing financial statements with the Commission, U.S. 
issuers commonly provide financial information to a wide variety of 
other parties for different purposes. While the federal securities laws 
provide the Commission with the authority to prescribe accounting 
principles and standards to be followed by public companies and other 
entities that provide financial information to the Commission and 
investors, the Commission does not directly prescribe the provision and 
content of information that U.S. issuers provide to parties other than 
it and investors.\59\ However, changes to the Commission's accounting 
standards could affect issuers and the information they provide to 
regulatory authorities and others that rely on U.S. GAAP as a basis for 
their reporting regimes.\60\ In accordance with the Work Plan, the 
staff will study and consider other regulatory effects of mandating 
IFRS for U.S. issuers.
---------------------------------------------------------------------------

    \59\ Id.
    \60\ Id. For example, U.S. issuers often provide U.S. GAAP-based 
financial information to various federal and state regulators, 
including regulators of financial institutions, insurance companies 
and public utilities. Another example of the effect on reporting to 
others relates to federal and state income taxes. Existing U.S. GAAP 
is the predominant set of accounting standards used in the United 
States, and the Internal Revenue Code has developed over time in 
reliance on such accounting standards.
---------------------------------------------------------------------------

E. The Impact on Issuers, Both Large and Small, Including Changes to 
Accounting Systems, Changes to Contractual Arrangements, Corporate 
Governance Considerations, and Litigation Contingencies

    In considering incorporation of IFRS into the U.S. financial 
reporting system, the Commission must assess the significant effects 
that such changes would have on the preparers of financial statements--
the thousands of companies that file financial statements with the 
Commission under the federal securities laws. In addition to the 
significant effects that a transition would have on investors, the 
issuers of financial statements would incur costs, effort, and time as 
a result of a transition. Smaller companies and those without 
international operations will bear those costs and efforts differently 
than larger companies and those that compete globally. As part of the 
Work Plan, the staff will consider the impact of the logistical changes 
involved in incorporating IFRS into the U.S. financial reporting 
system. The extent of that impact may be decreased by ongoing 
convergence efforts between the IASB and the FASB.

F. Human Capital Readiness

    As contemplated by the Proposed Roadmap, incorporation of IFRS 
would require consideration of the readiness of all parties involved in 
the financial reporting process, including investors, preparers, 
auditors, regulators, and educators. As a result, any change involving 
the incorporation of IFRS into the financial reporting system for U.S. 
issuers would require greater familiarity of IFRS for investors, 
preparers, auditors, regulators, academics, and many others. Under the 
Work Plan, the staff will review the effect of the incorporation of 
IFRS on the education and training of professionals involved in the 
financial reporting process as well as any impact on auditor capacity.

V. Potential Transition Matters

    Many commenters on the Proposed Roadmap expressed concern about 
having appropriate transition time to plan for and implement any 
changes that would be needed in connection with a further move toward 
incorporation of IFRS in domestic financial reporting.\61\ Commenters 
also indicated that the Proposed Roadmap had created a significant 
amount of uncertainty for market participants about how any proposed 
changes would affect them and whether they should begin immediately to 
allocate resources to prepare for use of IFRS.\62\
---------------------------------------------------------------------------

    \61\ See, e.g., AICPA, Cymer, Inc., and Graybar.
    \62\ See, e.g., Best Buy Co., Inc., Cisco Systems, Inc., and 
Fannie Mae.
---------------------------------------------------------------------------

    We acknowledge that the changes to our current financial reporting 
system that would be necessary to transition to a single set of global 
accounting standards, including the incorporation of IFRS for U.S. 
issuers, could represent a fundamental change that would require 
significant transition time and effort for issuers, investors, and 
others. Several steps in the Work Plan, including progress toward 
completion of convergence, focus on providing the Commission with 
additional information about the magnitude of these changes and the 
logistics necessary for implementing them. This information will enable 
the Commission to consider the plans that would need to be implemented 
in a move to incorporate IFRS into the financial reporting system for 
U.S. issuers, including providing sufficient time to efficiently and 
effectively implement any changes in accounting standards.
    The Proposed Roadmap proposed to allow certain large U.S. issuers 
the option of preparing their financial statements using IFRS beginning 
with filings for fiscal years ending on or after December 15, 2009. A 
significant group of commenters disagreed with an early use option, 
generally because of the increased complexity, lack of comparability 
between U.S. issuers under a dual system, and the possibility of 
companies opportunistically selecting which system of accounting 
standards to apply.\63\ Alternative strategies proposed by this group 
varied widely, and included the optional use of IFRS during any 
contemplated transition period to a single set of global accounting 
standards.\64\ Some commenters suggested an open option for all issuers 
or, at least, a significantly expanded group of issuers.\65\
---------------------------------------------------------------------------

    \63\ See, e.g., CalPERS, CFA, CII, ICGN, and ITAC.
    \64\ See, e.g., Ernst & Young LLP and PwC.
    \65\ See, e.g., Abbott, AICPA, and S&P.
---------------------------------------------------------------------------

    The Commission is not foreclosing the possibility in the future 
that issuers may be permitted to choose between IFRS and U.S. GAAP, nor 
is the Commission foreclosing the possibility of some manner of early 
use or adoption approach. The conditions for early adoption, however, 
would depend on the overall approach to incorporate IFRS into the U.S. 
financial reporting system for U.S. issuers. As that overall approach 
remains under evaluation, we are not actively pursuing rulemaking to 
provide for an early use option at this time.\66\
---------------------------------------------------------------------------

    \66\ Accordingly, we are withdrawing the proposed rules for 
limited early use of IFRS by certain U.S. issuers.
---------------------------------------------------------------------------

VI. Role of the FASB

    The FASB is the independent, private-sector accounting standard-
setting body for the United States. Since 1973, the Commission has 
recognized the FASB's pronouncements establishing and amending 
accounting principles as ``authoritative'' and ``generally accepted'' 
for purposes of the federal securities laws, absent any contrary 
determination by the Commission.\67\ After enactment of the

[[Page 9500]]

Act, the Commission reaffirmed the recognition of the financial 
accounting and reporting standards of the FASB as ``generally 
accepted'' for purposes of the federal securities laws.\68\
---------------------------------------------------------------------------

    \67\ See Statement of Policy on the Establishment and 
Improvement of Accounting Principles and Standards, Accounting 
Series Release No. 150 (December 20, 1973) (expressing the 
Commission's intent to continue to look to the private sector for 
leadership in establishing and improving accounting principles and 
standards through the FASB) and the 2003 Policy Statement.
    \68\ See 2003 Policy Statement.
---------------------------------------------------------------------------

    Some commenters believed the lack of clarity in the Proposed 
Roadmap regarding the future role of the FASB has created unnecessary 
uncertainty. Commenters offered divergent opinions about whether the 
Commission should maintain a relationship with the FASB as the U.S. 
national accounting standard setter in lieu of directly relying on the 
IASB.\69\
---------------------------------------------------------------------------

    \69\ NASBA and CalPERS expressed the view that the Commission 
should maintain a relationship with the FASB, whereas KPMG LLP 
expressed the view that the Commission should recognize the IASB as 
the single accounting standard setter.
---------------------------------------------------------------------------

    We believe the FASB will continue to play a critical and 
substantive role in achieving the goal of global accounting standards. 
The FASB is the accounting standard setter for the U.S. capital 
markets, and it should continue to work with the IASB to improve 
accounting standards. Moreover, that role would remain critical after 
adoption of global standards. In this regard, we have considered the 
role that other national standard setters have maintained in connection 
with their consideration of IFRS. In particular, one organization with 
national regulatory responsibilities noted in its comment letter on the 
Proposed Roadmap that the continued existence of a national standard 
setter allows for more effective working relationships with the IASB 
and helps the IASB have an effective dialogue with constituents in that 
country.\70\ We note many developed countries have maintained a 
national standard setter or other mechanisms in connection with the 
incorporation of IFRS into their capital markets.\71\
---------------------------------------------------------------------------

    \70\ See U.K. Financial Reporting Council.
    \71\ For example, the European Union (``EU''), which required 
the use of IFRS as the accounting standards for companies 
incorporated in one of its Member States and whose securities are 
listed on an EU-regulated market beginning with their 2005 financial 
year, uses the European Financial Reporting Advisory Group to 
provide technical advice to the European Commission in connection 
with the EU's mechanism for endorsement of IFRS.
---------------------------------------------------------------------------

    As part of the staff's execution of the Work Plan, it will continue 
to analyze the nature of the appropriate and ongoing role of the FASB 
should IFRS be incorporated into the U.S. financial reporting system 
for U.S. issuers.

VII. Regulatory Requirements

    This statement is not an agency rule requiring notice of proposed 
rulemaking, opportunities for public participation, and prior 
publication under the provisions of the Administrative Procedure Act 
(``APA''). Similarly, the provisions of the Regulatory Flexibility Act, 
which apply only when notice and comment are required by the APA or 
another statute, are not applicable.

    Dated; February 24, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.

Work Plan for the Consideration of Incorporating International 
Financial Reporting Standards Into the Financial Reporting System for 
U.S. Issuers

Office of the Chief Accountant United States Securities and 
Exchange Commission

    This is a report by the Staff of the U.S. Securities and 
Exchange Commission. The Commission has expressed no view regarding 
the analysis, findings, or conclusions contained herein.

Table of Contents

Background......................................................  ......
I. Sufficient Development and Application of IFRS for the U.S.    ......
 Domestic Reporting System......................................
    A. Introduction.............................................  ......
    B. Comprehensiveness of IFRS................................  ......
    C. Auditability and Enforceability..........................  ......
    D. Comparability Within and Across Jurisdictions............  ......
II. Independent Standard Setting for the Benefit of Investors...  ......
    A. Introduction.............................................  ......
    B. Oversight of the IFRS Foundation.........................  ......
    C. Composition of the IFRS Foundation and the IASB..........  ......
    D. Funding of the IFRS Foundation...........................  ......
    E. IASB Standard-Setting Process............................  ......
    1. Pre-eminence of Investors................................  ......
    2. Timeliness...............................................  ......
    3. Objectivity..............................................  ......
III. Investor Understanding and Education Regarding IFRS........  ......
    A. Introduction.............................................  ......
    B. Investor Understanding and Education.....................  ......
IV. Regulatory Environment......................................  ......
    A. Introduction.............................................  ......
    B. Manner in which the SEC Fulfills its Mission.............  ......
    C. Industry Regulators......................................  ......
    D. Federal and State Tax Impacts............................  ......
    E. Statutory Dividend and Stock Repurchase Restrictions.....  ......
    F. Audit Regulation and Standard Setting....................  ......
    G. Broker-Dealer and Investment Company Reporting...........  ......
    H. Public versus Private Companies..........................  ......
V. Impact on Issuers............................................  ......
    A. Introduction.............................................  ......
    B. Accounting Systems, Controls, and Procedures.............  ......
    C. Contractual Arrangements.................................  ......
    D. Corporate Governance.....................................  ......
    E. Accounting for Litigation Contingencies..................  ......
    F. Smaller Issuers versus Larger Issuers....................  ......
VI. Human Capital Readiness.....................................  ......
    A. Introduction.............................................  ......
    B. Education and Training...................................  ......
    C. Auditor Capacity.........................................  ......
 


[[Page 9501]]

Background

    In the 2010 Statement,\72\ the U.S. Securities and Exchange 
Commission (``SEC'' or ``Commission'') directs the staff of the 
Office of the Chief Accountant of the SEC, with appropriate 
consultation with other Divisions and Offices of the Commission 
(collectively, the ``Staff''), to develop and execute a work plan 
(``Work Plan''). The purpose of the Work Plan is to consider 
specific areas and factors relevant to a Commission determination of 
whether, when, and how our current financial reporting system for 
U.S. issuers should be transitioned to a system incorporating 
International Financial Reporting Standards (``IFRS'').\73\ 
Specifically, the Work Plan addresses areas of concern that were 
highlighted by commenters on the Commission's proposed Roadmap for 
the Potential Use of Financial Statements Prepared in Accordance 
with International Financial Reporting Standards by U.S. 
Issuers,\74\ including:
---------------------------------------------------------------------------

    \72\ See Commission Statement in Support of Convergence and 
Global Accounting Standards, Release No. 33-9109 (February 24, 2010) 
(``2010 Statement'').
    \73\ Hereafter, the term ``IFRS'' refers to ``IFRS as issued by 
the International Accounting Standards Board (`IASB')'' unless 
otherwise noted.
    \74\ Release No. 33-8982 (November 14, 2008) [73 FR 70816 
(November 21, 2008)] (``Proposed Roadmap'').
---------------------------------------------------------------------------

    1. Sufficient development and application of IFRS for the U.S. 
domestic reporting system;
    2. The independence of standard setting for the benefit of 
investors;
    3. Investor understanding and education regarding IFRS;
    4. Examination of the U.S. regulatory environment that would be 
affected by a change in accounting standards;
    5. The impact on issuers, both large and small, including 
changes to accounting systems, changes to contractual arrangements, 
corporate governance considerations, and litigation contingencies; 
and
    6. Human capital readiness.
    The first two areas above consider characteristics of IFRS and 
its standard setting that would be the most relevant to a future 
determination by the Commission regarding whether to incorporate 
IFRS into the financial reporting system for U.S. issuers. The 
remaining four areas above relate to transitional considerations 
that will enable the Staff to better evaluate the scope of, timing 
of, and approach to changes that would be necessary to effectively 
incorporate IFRS into the financial reporting system for U.S. 
issuers, should the Commission determine in the future to do so.
    In formulating this initial Work Plan, the Staff considered 
commenters' views that U.S. issuers would need approximately four to 
five years to successfully implement a change in their financial 
reporting systems to incorporate IFRS.\75\ Therefore, assuming that 
the Commission determines in 2011 to incorporate IFRS into the U.S. 
financial reporting system, the first time U.S. issuers would report 
under such a system would be approximately 2015 or 2016. The Staff 
will further evaluate this timeline as a part of the Work Plan.
---------------------------------------------------------------------------

    \75\ See, e.g., The Boeing Company (``Boeing''), Northrop 
Grumman Corporation (``Northrop Grumman''), PepsiCo, Inc. 
(``Pepsi''), and tw telecom inc (``tw telecom''). Comment letters in 
response to the Proposed Roadmap are available on the Commission's 
Web site (at http://www.sec.gov/comments/s7-27-08/s72708.shtml). 
Comments are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10 a.m. and 
3 p.m. Unless otherwise noted, comment letters referenced in this 
Work Plan were submitted in response to the Proposed Roadmap and are 
cited by author.
---------------------------------------------------------------------------

    While an ultimate determination of any specific methods (e.g., 
convergence, standard-by-standard adoption, wholesale adoption) or 
dates for the possible incorporation of IFRS into the financial 
reporting system for U.S. issuers is beyond the scope of the Work 
Plan, the information obtained through the Work Plan will facilitate 
future Commission consideration of those matters. Further, while the 
Work Plan focuses on the implications of incorporation of IFRS into 
the financial reporting system for U.S. issuers on U.S. 
constituents, the Staff also will consider the effects of its 
recommendations to the Commission on other jurisdictions that have 
incorporated or have committed to incorporate IFRS into their 
financial reporting systems.
    Each area is important to the Staff's consideration of the most 
effective approach to advance the Commission's objective of 
achieving a single set of high-quality globally accepted accounting 
standards. The Staff, however, did not develop the Work Plan with 
the intention that any one step is individually determinative of the 
optimal path forward. Further, for many of the steps, the Staff is 
seeking to assess the degree to which a particular attribute or 
condition exists for consideration of how the topic interacts with 
policy considerations. The Staff does not view the objective of its 
efforts as being to determine whether an attribute ``passes'' or 
``fails'' a pre-determined standard.
    The Staff has developed this Work Plan based on its 
understanding of the current environment. The Staff intends to 
continually re-assess this Work Plan and adjust it as new 
information is obtained or developments occur. Further, of 
necessity, the Staff will modify this Work Plan in response to 
constraints encountered, such as limited availability of 
information, with the intention of accomplishing each section's 
stated objective to the maximum extent possible.
    In executing this Work Plan, the Staff will gather information 
using a variety of methods, including, but not limited to, 
performing its own research; seeking comment from, holding 
discussions with, and analyzing information from constituents, 
including investors, issuers, auditors, attorneys, other regulators, 
standard setters, and academics; considering academic research; and 
researching the experiences of other jurisdictions that have 
incorporated or have committed to incorporate IFRS into their 
financial reporting systems and foreign private issuers who 
currently report under IFRS. The Staff will provide public progress 
reports beginning no later than October 2010 and frequently 
thereafter until the work is complete.

I. Sufficient Development and Application of IFRS for the U.S. Domestic 
Reporting System

A. Introduction

    The 2010 Statement notes that ``[a] necessary element for a set 
of global accounting standards to meet [the agency's mission] is 
that they must be high-quality * * *.'' The Commission previously 
has described high-quality standards as consisting of a 
``comprehensive set of neutral principles that require consistent, 
comparable, relevant and reliable information that is useful for 
investors, lenders and creditors, and others who make capital 
allocation decisions.'' \76\ The Commission also has expressed its 
belief that high-quality accounting standards ``must be supported by 
an infrastructure that ensures that the standards are rigorously 
interpreted and applied.'' \77\
---------------------------------------------------------------------------

    \76\ International Accounting Standards, Release No. 33-7801 
(February 16, 2000) [65 FR 8896 (February 23, 2000)] (``2000 Concept 
Release'').
    \77\ 2000 Concept Release.
---------------------------------------------------------------------------

    In the Proposed Roadmap, the Commission stated that, in further 
considering IFRS, it would ``consider whether those accounting 
standards are of high-quality and sufficiently comprehensive.'' 
Accordingly, the Staff believes that an evaluation of whether IFRS 
is sufficiently developed and applied to be the single set of 
globally accepted accounting standards for U.S. issuers requires 
consideration of the following areas:
     The comprehensiveness of IFRS;
     The auditability and enforceability of IFRS; and
     The comparability of IFRS financial statements within 
and across jurisdictions.
    As the Commission noted in the Proposed Roadmap, there are areas 
where completion of the IASB's standard-setting initiatives, 
including those included in its convergence agenda with the 
Financial Accounting Standards Board (``FASB''), as discussed in the 
2010 Statement, should improve and further develop IFRS. The 
Commission further notes in the 2010 Statement, ``[t]he successful 
completion of these efforts would be a significant accomplishment 
toward improving financial reporting for investors worldwide.'' As 
such, the Staff's efforts in the above areas will include 
consideration of the IASB's efforts to improve IFRS.

B. Comprehensiveness of IFRS

    The Commission stated in the Proposed Roadmap that ``IFRS is not 
as developed as [U.S. generally accepted accounting principles 
(`U.S. GAAP')] in certain areas.'' This is due, in part, to IFRS's 
relative youth, as articulated by one commenter:

    ``[W]e are concerned about quality and maturity of IFRS in 
comparison to * * * [U.S. GAAP]. U.S. GAAP has a long history and 
has been tested and refined through multiple and complex economic 
events and developments. Many of the standards in U.S. GAAP have 
emerged as a direct result of circumstances and events that 
demonstrated

[[Page 9502]]

the need for better and more transparent financial reporting (for 
example, the rise of derivative instruments and recent financial 
scandals such as the collapse of Enron) * * *.'' \78\

    \78\ CMS Energy Corporation and Consumers Energy Company. See 
also, e.g., FedEx Corporation, Hess Corporation, Honeywell 
International (``Honeywell''), Northrop Grumman, and Andrea Psoras 
(``Psoras'').
---------------------------------------------------------------------------

    The Commission and commenters have noted limited IFRS guidance 
in two respects. First, IFRS lacks broad guidance for: (1) Certain 
topical areas, such as accounting for certain common control 
transactions, recapitalization transactions, reorganizations, 
acquisitions of minority shares not resulting in a change of control 
and similar transactions, and the push down of a new accounting 
basis in an entity's separate financial statements; (2) certain 
industries, such as those related to utilities, insurance, 
extractive activities, and investment companies; and (3) disclosures 
in order to provide better transparency regarding the application of 
accounting principles.\79\
---------------------------------------------------------------------------

    \79\ See, e.g., Proposed Roadmap. See also, e.g., Financial 
Accounting Foundation (``FAF''), Investors Technical Advisory 
Committee (``ITAC''), Liberty Global, and Standard & Poor's Ratings 
Services. The Staff acknowledges that in certain of these specified 
areas, these concerns are equally applicable to U.S. GAAP.
---------------------------------------------------------------------------

    Second, where IFRS provides broad guidance, the IASB, as a 
matter of operating practice, has elected to make guidance less 
detailed and prescriptive than U.S. GAAP.\80\ Commenters' views were 
mixed as to whether the lesser degree of detailed guidance under 
IFRS, as compared to U.S. GAAP, is indicative of a higher quality 
set of accounting standards. Commenters who preferred IFRS's 
approach asserted that it is less complex than U.S. GAAP and allows 
companies to capture the substance of transactions.\81\ On the other 
hand, commenters who preferred U.S. GAAP's approach expressed that 
IFRS relies too much on management discretion, thereby increasing 
the potential for opportunistic accounting; creating challenges for 
auditors, as discussed in section I.C below; and reducing 
comparability, as discussed in section I.D below.\82\
---------------------------------------------------------------------------

    \80\ See, e.g., Proposed Roadmap. See also, e.g., Accretive 
Solutions, First Commonwealth Financial Corporation (``First 
Commonwealth''), and ITAC.
    For example, as the FASB staff discussed in ``Board Meeting 
Handout: Joint Revenue Recognition Project'' (April 9, 2008) 
(available at: http://www.fasb.org/04-09-08_rev.pdf)), revenue 
recognition guidance under U.S. GAAP (prior to the FASB 
Codification) consisted of over 200 pieces of literature from 
various sources, whereas revenue recognition guidance under IFRS 
``lacks explicit measurement guidance. Although such measurement 
guidance exists in abundance in U.S. GAAP, IFRS suffers from the 
opposite extreme.''
    \81\ See, e.g., Alcoa Inc. (``Alcoa''), The Bank of New York 
Mellon, Federation of European Accountants (``FEE''), Institute of 
Chartered Accountants in England and Wales (``ICAEW''), and Gregory 
Misiorek.
    \82\ See, e.g., First Commonwealth, Fund of Stockowners Rights 
(``Fund Stockowners Rights''), State of New York Banking Department 
(``NYBD''), Psoras, Sanctuary Financial Group, Inc., and tw telecom.
---------------------------------------------------------------------------

    Other commenters have argued, however, that this debate may not 
be relevant in the U.S. environment. For example, the FAF asserted 
in its comment letter that:

    ``[W]hile it is perceived that IFRS provides financial statement 
preparers more discretion in application than U.S. GAAP, such 
additional discretion may not result in major differences in the 
application of IFRS by U.S. companies because the U.S. institutional 
framework plays a major role in shaping how companies would apply 
the discretion.''

    The Staff will analyze for the Commission's benefit the extent 
to which IFRS is comprehensive so as to support a Commission 
decision regarding whether to incorporate IFRS into the financial 
reporting system for U.S. issuers. Specifically, the Staff will:
     Inventory areas in which IFRS does not provide guidance 
or where it provides less guidance than U.S. GAAP.
     Analyze how issuers, auditors, and investors currently 
manage these situations in practice.
     Identify areas in which issuers, auditors, and 
investors would most benefit from additional IFRS guidance.

C. Auditability and Enforceability

    IFRS's less detailed and prescriptive guidance may or may not 
create challenges in its auditability and enforceability. If it were 
to do so, IFRS may ``[make] litigation or enforcement outcomes more 
difficult to predict.'' \83\ This outcome may be true not only 
within jurisdictions, but also across jurisdictions, as the 
existence of differing regulatory regimes and legal environments 
across jurisdictions may exacerbate the inconsistent interpretation 
and enforcement of IFRS. For example, the CFA Institute stated the 
following in its comment letter:
---------------------------------------------------------------------------

    \83\ Proposed Roadmap.

    ``Investors need greater assurance regarding the divergence of 
application within the principles-based standards of IFRS prior to 
adoption. Conversion to more principles-based standards that are 
applied inconsistently in different regulatory environments, 
---------------------------------------------------------------------------
auditing regimes and cultures may not be beneficial to investors.''

    Commenters raised several concerns regarding the auditability 
and enforceability of IFRS, including the risk of opportunistic 
accounting; the potential for accounting conclusions of preparers to 
be unfairly criticized by auditors, regulators, and investors; and 
diminished comparability.
    First, regarding the risk of opportunistic accounting, some 
commenters expressed that IFRS allows for increased flexibility, as 
compared to U.S. GAAP, and may result in standards being less 
auditable and enforceable, which would not be in the public 
interest.\84\ For example, one commenter stated:
---------------------------------------------------------------------------

    \84\ See, e.g., Fund Stockowners Rights, National Association of 
State Boards of Accountancy (``NASBA''), and Psoras.

    ``The international standards (IFRS) are widely viewed as less 
specific and providing less prescriptive guidance than U.S. GAAP 
(i.e., IFRS are more principles based), as well as more subjective 
primarily due to more use of fair value measurements. The 
downgrading of verifiability as a key concept guiding accounting 
standard setting and the resulting focus on fair value measurement 
significantly impairs the ability of an auditor to limit 
opportunistic actions of management and improve financial 
reporting.'' \85\
---------------------------------------------------------------------------

    \85\ American Accounting Association, Financial Accounting 
Standards Committee (``AAA-FASC'').

    Second, regarding the potential for accounting conclusions of 
preparers to be unfairly criticized by auditors, regulators, and 
investors, some commenters have expressed concerns that IFRS's less 
detailed and prescriptive guidance could expose companies to 
increased claims by shareholders and others seeking to challenge its 
application, given the perceived litigious environment in the United 
States.\86\ The Staff has acknowledged similar concerns in the 
context of an objectives-oriented system, noting:
---------------------------------------------------------------------------

    \86\ See, e.g., FPL Group, Inc. (``FPL'') and tw telecom.

    ``We believe that the existence of a strong and consistently 
applied enforcement mechanism is a necessary component to the 
success of an objectives-oriented system. Preparers and auditors 
have expressed concern that those charged with enforcement in a 
principles-based environment will question reasonable judgments made 
in good faith (footnote omitted). In fact, some have asked whether 
the Commission staff would be willing to accept reasonable views and 
interpretations by preparers and auditors in the application of 
accounting principles (citation omitted).'' \87\
---------------------------------------------------------------------------

    \87\ ``Study Pursuant to Section 108(d) of the Sarbanes-Oxley 
Act of 2002 on the Adoption by the United States Financial Reporting 
System of a Principles-Based Accounting System'' (July 25, 2003) 
(``Principles-Based Accounting System Study'').

---------------------------------------------------------------------------
    However, the Staff also stated:

    ``We believe * * * that the concern over litigation uncertainty 
is sometimes overstated * * *. If preparers and auditors maintain 
contemporaneous documentation that demonstrates that they properly 
determined the substance of a covered transaction or event, applied 
the proper body of literature to it, had a sound basis for their 
conclusions-particularly those involving the exercise of judgment-
and ensured through disclosure that their method was transparent, 
their exposure to litigation may be reduced.'' \88\
---------------------------------------------------------------------------

    \88\ Principles-Based Accounting System Study.

    Some commenters stated that the U.S. legal system, which relies, 
to a larger extent, on guidance, rules, and bright lines, ultimately 
will drive IFRS to evolve, similar to U.S. GAAP, into a rules-based 
set of standards.\89\ Accordingly, commenters advocated addressing 
the causes of rules-based standards, such as through changes to the 
U.S. legal and regulatory environment, and development of an 
accounting and auditing judgment framework to reassure issuers that

[[Page 9503]]

they will not be penalized for the use of reasonable judgment in the 
application of IFRS.\90\
---------------------------------------------------------------------------

    \89\ See, e.g., Air Products and Chemicals, Inc. (``Air 
Products''), Community Health Systems, Inc. (``Community Health''), 
JPMorgan Chase (``JP Morgan''), The London Centre for International 
Corporate Governance Law (``London Ctr Int'l Corp Gov Law''), and 
Edward Randle.
    \90\ See, e.g., American Institute of Certified Public 
Accountants (``AICPA''), California Society of Certified Public 
Accountants (``CA CPAs''), Center for Audit Quality (``CAQ''), 
Deloitte & Touche LLP (``Deloitte''), McGladrey & Pullen LLP 
(``McGladrey''), Morgan Stanley, NYBD, and The Ohio Society of CPAs 
(``Ohio CPAs'').
---------------------------------------------------------------------------

    The Staff also observed that the exercise of professional 
judgment in an objectives-oriented regime would require certain 
cultural changes, including: (1) A reduction in the tendency to ask 
questions like ``where does the literature say I cannot do this,'' 
(2) a reduction in an audit checklist mentality, (3) an improvement 
in accounting professionals' understanding of the economic substance 
of a transaction, and (4) an improvement in the transparency of 
disclosures.\91\
---------------------------------------------------------------------------

    \91\ See Principles-Based Accounting System Study.
---------------------------------------------------------------------------

    Finally, IFRS's less detailed and prescriptive guidance, coupled 
with any diversity of perspectives amongst issuers, auditors, and 
regulators on a global basis may affect the comparability of 
financial statements prepared under IFRS. For example, in the 
auditing context, commenters raised concerns regarding the 
possibility that each audit firm will develop its own 
interpretations of IFRS,\92\ resulting in reduced comparability 
across companies using different auditors. Some commenters went 
further by echoing concerns raised in the 2007 Concept Release \93\ 
that IFRS also may contribute to reduced comparability within audit 
firms, due to the lack of internationally integrated accounting 
firms with a single global accounting perspective.\94\
---------------------------------------------------------------------------

    \92\ See, e.g., Community Health, Eli Lilly and Company (``Eli 
Lilly''), and Marriott International, Inc. (``Marriott'').
    \93\ In Concept Release on Allowing U.S. Issuers to Prepare 
Financial Statements in Accordance with International Financial 
Reporting Standards, Release No. 33-8831 (August 7, 2007) [72 FR 
45600 (August 14, 2007)] (``2007 Concept Release''), the Commission 
stated, ``for the U.S. firms that are members of global audit 
networks, systems of quality control need to foster the high quality 
and consistent application of IFRS across national borders.''
    \94\ See, e.g., London Ctr Int'l Corp Gov Law.
---------------------------------------------------------------------------

    Similarly, commenters expressed concern that differing 
regulation and enforcement structures and practice on a global basis 
may undermine the comparability of financial statements prepared 
under IFRS.\95\ The Commission has noted that securities regulators 
have developed and continue to improve infrastructure to foster the 
consistent and faithful application and enforcement of IFRS around 
the world.\96\ For example, in January 2007, an International 
Organization of Securities Commissions (``IOSCO'') database for 
cataloguing and sharing securities regulators' experiences on IFRS 
application around the world became operational.\97\ Further, the 
Commission and the Committee of European Securities Regulators 
(``CESR'') published a work plan in August 2006, covering 
information sharing in regular meetings and the confidential 
exchange of issuer-specific information.\98\ In addition to the 
coordination with organizations of securities regulators and under 
the CESR work plan, the Commission also has developed bilateral 
dialogues with particular securities regulators to discuss 
accounting and enforcement matters.
---------------------------------------------------------------------------

    \95\ See, e.g., California Public Employees' Retirement System 
(``CalPERS''), Cleary Gottlieb Steen & Hamilton LLP, Group of North 
American Insurance Enterprises, and International Corporate 
Governance Network (``ICGN'').
    \96\ See 2007 Concept Release.
    \97\ See Id.
    \98\ See Id.
---------------------------------------------------------------------------

    These recent developments were noted by the CFA Institute in its 
comment letter:

    ``[T]his coordinated effort and related processes [by members of 
IOSCO] are still being developed and the overall effectiveness of 
their regulatory oversight has not been fully demonstrated (i.e., 
that the interpretation and enforcement of IFRS is consistent). The 
SEC should focus on how IFRS is being applied and ensure that 
studies about this are undertaken and widely circulated to all 
interested parties.''

    The Staff believes that the auditability and enforceability of 
financial statements prepared under IFRS is a key component in 
considering whether to incorporate IFRS into the financial reporting 
system for U.S. issuers. Accordingly, the Staff intends to gather 
data to inform the Commission in this regard. Specifically, the 
Staff will:
     Analyze factors that may influence the auditability of 
financial statements prepared under, and the enforceability of, 
IFRS.
     Evaluate factors that may influence the consistent 
audit of financial statements prepared under, and the enforcement 
of, IFRS.
     Identify potential changes to improve the auditability 
and enforceability of financial statements prepared under IFRS and 
to facilitate their consistent audit and enforcement.

D. Comparability Within and Across Jurisdictions

    One of the primary benefits of a single set of global accounting 
standards is increased comparability of financial statements. 
However, as the Proposed Roadmap stated:
    ``The advantages to U.S. investors of increased comparability 
across investment alternatives, as contemplated under this Roadmap, 
are dependent upon financial reporting under IFRS that is, in fact, 
consistent across companies, industries and countries.''

    A number of factors may undermine the comparability of IFRS 
financial statements. As discussed above, the lesser degree of 
comprehensiveness and the challenges of consistent audit and 
enforcement of IFRS financial statements may affect their 
comparability. In addition, jurisdictional variations in the 
application of IFRS, the optionality within IFRS, and 
inconsistencies arising from differences in the translation of IFRS 
also may reduce the benefits of IFRS as a single set of global 
accounting standards.\99\
---------------------------------------------------------------------------

    \99\ See Proposed Roadmap.
---------------------------------------------------------------------------

    Some sources indicate that more than 100 countries ``require or 
allow the use'' of IFRS.\100\ At the same time, there is the real 
possibility of jurisdictional variations, which could undermine 
comparability. Jurisdictional variations may arise from both 
authoritative and informal application guidance, changes made to the 
standards for purposes of use within a jurisdiction, and variations 
in the times it may take separate jurisdictions to complete their 
respective processes to enact into law or otherwise adopt new or 
amended standards. Historical approaches and cultural differences 
also may give rise to jurisdictional variations.
---------------------------------------------------------------------------

    \100\ See, e.g., Deloitte Touche Tohmatsu, ``Use of IFRSs by 
Jurisdiction.'' (available at: http://www.iasplus.com/country/useias.htm)
---------------------------------------------------------------------------

    Commenters frequently cited concerns regarding the existence of 
and future potential for jurisdictional variations of IFRS.\101\ 
Similarly, the Commission noted that ``the extent to which IFRS is 
adopted and applied globally, and whether IFRS is adopted and 
applied in foreign jurisdictions as issued by the IASB or as 
jurisdictional variations of IFRS'' ``may influence the degree to 
which comparability may be achieved through widespread adoption of 
IFRS.'' \102\
---------------------------------------------------------------------------

    \101\ See, e.g., Corporate Roundtable on International Financial 
Reporting (``CRIFR''), The Davey Tree Expert Company (``Davey 
Tree''), Institute of Chartered Accountants of Scotland (``ICAS''), 
KPMG LLP (``KPMG''), The Lubrizol Corporation, McDonald's 
Corporation (``McDonald's''), Mead Westvaco Corporation (``Mead 
Westvaco''), NASBA, The Travelers Companies, Inc. (``Travelers''), 
and Tuesday Morning Corporation (``Tuesday Morning'').
    \102\ Proposed Roadmap.
---------------------------------------------------------------------------

    Regarding optionality, the SEC's Advisory Committee on 
Improvements to Financial Reporting (``CIFiR'') and others have 
asserted that IFRS's permitted alternative accounting treatments in 
a number of areas ``contribute to avoidable complexity by making 
financial reports less comparable.'' \103\
---------------------------------------------------------------------------

    \103\ ``Final Report of the Advisory Committee on Improvements 
to Financial Reporting to the United States Securities and Exchange 
Commission'' (August 1, 2008) (``CIFiR Final Report''), page 50. 
(available at: http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf)
---------------------------------------------------------------------------

    In the Proposed Roadmap, the Commission expressed that:

    ``IFRS * * * in certain areas permits a greater amount of 
options than in U.S. GAAP * * * [This] greater optionality in IFRS 
could reduce comparability of reported financial information, as 
different issuers may account or provide disclosure for similar 
transactions or events in different ways[,] but this flexibility 
also allows a financial statement that may more closely reflect the 
economics of transactions.''

    To counter any diminished comparability, commenters expressed 
the need for greater transparency around divergence in 
application.\104\ However, as one commenter noted, extensive 
footnote disclosures explaining how management has applied its 
discretion ``will place the burden upon the user of the financial 
statements to understand and interpret the differences between 
companies * * *.'' \105\
---------------------------------------------------------------------------

    \104\ See, e.g., CFA Institute (``CFA'') and ITAC.
    \105\ tw telecom.
---------------------------------------------------------------------------

    In light of the these concerns, the Staff will analyze for the 
Commission's benefit the

[[Page 9504]]

extent to which financial statements prepared under IFRS are 
comparable within and across jurisdictions so as to support a 
Commission decision regarding whether to incorporate IFRS into the 
financial reporting system for U.S. issuers. Specifically, the Staff 
will:
     Analyze factors that may influence the degree of 
comparability of financial statements prepared under IFRS on a 
global basis.
     Assess the extent to which financial statements 
prepared under IFRS may not be comparable in practice and how 
investors manage these situations.
     Identify ways to improve the comparability of financial 
statements prepared under IFRS on a cross-border basis to provide 
the most benefit for investors.

II. Independent Standard Setting for the Benefit of Investors

A. Introduction

    The 2010 Statement notes that ``[a]nother important element for 
a set of high-quality global accounting standards is whether the 
accounting standard setter's funding and governance structure 
support the independent development of accounting standards for the 
ultimate benefit of investors.'' To provide the Commission with the 
information necessary to determine whether the IASB is sufficiently 
independent for IFRS to be the single set of high-quality globally 
accepted accounting standards for U.S. issuers, the Staff will 
analyze four areas in particular:
     Oversight of the IFRS Foundation (formerly called the 
``International Accounting Standards Committee (`IASC') 
Foundation''); \106\
---------------------------------------------------------------------------

    \106\ In January 2010, the IFRS Foundation Trustees 
(``Trustees'') agreed to a number of changes to their Constitution, 
including changes to the names of several bodies within the 
organization, effective March 1, 2010. This Work Plan uses the 
revised names, except when citing a document issued under the 
predecessor name. See IASC Foundation, Trustees Announce Further 
Governance Enhancements (February 15, 2010). (available at: http://www.iasb.org/News/Press+Releases/further+governance+enhancements.htm)
---------------------------------------------------------------------------

     Composition of the IFRS Foundation and the IASB;
     Funding of the IFRS Foundation; and
     IASB standard-setting process.

B. Oversight of the IFRS Foundation

    The IASB was established to develop global standards for 
financial reporting.\107\ The IASB is overseen by the IFRS 
Foundation, which is responsible for the activities of the IASB and 
other work that centers on IFRS, such as initiatives related to 
translation of IFRS from the English language, education about IFRS, 
and the development of interactive data taxonomies for IFRS.\108\
---------------------------------------------------------------------------

    \107\ For more information on the structure and operation of the 
IASB, see www.iasb.org.
    \108\ See Proposed Roadmap.
---------------------------------------------------------------------------

    National accounting standard setters traditionally have been 
accountable to a national securities regulator or other government 
authority. In the United States, the FASB is overseen by the 
Commission. Until 2009, the IFRS Foundation did not have a similar 
link with any national securities regulators and public capital 
market authorities.\109\
---------------------------------------------------------------------------

    \109\ See Id.
---------------------------------------------------------------------------

    The Commission has long supported enhanced governance of the 
IFRS Foundation (and its predecessor, the IASC), which includes 
independent oversight representing the public interest.\110\
---------------------------------------------------------------------------

    \110\ See Id.; Acceptance From Foreign Private Issuers of 
Financial Statements Prepared in Accordance With International 
Financial Reporting Standards Without Reconciliation to U.S. GAAP, 
Release No. 33-8879 (December 21, 2007) [73 FR 986 (January 4, 
2008)] (``2007 FPI Adopting Release''); 2007 Concept Release; and 
2000 Concept Release.
---------------------------------------------------------------------------

    Recognizing that a relationship with public capital market 
authorities would enhance the public accountability of the IFRS 
Foundation, the Trustees amended the IFRS Foundation's Constitution 
to establish a connection between the IFRS Foundation and a 
Monitoring Board \111\ composed of public capital market authorities 
charged with the adoption or recognition of accounting standards 
used in their respective jurisdictions.
---------------------------------------------------------------------------

    \111\ For more information on the mission, duties, structure, 
and operation of the Monitoring Board, see ``Charter of the IASCF 
Monitoring Board'' (available at: http://www.iasb.org/NR/rdonlyres/28B9BB17-79C8-4623-B043-B15F8D7A774D/0/Monitoring_Board_Charter.pdf) and Memorandum of Understanding To Strengthen the 
Institutional Framework of the International Accounting Standards 
Committee Foundation (April 2009) (available at: http://www.iasb.org/NR/rdonlyres/67B0EE51-56B8-4183-9958-CDAC52BC505C/0/MGMou060409.pdf).
---------------------------------------------------------------------------

    Commenters noted that recent events have demonstrated the 
significant pressure that can be exerted on a standard setter and 
acknowledged that the establishment of the Monitoring Board was an 
important step in improving the public accountability of the IFRS 
Foundation.\112\ However, some commenters suggested improvements to 
the Monitoring Board \113\ and urged that the Monitoring Board 
should include representatives from the investment community, 
analysts, auditors, and preparers, as well as national and regional 
regulators.\114\ A number of commenters noted that additional time 
is needed to determine the effect that the Monitoring Board will 
have on the public accountability of the IFRS Foundation and the 
IASB.\115\
---------------------------------------------------------------------------

    \112\ See, e.g., Alcoa, Ernst & Young LLP (``EY''), FEE, U.K. 
Financial Reporting Council (``FRC''), Potash Corporation of 
Saskatchewan Inc. (``Potash''), and Securities Industry and 
Financial Markets Association (``SIFMA'').
    \113\ See, e.g., Council of Institutional Investors (``CII'') 
(suggested, for example, that the Monitoring Board duties include: 
(1) explicit responsibility for protecting and defending the 
independence of the IASB and (2) focus primarily on educating and 
communicating with the representatives of public authorities about 
the benefits of independent private-sector standard setting), 
Institut der Wirtschaftspr[uuml]fer in Deutschland (Institute of 
Public Auditors in Germany) (``IDW'') (suggested the Monitoring 
Board participate in the appointment process and approve the 
appointment of Trustees, but not assume responsibility for Trustee 
appointment directly, so as to avoid overstepping the fine line 
between oversight and control of the IFRS Foundation).
    \114\ See, e.g., CalPERS, CII, FRC (expressed the view that in 
due course the IFRS Foundation Monitoring Board should be extended 
to encompass official global organizations with a wider range of 
responsibilities, notably those with financial stability, banking, 
and insurance mandates, provided that the primary aim of accounting 
standards to improve information to providers of capital is 
respected), ICGN, and Nicholas V[eacute]ron (observed that the 
current Monitoring Board is badly designed as it excludes important 
stakeholders. This commenter suggested that the Commission should 
promote the transformation of the Monitoring Board into a broader 
body that represents all the stakeholders, especially investor 
groups).
    \115\ See, e.g., AICPA, Alcoa, Deloitte, Deutsche Bank AG 
(``Deutsche Bank''), FAF, FEE, FRC, IBM Corporation, ICAEW, IDW, 
Potash, tw telecom, and XenoPort, Inc. (``XenoPort'').
---------------------------------------------------------------------------

    The Staff believes that effective oversight is critical to any 
decision to incorporate IFRS into the financial reporting system for 
U.S. issuers. The Staff will analyze for the Commission's benefit 
the extent to which the Monitoring Board is functioning as designed 
so as to support a Commission decision regarding whether to 
incorporate IFRS into the financial reporting system for U.S. 
issuers. Specifically, the Staff will analyze the operations of the 
Monitoring Board and assess any areas for improvement.

C. Composition of the IFRS Foundation and the IASB

    The IFRS Foundation is governed by 22 trustees with 
geographically diverse backgrounds.\116\ Trustees are appointed for 
a term of three years that is renewable once.
---------------------------------------------------------------------------

    \116\ Six of the Trustees must be selected from the Asia/Oceania 
region, six from Europe, six from North America, one from Africa, 
one from South America, and two from any region, subject to 
maintaining overall geographical balance.
---------------------------------------------------------------------------

    The IASB is currently composed of 15 full-time members who serve 
five-year terms subject to one re-appointment.\117\ Full-time 
members are required to sever all employment relationships and 
positions that may give rise to economic incentives that might 
compromise a member's independent judgment in setting accounting 
standards. The IASB members come from ten countries \118\ and have a 
variety of backgrounds (e.g., auditors, investors, and preparers). 
In selecting IASB members, the Trustees must seek an appropriate 
mix, such that the IASB is not dominated by any particular 
constituency.
---------------------------------------------------------------------------

    \117\ As a result of changes to the IFRS Foundation's 
Constitution in January 2010, second terms will be limited to three 
years for IASB members not serving as the chair or vice chair. See 
Trustees Announce Further Governance Enhancements (February 15, 
2010). (available at: http://www.iasb.org/News/Press+Releases/further+governance+enhancements.htm)
    \118\ As of February 2010.
---------------------------------------------------------------------------

    In response to feedback received through its current 
Constitution review, the IFRS Foundation has approved amendments to 
its Constitution, which:
     Emphasize the organization's commitment to developing 
standards for investors.

[[Page 9505]]

     Provide for enhanced guidelines regarding the Trustees' 
geographical diversity.\119\
---------------------------------------------------------------------------

    \119\ See footnote 45, above.
---------------------------------------------------------------------------

     Provide additional guidelines regarding geographical 
diversity of the IASB members to help ensure that membership of the 
IASB represents a broad international basis.\120\
---------------------------------------------------------------------------

    \120\ Membership of the IASB will be four members drawn from 
each of the Asia/Oceania region, Europe, and North America; one 
member from South America; one member from Africa; and two members 
from any area, subject to overall geographical balance.
---------------------------------------------------------------------------

     Increase the maximum number of members of the IASB to 
16 by July 2012, with up to three positions being permitted for 
part-time members (There are no part-time members currently).\121\
---------------------------------------------------------------------------

    \121\ The Trustees concluded that the expansion of the IASB to 
16 members would enable the IASB to discharge its increasing liaison 
functions in an improved manner, while not negatively affecting the 
efficiency of the IASB's deliberative processes.
---------------------------------------------------------------------------

    Some commenters argued that all IASB members should be full 
time--for example, in order to avoid potential conflicts of interest 
with their outside employers.\122\ Further, these commenters 
expressed the view that the IASB should include greater 
representation from investors, as the primary consumers of financial 
reports.
---------------------------------------------------------------------------

    \122\ See, e.g., CII and ICGN.
---------------------------------------------------------------------------

    The Staff believes the composition of the IFRS Foundation and 
the IASB affects the independence of the IASB's standard-setting 
process. The Staff will analyze for the Commission's benefit the 
extent to which the composition of the IFRS Foundation and the IASB 
promotes the independent development of accounting standards for the 
ultimate benefit of investors so as to support a Commission decision 
regarding whether to incorporate IFRS into the financial reporting 
system for U.S. issuers. Specifically, the Staff will analyze the 
changes to the composition of the IFRS Foundation and the IASB and 
their effect on the IASB's ability to independently develop 
accounting standards for the ultimate benefit of investors.

D. Funding of the IFRS Foundation

    Until 2008, the IFRS Foundation financed IASB operations largely 
through voluntary contributions from a wide range of market 
participants from across the world's capital markets, including from 
a number of firms in the accounting profession, companies, 
international organizations, central banks, and governments. Funding 
commitments were made for the period 2001-2005 and then were 
extended for an additional two years through 2007. In June 2006, the 
Trustees agreed on four characteristics \123\ that should govern the 
establishment of a funding approach designed to enable the IFRS 
Foundation to remain a private-sector organization with the 
necessary resources to conduct its work in a timely fashion. The 
IFRS Foundation has no authority to impose funding regimes on 
countries, but the Trustees have worked closely with regulatory and 
other public authorities and key stakeholder groups on the creation 
of national regimes. Since 2008, efforts to change the financing 
basis of the IFRS Foundation have continued. Most funds are now 
obtained on a national basis from national standard setters and 
national capital market authorities.\124\ The number of narrowly-
based voluntary regimes is decreasing. Contributions from the major 
accounting firms also are decreasing.
---------------------------------------------------------------------------

    \123\ The Trustees determined that characteristics of the new 
plan for 2008 would be broad-based, compelling, open-ended, and 
country-specific. See IASC Foundation, Annual Report 2006. 
(available at: http://www.iasb.org/NR/rdonlyres/D95B6BF3-A12A-4C6C-BDA1-BDC98B4F2A45/0/IASCFoundationAnnualReportFinal.pdf)
    \124\ See the list of long-term funding commitments on the 
IASB's Web site. (available at: http://www.iasb.org/The+organisation/Governance+and+accountability/Financing/Long-term+funding+commitments.htm)
---------------------------------------------------------------------------

    The Commission previously has expressed concern that the IASB 
may be subject to a perceived or, potentially, an actual connection 
between the availability of funding and the outcome of its standard-
setting process.\125\ Similarly, the FCAG Final Report stated that 
in order for the IASB to protect its independence from undue 
influence, ``the IASB must have a permanent funding structure under 
which sufficient funds are provided to it on an equitable and 
mandatory basis.'' In the Proposed Roadmap, the Commission expressed 
the view that its ``future determination regarding the required use 
of IFRS for all U.S. issuers should only occur after the IFRS 
Foundation reaches its goal of securing a stable funding mechanism 
that supports the independent functioning of the IASB.''
---------------------------------------------------------------------------

    \125\ See Proposed Roadmap and 2007 FPI Adopting Release. See 
also ``Report of the Financial Crisis Advisory Group'' (July 28, 
2009) (``FCAG Final Report''). (available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156365880). The Financial Crisis Advisory 
Group (``FCAG'') was formed to advise the FASB and the IASB 
(collectively, the ``Boards'') about the standard-setting 
implications of the financial crisis and potential changes in the 
global regulatory environment. The members of the FCAG are senior 
leaders with broad international experience in the financial 
markets, observed by key global banking, insurance and securities 
regulators.
---------------------------------------------------------------------------

    Similarly, many comment letters raised concerns about the 
independence and stability of the IASB's funding.\126\ A number of 
commenters were concerned that the current voluntary nature of the 
contributions, as well as the source, might impact the apparent, or 
actual independence of the IASB.\127\ Commenters expressed the view 
that establishing a stable, transparent funding framework for the 
IFRS Foundation would significantly reduce the concern that 
financial pressure could compromise the independence of the IASB's 
decision-making.\128\
---------------------------------------------------------------------------

    \126\ See, e.g., Association of Chartered Certified Accountants 
(``ACCA''), Alcoa, BEP, CAQ, Grant Thornton LLP (``GT''), McGladrey, 
PPL Corporation (``PPL''), PricewaterhouseCoopers LLP (``PwC''), UBS 
AG (``UBS''), United Technologies Corporation (``UTC''), and 
WellPoint, Inc.
    \127\ See, e.g., American Accounting Association, Financial 
Reporting Standing Committee; CalPERS; CRIFR; and Institute of 
Management Accountants (``IMA'').
    \128\ See, e.g., CalPERS and IMA.
---------------------------------------------------------------------------

    The Staff recognizes that the United States has a significant 
interest in the stable funding of the IFRS Foundation \129\ and is 
committed to exploring strategies to address this issue. 
Accordingly, the Staff will analyze for the Commission's benefit: 
(1) The extent to which the IFRS Foundation's sources of funding 
promote the independence of the IASB, and (2) possible funding 
mechanisms to provide the U.S.-based contribution to the IFRS 
Foundation. Specifically, the Staff will:
---------------------------------------------------------------------------

    \129\ In 2009, 33 companies based in the United States were 
expected to provide voluntary contributions, ranging widely in 
amount. See IASC Foundation, Information for Observers: IASCF 
Meeting with Monitoring Board (April 1, 2009). (available at: http://www.iasb.org/NR/rdonlyres/B0B1770C-F414-4DCA-968D-505D521D1839/0/APMB2CFundingreport.pdf)
---------------------------------------------------------------------------

     Evaluate whether the Trustees' four characteristics 
governing the establishment of a funding approach are appropriate.
     Monitor the IFRS Foundation's funding arrangements to 
determine whether voluntary funding from individual organizations 
continues to be reduced and a stable, independent funding platform 
is secured.
     Explore alternatives for funding mechanisms in the 
United States.

E. IASB Standard-Setting Process

    The IASB conducts projects necessary to develop high-quality 
standards. The Due Process Handbook for the IASB details procedures 
to be followed when setting standards, with an emphasis on how each 
stage of the process must address transparency and accessibility, 
extensive consultation and responsiveness, and accountability.\130\
---------------------------------------------------------------------------

    \130\ See IASC Foundation, Due Process Handbook for the IASB 
(October 2008) (``Handbook''). (available at: http://www.iasb.org/NR/rdonlyres/1E8D75B7-927F-495B-BE4A-04C9BE967097/0/DueProcess09.pdf)
---------------------------------------------------------------------------

    The IASB solicits views and seeks input from the public 
throughout the standard-setting process, starting with selecting 
items for its agenda and including developing and publishing a 
discussion paper and/or exposure draft and issuing a final standard. 
Input is received from discussions at its project working group and 
roundtable meetings as well as written submissions from 
constituents.\131\
---------------------------------------------------------------------------

    \131\ See Id.
---------------------------------------------------------------------------

    In the 2003 Policy Statement, the Commission stressed the 
importance of three components in the standard-setting process, as 
follows:
     Consideration of international convergence on high-
quality accounting standards for the public interest and for the 
protection of investors;\132\
---------------------------------------------------------------------------

    \132\ The effect of international convergence on the quality of 
IFRS will be evaluated in section I. Accordingly, in this section, 
this component of the standard-setting process will focus on 
accounting standards for the public interest and the protection of 
investors.
---------------------------------------------------------------------------

     Timeliness in completing projects, while satisfying 
appropriate public notice and comment requirements; and
     Objectivity in decision-making and careful 
consideration of the views of constituents and the expected benefits 
and perceived costs of each standard.

[[Page 9506]]

    The following discussion will consider each of these components 
in the context of the IASB's standard-setting process.

1. Pre-eminence of Investors

    In its final report, CIFiR asserted that:

    Investor perspectives are critical to effective standards-
setting, as investors are the primary consumers of financial 
reports. Only when investor perspectives are properly considered by 
all parties does financial reporting meet the needs of those it is 
primarily intended to serve. Therefore, investor perspectives should 
be given pre-eminence by all parties involved in standards-
setting.'' \133\

    \133\ See CIFiR Final Report, page 57.
---------------------------------------------------------------------------

    Several commenters, including investor groups, expressed the 
view that greater investor representation on the IASB (and FASB) and 
related oversight groups would assist in meeting the primary 
objective of general purpose financial reporting (i.e., providing 
useful information to investors in making business and economic 
decisions).\134\ One commenter expressed the view that the lack of 
investor representation may expose those charged with governance to 
pressure from special interest groups to act in a manner that may 
not be compatible with the best interests of investors.\135\
---------------------------------------------------------------------------

    \134\ See, e.g., ICGN.
    \135\ See CFA.
---------------------------------------------------------------------------

    The Staff notes the IFRS Foundation's recent efforts involving 
investor groups. Recently, two new members from the U.S. investor 
community have been appointed to the IASB.\136\ In addition, the 
IASB has an advisory council--the IFRS Advisory Council (formerly 
called the ``Standards Advisory Council'') \137\--that is composed 
of approximately 40 individuals \138\ drawn from geographically-
diverse countries, some of which use IFRS and others that do not. 
The IFRS Advisory Council has an investor sub-group representing 
major investment organizations in the U.S. and internationally to 
allow for better engagement of the IASB and its staff with investor 
representatives.
---------------------------------------------------------------------------

    \136\ See ``Two leading US analysts appointed to the IASB,'' 
IASB press release (May 21, 2009). (available at: http://www.iasb.org/NR/rdonlyres/2BA72D82-ACFD-4899-89D9-4DB8151B44F2/0/PRTwoleadingUSanalystsappointedtotheIASB210509.pdf)
    \137\ The IFRS Advisory Council supports the IASB and provides a 
forum where the IASB consults individuals and representatives of 
organizations affected by its work that are committed to the 
development of high-quality IFRS.
    \138\ A list of members is available at: http://www.iasb.org/NR/rdonlyres/A0D53C88-8988-4B3F-8B0A-07B01DCBF975/0/MembershipSAC.pdf.
---------------------------------------------------------------------------

    The Staff intends to explore the extent to which the IASB 
promotes the pre-eminence of investor views. For example, the Staff 
will review the IASB's practices, as compared to the requirements 
detailed in the Constitution, Handbook, and other relevant IFRS 
Foundation and IASB documents and constituent expectations, to 
assess the IASB's focus on the pre-eminence of investor views.

2. Timeliness

    The IASB normally allows a period of 120 days for comment on a 
discussion paper and exposure draft. For major projects (which are 
those projects involving pervasive or difficult conceptual or 
practical issues), the IASB normally will allow a period of more 
than 120 days for comments.
    A commenter noted that the IASB's standard-setting process could 
be improved through prompt consideration to keep standards current 
and reflect emerging accounting issues and changing business 
practices. The commenter also noted that in rare circumstances, the 
IASB may need to shorten its due process period in order to achieve 
a timely solution.\139\
---------------------------------------------------------------------------

    \139\ See FRC.
---------------------------------------------------------------------------

    The Handbook allows for the IASB to have a shorter period of 
consultation, if required, of 30 days. Effective March 1, 2010, the 
Trustees revised their Constitution to include a provision to allow 
them, in exceptional circumstances, to authorize a shorter due 
process period. Authority would be given only with the approval of 
75 percent of the Trustees after the IASB had made a formal request. 
The due process periods could be reduced but never dispensed with 
completely.
    Recently, the FCAG addressed situations in which it may be 
appropriate for the Boards to expedite due process. The FCAG Final 
Report urged the Boards to adequately define the circumstances under 
which it is appropriate to act on the basis of expedited due process 
and develop procedures to ensure that, in such circumstances, the 
maximum consultation practicable is obtained.
    The Staff believes that the standard-setting process requires a 
careful balance between timely resolution of emerging issues and 
sufficient due process. The Staff will analyze for the Commission's 
benefit the extent to which the IASB balances timely resolution of 
emerging issues and due process so as to support a Commission 
decision regarding whether to incorporate IFRS into the financial 
reporting system for U.S. issuers. Specifically, the Staff will 
review the IASB's practices, as compared to the requirements 
detailed in relevant IFRS Foundation and IASB documents and 
constituent expectations, to assess the IASB's ability to resolve 
emerging issues in a timely and effective manner without 
compromising due process.

3. Objectivity

    The Monitoring Board, of which the SEC Chairman is a member, 
recently stated that ``[c]onfidence in the quality and integrity of 
the standards depends upon independence and transparency in the 
standard setter's due process.'' \140\ The Monitoring Board 
statement expressed the view that robust participation by all 
interested parties is an essential element of due process.
---------------------------------------------------------------------------

    \140\ Statement of the Monitoring Board for the International 
Accounting Standards Committee Foundation on Principles for 
Accounting Standards and Standard Setting (September 22, 2009). 
(available at: http://www.iosco.org/monitoring_board/pdf/Monitoring_Board_of_IASCF_Statement_22092009.pdf)
---------------------------------------------------------------------------

    Commenters expressed concerns regarding whether the independence 
of the IASB recently has been compromised.\141\ A commenter further 
questioned whether the IFRS Foundation and the IASB have the ability 
and infrastructure to confront political pressure from governments 
around the world.\142\
---------------------------------------------------------------------------

    \141\ See, e.g., BEP, CFA, and ITAC.
    \142\ See MetLife, Inc. (``MetLife'').
---------------------------------------------------------------------------

    Similarly, the FCAG observed that:

    ``[T]o develop standards that are high quality and unbiased, 
accounting standard setters must enjoy a high degree of independence 
from undue commercial and political pressures, but they must also 
have a high degree of accountability through appropriate due 
process, including wide engagement with stakeholders and oversight 
conducted in the public interest.\143\

    \143\ See FCAG Final Report.
---------------------------------------------------------------------------

    The IASB relies on a number of practices and other factors to 
ensure that it considers a diversity of views, including:
     The IASB's meetings are open to public observers and 
broadcast over the internet.
     Meeting materials, comment letters received, and staff 
summaries of comment letters on discussion papers and exposure 
drafts are publicly available on the IASB Web site.\144\
---------------------------------------------------------------------------

    \144\ See the IASB's Web site at http://www.iasb.org for more 
information on IASB process.
---------------------------------------------------------------------------

     The IASB is assisted on IFRS interpretive matters by 
its IFRS Interpretations Committee (formerly called the 
``International Financial Reporting Interpretations Committee,'' or 
``IFRIC'').\145\
---------------------------------------------------------------------------

    \145\ The IFRS Interpretations Committee 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 IFRS Interpretations Committee is comprised of 
fourteen voting members, appointed by the IFRS Foundation Trustees 
for renewable terms of three years, and two observers (IOSCO and the 
European Commission). Interpretations by the IFRS Interpretations 
Committee are ratified by the IASB prior to becoming effective.
---------------------------------------------------------------------------

     The IASB consults with the IFRS Advisory Council on 
single projects with a particular emphasis on practical application 
and implementation issues.\146\
---------------------------------------------------------------------------

    \146\ In 2008, the Trustees agreed to change the membership 
structure of the SAC, so that members would serve primarily as 
representatives of organizations. The Trustees believe that this 
adaptation of the IFRS Advisory Council will enable the IASB to 
receive views reflecting a wider range of interested parties and 
would give greater authority to views received. The Commission also 
participates as an observer of the IFRS Advisory Council.
---------------------------------------------------------------------------

     The IASB cooperates with national accounting standard 
setters and other official bodies concerned with standard setting in 
order to promote the convergence in accounting standards around the 
world.\147\
---------------------------------------------------------------------------

    \147\ For additional information, see IASB, Statement of Best 
Practice: Working Relationships between the IASB and other 
Accounting Standard-Setters (February 2006). (available at: http://www.iasb.org/NR/rdonlyres/8F20428C-BC3C-4CFE-A194-4386174C949D/0/SOBPFebruary2006final.pdf)
---------------------------------------------------------------------------

     The due process of the IASB is subject to the active 
oversight of the Trustee Due Process Oversight Committee.
    The Staff will analyze for the Commission's benefit the extent 
to which the

[[Page 9507]]

IASB's standard-setting process is independent and objective. 
Specifically, in conjunction with the other steps in this section 
related to the oversight, composition, and funding of the IFRS 
Foundation and the IASB, the Staff will review the IASB's practices, 
as compared to the requirements detailed in relevant IFRS Foundation 
and IASB documents and constituent expectations, to assess the 
adequacy of the IASB's independence and objectivity during recent 
standard-setting efforts.

III. Investor Understanding and Education Regarding IFRS

A. Introduction

    Incorporation of IFRS into the financial reporting system for 
U.S. issuers requires consideration of the impact on investors. This 
consideration includes focus on the extent to which the accounting 
standards and the standard-setting process promote the reporting of 
transparent and useful financial information to support investors in 
their investment decision-making process. In addition, this 
consideration requires an assessment of investor understanding and 
education regarding IFRS, as the main benefits to investors of a 
single set of high-quality globally accepted accounting standards 
would be realized only if investors understand and have confidence 
in the basis for the reported results.
    Investor considerations regarding IFRS and investor confidence 
in IFRS and its standard setting are discussed in more detail in 
sections I and II, respectively. This section focuses on investor 
understanding and education regarding IFRS. In particular, should 
the Commission determine in the future to incorporate IFRS into the 
financial reporting system for U.S. issuers, transitional 
considerations related to investor understanding and education 
regarding IFRS require evaluation to assess the scope of, timing of, 
and approach to changes that would be necessary for effective 
incorporation.

B. Investor Understanding and Education

    IFRS currently differs from U.S. GAAP in a number of areas; 
consequently, incorporation of IFRS into the financial reporting 
system for U.S. issuers may require significant investor education 
regarding IFRS. However, as noted by one commenter, many U.S. 
investors already possess some understanding of IFRS due to global 
industry focus, cross-border investment decisions, and investments 
in foreign private issuers.\148\ Moreover, through the convergence 
process undertaken by the Boards, we expect the differences between 
the two sets of standards should become fewer and narrower. As part 
of this Work Plan, the Staff will consider U.S. investors' current 
familiarity with IFRS and how they currently become educated about 
changes to accounting standards, in order to better assess the 
extent of investor educational effort necessary to effectively 
incorporate IFRS into the financial reporting system for U.S. 
issuers.
---------------------------------------------------------------------------

    \148\ See EY.
---------------------------------------------------------------------------

    Because standard setters are continually improving accounting 
standards, mechanisms already exist for investors to become educated 
about the effects of changes to the accounting standards. By 
considering the general education process currently used by 
investors in understanding changes to U.S. GAAP, the Staff will 
evaluate how this process could apply to investor education with 
respect to IFRS in preparation for its potential incorporation into 
the financial reporting system for U.S. issuers. In addition, the 
staff will consider whether additional educational efforts are 
needed.
    Existing mechanisms to educate investors traditionally are 
considered in the context of education after a standard has been 
developed. Also important, however, is investor education during the 
standard-setting process, which may occur in two ways. First, active 
investor outreach by the standard setters may increase both the 
extent and quality of understanding of new standards. In the past, 
both Boards have used a number of tools to facilitate investor, 
issuer, and auditor education about new standards, including 
education sessions, roundtables, and Web casts. Second, the Boards' 
convergence projects will be completed in accordance with their due 
process procedures, providing investors with time to become familiar 
with the new converged standards as they are developed. The Staff 
believes the effectiveness of these two areas in educating investors 
during the standard-setting process needs to be evaluated.
    The Staff will analyze for the Commission's benefit how to 
promote investor understanding of IFRS, as well as the existing 
mechanisms to educate investors about changes in the accounting 
standards, should the Commission determine in the future to 
incorporate IFRS into the financial reporting system for U.S. 
issuers. Specifically, the Staff will:
     Conduct research aimed at understanding U.S. investors' 
current knowledge of IFRS and preparedness for incorporation of IFRS 
into the financial reporting system for U.S. issuers.
     Gather input from various investor groups to understand 
how investors educate themselves on changes in accounting standards 
and the timeliness of such education.
     Consider the extent of, logistics for, and estimated 
time necessary to undertake changes to improve investor 
understanding of IFRS and the related education process to ensure 
investors have a sufficient understanding of IFRS prior to potential 
incorporation.

IV. Regulatory Environment

A. Introduction

    In addition to filing financial statements with the Commission, 
U.S. issuers commonly provide financial information to a wide 
variety of other parties for different purposes. While the federal 
securities laws provide the Commission with the authority to 
prescribe accounting principles and standards to be followed by 
public companies and other regulated entities that file financial 
statements with the Commission, the provision and content of 
information to other regulators generally is not determined by the 
Commission.\149\ However, these other regulators frequently rely on 
U.S. GAAP as a basis for their regulatory reporting regimes.
---------------------------------------------------------------------------

    \149\ See Proposed Roadmap.
---------------------------------------------------------------------------

    Therefore, should the Commission determine in the future to 
incorporate IFRS into the financial reporting system for U.S. 
issuers, transitional considerations related to the role of 
financial reporting in various regulatory regimes and how such 
incorporation would affect issuers, investors, and others in those 
contexts, require evaluation to assess the magnitude and logistics 
of changes that would be necessary for effective incorporation.
    Accordingly, this section explores considerations related to the 
following:
     Manner in which the SEC fulfills its mission;
     Industry regulators;
     Federal and state tax impacts;
     Statutory dividend and stock repurchase restrictions;
     Audit regulation and standard setting;
     Broker-dealer and investment company reporting; and
     Public versus private companies.

B. Manner in Which the SEC Fulfills its Mission

    Incorporation of IFRS into the financial reporting system for 
U.S. issuers may affect the manner in which the Commission fulfills 
its mission in two ways. First, the Commission must consider how to 
incorporate IFRS into its rules and regulations and Staff 
application guidance, to the extent they refer to accounting 
standards and requirements. Second, as stated in the Commission's 
2003 Policy Statement:

    ``The federal securities laws set forth the Commission's broad 
authority and responsibility to prescribe the methods to be followed 
in the preparation of accounts and the form and content of financial 
statements to be filed under those laws (citations omitted), as well 
as its responsibility to ensure that investors are furnished with 
other information necessary for investment decisions. To assist it 
in meeting this responsibility, the Commission historically has 
looked to private-sector standard-setting bodies designated by the 
accounting profession to develop accounting principles and 
standards.''

    Commenters questioned how a move to IFRS would affect the 
Commission's relationship with the standard setter. For example, 
some questioned whether, under securities law, as amended by the 
Sarbanes-Oxley Act, the SEC has the ability to designate the IASB as 
the U.S. standard setter.\150\ If the IASB were designated as the 
U.S. standard setter, commenters observed that the Proposed Roadmap 
is unclear as to how the Commission would exercise oversight of the 
IASB. Accordingly, commenters urged the Commission to determine how 
it would react in a crisis situation and how the Commission would 
protect U.S. investors if the IASB did not address U.S.-specific 
issues in a timely

[[Page 9508]]

manner.\151\ For example, some commenters indicated the Commission 
should retain the authority to interpret IFRS.\152\
---------------------------------------------------------------------------

    \150\ See, e.g., American Bar Association Business Law Section 
(``ABA Committee'').
    \151\ See, e.g., Darden Restaurant, Inc. (``Darden'') and Intel 
Corporation (``Intel'').
    \152\ See, e.g., ABA Committee and Travelers.
---------------------------------------------------------------------------

    At the same time, other commenters have cautioned against a 
``U.S. version of IFRS,'' \153\ as follows:

    \153\ See section I.D for further discussion regarding 
jurisdictional variations of IFRS.
---------------------------------------------------------------------------

    ``We do not believe the Commission should supplement any missing 
accounting or disclosure requirements or the financial statements 
would not be considered to be prepared in accordance with IFRS as 
issued by the IASB. We believe any additional disclosures the 
Commission would consider requiring should be included outside of 
the audited financial statements.'' \154\

    \154\ PPL. See also, e.g., Cisco Systems, Inc. (``Cisco'') and 
Liberty Global.
---------------------------------------------------------------------------

    In response to these concerns, the 2010 Statement states:

    ``[The Commission] believe[s] the FASB will continue to play a 
critical and substantive role in achieving the goal of global 
accounting standards. The FASB is the accounting standard setter for 
the U.S. capital markets, and it should continue to work with the 
IASB to improve accounting standards. Moreover, that role would 
remain critical after adoption of global standards.''

    The Staff will analyze for the Commission's benefit the impact 
on Commission rules and procedures and potential approaches for the 
ongoing role of the FASB in accounting standard setting and 
interpretation, should the Commission determine in the future to 
incorporate IFRS into the financial reporting system for U.S. 
issuers. Specifically, the Staff will:
     Analyze references to accounting standards and 
requirements in existing Commission rules and interpretations and 
Staff application guidance to identify the extent of, logistics for, 
and estimated time necessary to implement any changes prior to such 
incorporation.
     Consider how, if at all, such incorporation would 
affect the nature, manner, or frequency in which the Commission and 
its Staff provide interpretative accounting guidance and enforce 
accounting standards, and the extent of, logistics for, and 
estimated time necessary to implement any changes.
     Analyze approaches to the FASB's ongoing role in 
accounting standards used in the United States, and the extent of, 
logistics for, and estimated time necessary to undertake these 
approaches.

C. Industry Regulators

    In the Proposed Roadmap, the Commission observed:

    ``Various federal and state regulators, including regulators of 
financial institutions, insurance companies and public utilities, 
are provided with periodic financial information on an on-going 
basis. For example, U.S. GAAP financial statements frequently are 
used as the basis for determining capital requirements for financial 
institutions.''

    Due to the prevalence of financial information provided to 
different U.S. regulators, incorporation of IFRS into the financial 
reporting system for U.S. issuers may significantly affect different 
regulators and issuers subject to those regulators' compliance 
requirements. As such, it is important to identify the full range of 
regulatory regimes that rely on information developed for financial 
reporting purposes.
    A number of commenters suggested that the Commission determine 
the extent to which industry regulators would continue to accept 
financial statements prepared for SEC reporting purposes as a 
starting point for regulatory filings.\155\ Otherwise, commenters 
cautioned that a move to IFRS for financial reporting purposes risks 
creating costly dual-reporting requirements for issuers.\156\ 
Further, if regulators continue to accept reporting prepared for SEC 
purposes, any changes in the reporting as a result of incorporating 
IFRS could have regulatory impacts. The Staff recognizes that 
acceptance of IFRS-based financial statements by industry regulators 
may have consequences on issuers and others that require analysis.
---------------------------------------------------------------------------

    \155\ See, e.g., Office of the Comptroller of the Currency, 
Board of Governors of the Federal Reserve System, Federal Deposit 
Insurance Corporation, National Credit Union Administration, and 
Office of Thrift Supervision (collectively, ``BankReg''), Committee 
of Annuity Insurers, Dominion Resources Services (``Dominion''), 
First Data Corporation (``First Data''), and National Association of 
Regulatory Utility Commissioners (``NARUC'').
    \156\ See, e.g., Boeing and Honeywell.
---------------------------------------------------------------------------

    The Staff will analyze for the Commission's benefit the effects 
on issuer compliance with industry regulatory requirements, should 
the Commission determine in the future to incorporate IFRS into the 
financial reporting system for U.S. issuers. Specifically, the Staff 
will:
     Analyze the effects on issuer compliance with industry 
regulatory requirements.
     Consider the impact of a change in SEC reporting on 
industry regulators.
     Analyze constituent concerns associated with any 
potential changes, or lack thereof, to regulatory regimes.

D. Federal and State Tax Impacts

    Incorporation of IFRS into the financial reporting system for 
U.S. issuers also could affect federal and state tax regulations 
(e.g., Internal Revenue Code).\157\ As explained in the Proposed 
Roadmap:

    \157\ 26 U.S.C. 1 et seq. [1986.]
---------------------------------------------------------------------------

    ``As the Internal Revenue Code has developed over an extended 
period of time with existing U.S. GAAP as the predominant set of 
accounting standards used in the United States, certain interactions 
exist between certain provisions of U.S. GAAP and income tax 
requirements. For example, the Internal Revenue Code has conformity 
provisions related to the method of accounting for inventory for tax 
reporting purposes and the method used for reporting to shareholders 
(and other owners or beneficiaries) or for credit purposes.\158\ 
IFRS does not allow for the use of last-in, first-out, or LIFO, 
method of accounting for inventory. As a result, a company that 
reports in accordance with IFRS would be required to use a method of 
accounting for inventory that is acceptable under IFRS, for example 
the first-in, first-out, or FIFO, method. U.S. issuers changing to 
FIFO for financial reporting purposes may experience a change in 
taxable income based on the difference between inventory valued on a 
LIFO basis and on a FIFO basis.''

    \158\ See Section 472 of the Internal Revenue Code (26 U.S.C. 
472).
---------------------------------------------------------------------------

    If federal and state tax regulators maintained their current tax 
codes, companies may experience a significant increase in the number 
of book-tax differences they would be required to track upon 
incorporation of IFRS into the financial reporting system for U.S. 
issuers. Several commenters expressed that because of the high cost 
that otherwise would be incurred in maintaining two sets of records, 
the U.S. Internal Revenue Code, as well as state and local tax codes 
and related regulations, would need to be modified.\159\
---------------------------------------------------------------------------

    \159\ See, e.g., Allergan, Inc. and tw telecom.
---------------------------------------------------------------------------

    Alternatively, if federal and state tax regulators continued to 
align their tax codes with reporting for SEC purposes, companies may 
experience significant changes to their expected tax liabilities. 
Commenters expressed that the SEC should work with the Internal 
Revenue Service and other tax authorities to mitigate the LIFO 
transitional issue,\160\ as well as address the transfer pricing 
arrangements and franchise tax considerations that may be affected 
in the transition.\161\
---------------------------------------------------------------------------

    \160\ See, e.g., KPMG, The LIFO Coalition (``LIFO''), and 
National Association of Wholesaler-Distributors.
    \161\ See KPMG.
---------------------------------------------------------------------------

    The Staff will analyze for the Commission's benefit the effects 
on federal and state tax regulations, as well as issuers subject to 
such regulations, should the Commission determine in the future to 
incorporate IFRS into the financial reporting system for U.S. 
issuers. Specifically, the Staff will:
     Analyze the effects on federal and state tax 
regulations, as well as issuers subject to such regulations.
     Consider the impact of a change in SEC reporting on 
federal and state tax regulators.
     Analyze constituent concerns associated with any 
potential changes, or lack thereof, to federal and state tax 
regulation.

E. Statutory Dividend and Stock Repurchase Restrictions

    Certain legal standards may be tied to amounts determined for 
financial reporting purposes. For example, companies may declare 
dividends to or repurchase stock from shareholders. While the 
amount, timing, and manner of payment of dividend distributions and 
stock repurchases are typically determined by the companies' boards 
of directors, the amount available may be restricted by state 
statute. For example, some jurisdictions provide that dividends may 
only be paid from retained earnings or may be paid from current 
earnings despite an accumulated deficit.
    To the extent that jurisdictions base legal standards on amounts 
determined for

[[Page 9509]]

financial reporting purposes, incorporation of IFRS into the 
financial reporting system for U.S. issuers could affect a company's 
ability to undertake certain actions and an investor's expectations 
in that regard. In addition, to the extent that legal standards do 
not change based on changes in SEC reporting, companies would need 
to maintain two sets of records. Accordingly, the Staff will analyze 
for the Commission's benefit the effects on such legal standards, 
should the Commission determine in the future to incorporate IFRS 
into the financial reporting system for U.S. issuers. Specifically, 
the Staff will:
     Analyze the effect of such incorporation on legal 
standards, such as a company's ability to pay dividends or 
repurchase stock, on issuers and investors.
     Consider the impact of a change in SEC reporting on 
state statutes in this regard.
     Analyze constituent concerns associated with any 
potential changes, or lack thereof, to such state statutes.

F. Audit Regulation and Standard Setting

    Another regulatory body that may be affected by incorporation of 
IFRS into the financial reporting system for U.S. issuers is the 
Public Company Accounting Oversight Board (``PCAOB''), which is 
responsible for overseeing public company audit firms and 
establishing audit, quality control, ethics, and independence 
standards used by those firms.\162\ The Proposed Roadmap and 
commenters raised two primary considerations related to the PCAOB. 
First, commenters questioned whether a move to global accounting 
standards should be coupled with a move to global auditing standards 
in the United States, for example, through convergence of PCAOB 
standards with or adoption of auditing standards issued by the 
International Accounting and Assurances Standards Board.\163\ 
Second, commenters noted that PCAOB auditing standards may require 
better alignment with IFRS. For example, one commenter expressed a 
general concern that there would be a mismatch between the less 
prescriptive standards in IFRS and U.S. auditing standards.\164\ In 
addition, the Proposed Roadmap identified a general need for 
conforming amendments to PCAOB standards where they refer to current 
U.S. GAAP literature.
---------------------------------------------------------------------------

    \162\ See Section 101 of the Sarbanes-Oxley Act (15 U.S.C. 
7211).
    \163\ See, e.g., CalPERS and FEE.
    \164\ See AAA-FASC.
---------------------------------------------------------------------------

    Commenters also provided specific examples of PCAOB auditing 
standards that may require better alignment with IFRS. For example, 
commenters suggested that the PCAOB issue additional guidance for 
auditors engaged in auditing market risk information included in the 
audited financial statements pursuant to IFRS 7 (currently U.S. 
issuers provide similar information outside the financial statements 
pursuant to Item 305 of Regulation S-K).\165\
---------------------------------------------------------------------------

    \165\ See, e.g., KPMG.
---------------------------------------------------------------------------

    Further, the Proposed Roadmap discussed the audit of legal 
contingencies as follows:

    ``One of the conditions under IFRS for recognizing a provision 
for a legal contingency is that it is more likely than not that an 
obligation exists (footnote omitted). This recognition threshold is 
lower than the current recognition threshold in U.S. GAAP, resulting 
in the potential for an earlier income statement recognition of 
costs associated with litigation (footnote omitted). Concerns have 
been raised about an auditor's ability to corroborate the 
information furnished by management related to litigation, claims, 
and assessments by obtaining an audit inquiry letter from a client's 
attorney.'' \166\

    \166\ As further discussed in the Proposed Roadmap:
    Some believe that changes to the American Bar Association 
Statement of Policy Regarding Lawyers' Responses to Auditors' 
Requests for Information may be necessary. See AU section 337C. The 
Statement of Policy, commonly referred to as the ``Treaty,'' 
recognizes the professional responsibilities of attorneys and 
auditors and seeks to preserve confidentiality while providing the 
necessary level of assurance for the audit. The Treaty recognizes 
that the confidentiality of communications between an attorney and a 
client may be impaired by the disclosure of the substance of such 
communications to third parties, including auditors. By describing 
thresholds for disclosure and limitations on responses, the Treaty 
sets the scope of the attorney's responses to audit requests for 
information on legal matters. Some believe that the thresholds and 
limitations described in the Treaty are inconsistent with certain 
provisions within IFRS.
    See also, e.g., ABA Committee (echoed the Commission's 
statements in the Proposed Roadmap regarding the audit of legal 
contingencies).
---------------------------------------------------------------------------

    Notwithstanding the above examples of areas where PCAOB auditing 
standards may require better alignment with IFRS, most auditors that 
responded to the Proposed Roadmap did not have concerns regarding 
their ability to opine on financial statements prepared under 
IFRS.\167\
---------------------------------------------------------------------------

    \167\ See, e.g., CAQ (stated that the U.S. auditing profession 
stands ready to support the use of IFRS by all U.S. issuers, 
including early adopters under an option), J.H. Cohn LLP (confirmed 
its readiness to prepare for audits of IFRS financial statements 
once the SEC reaches a decision), and PwC.
---------------------------------------------------------------------------

    The Staff will analyze for the Commission's benefit the effects 
on audit standard setting and auditor requirements, should the 
Commission determine in the future to incorporate IFRS into the 
financial reporting system for U.S. issuers. Specifically, the Staff 
will:
     Consider the impact of such incorporation on PCAOB 
standards.
     Consider the extent of, logistics for, and estimated 
time necessary to undertake any changes to the auditing standards.

G. Broker-Dealer and Investment Company Reporting

    The Proposed Roadmap excluded investment companies registered 
under the Investment Company Act of 1940 and certain other regulated 
entities that are required to file or furnish certain types of 
financial reports (e.g., broker-dealers).
    Some commenters expressed that no issuers should be exempt from 
the scope of the Proposed Roadmap \168\ and that the final Roadmap 
should include a plan so that all filings with the SEC are based on 
IFRS and allow adequate time for the IASB and SEC to consider the 
appropriate financial reporting model for these entities.\169\
---------------------------------------------------------------------------

    \168\ See, e.g., BDO Seidman, LLP (``BDO''), CAQ, and Verizon 
Communications, Inc.
    \169\ See, e.g., EY.
---------------------------------------------------------------------------

    Alternatively, some commenters supported the exclusion of 
investment companies from the rule proposal.\170\ Another commenter 
expressed the view that the Commission has not sufficiently 
articulated its rationale for excluding investment companies and 
other regulated entities from the scope of the Proposed Roadmap and 
would agree with excluding these issuers ``only if there are unique 
considerations surrounding these entities that could delay the 
Commission's decision making process.''\171\
---------------------------------------------------------------------------

    \170\ See, e.g., AICPA and Investment Company Institute (who 
expressed that convergence in accounting standards as applied to 
investment companies and resolution of conflicts between IFRS and 
Article 6 of Regulation S-X should be prerequisites to a move to 
IFRS).
    \171\ GT.
---------------------------------------------------------------------------

    Finally, commenters also expressed concerns regarding costs 
imposed by the reduced comparability introduced by the continued use 
of another basis of accounting (e.g., for private companies (see 
below), and/or Investment Company Act registrants).\172\ As another 
example, excluding broker-dealer reporting could result in a broker-
dealer subsidiary being required to report to the Commission under 
one set of standards with the public holding company that 
consolidates that subsidiary required to report under another. Also, 
to the extent reporting results changed if IFRS were to be 
incorporated for these entities, such a change could impact 
compliance with financial responsibility rules, such as net capital 
requirements.
---------------------------------------------------------------------------

    \172\ See, e.g., Private Equity Council.
---------------------------------------------------------------------------

    In light of the different views noted above, the Staff will 
analyze for the Commission's benefit possible approaches for 
financial reporting requirements for broker-dealers and investment 
companies, should the Commission determine in the future to 
incorporate IFRS into the financial reporting system for U.S. 
issuers. Specifically, the Staff will:
     Assess the effects of such incorporation on broker-
dealers, investment companies, and investors, including whether IFRS 
includes sufficient standards, and the extent of, logistics for, and 
estimated time necessary to undertake any changes, should broker-
dealers and investment companies be included in the scope any 
potential Commission decision.
     Evaluate the effect on investors of excluding broker-
dealers and investment companies from the scope of any potential 
Commission decision.

H. Public Versus Private Companies

    The Proposed Roadmap focused only on companies that file with 
the Commission. However, existing U.S. GAAP also is used by private 
companies.
    Commenters expressed concern over the impact a move to IFRS 
would have on U.S.

[[Page 9510]]

private companies.\173\ One concern raised in the Proposed Roadmap 
and echoed by commenters was that, to the extent two sets of 
standards existed, a requirement to file different financial 
statements with the Commission would increase costs of capital for 
private companies considering an initial public offering.\174\ It 
could also impact the evaluation of business combinations between 
public and private companies. Some commenters acknowledged that 
private company reporting is largely outside of the mandate of the 
Commission, but stated that the Commission should assess the 
consequences its decision on IFRS would have to this large and 
important part of the U.S. economy. Specifically, certain of these 
commenters believed that if a ``dual-GAAP'' system emerged for 
private versus public companies, this could adversely affect the 
efficiency of the U.S. capital markets.\175\ Even if U.S. private 
companies were to report under IFRS, a ``dual-GAAP'' system may 
evolve, if private companies followed IFRS for small- and medium-
sized entities (``SMEs''), which:

    \173\ See, e.g., The New York State Society of Certified Public 
Accountants (``NY CPAs'') and Ohio CPAs.
    \174\ See, e.g., ABA Committee, Center for Capital Markets 
Competitiveness (``CCMC''), Davey Tree, First Data, and ITAC.
    \175\ See, e.g., CA CPAs and CIGNA Corporation.
---------------------------------------------------------------------------

    ``[I]s a self-contained standard of about 230 pages tailored for 
the needs and capabilities of smaller [private] businesses. Many of 
the principles in full IFRSs for recognising and measuring assets, 
liabilities, income and expenses have been simplified, topics not 
relevant to SMEs have been omitted, and the number of required 
disclosures has been significantly reduced. To further reduce the 
reporting burden for SMEs revisions to the IFRS will be limited to 
once every three years.'' \176\

    \176\ ``IASB publishes IFRS for SMEs,'' IASB press release (July 
9, 2009). (available at: http://www.iasb.org/News/Press+Releases/IASB+publishes+IFRS+for+SMEs.htm)
---------------------------------------------------------------------------

    The Staff will analyze for the Commission's benefit the effects 
on U.S. private companies, should the Commission determine in the 
future to incorporate IFRS into the financial reporting system for 
U.S. issuers. Specifically, the Staff will:
     Analyze the effects of such incorporation for U.S. 
issuers on private companies, auditors, and investors.
     Assess the extent of, logistics for, and estimated time 
necessary to undertake changes to accommodate any resulting 
implications on private companies.

V. Impact on Issuers

A. Introduction

    Incorporation of IFRS into the financial reporting system for 
U.S. issuers would significantly affect preparers of financial 
statements--the several thousand issuers that file reports with the 
Commission. Numerous commenters expressed the view that the costs, 
effort, and time involved with a move to IFRS would be 
considerable,\177\ with many asserting that the benefits of such a 
move may not outweigh those costs.\178\ A number of commenters 
further asserted that the transition time articulated in the 
Proposed Roadmap was not sufficient \179\ and may cause confusion, 
thereby damaging investor confidence.\180\
---------------------------------------------------------------------------

    \177\ See, e.g., Phil Ameen (``Ameen''), Chevron Corporation, 
Eli Lilly, Shawn S. Fahrer, Hot Topic Inc. (``Hot Topic''), Intel, 
Graduating Seniors--Jacksonville University (Georgia), Kohl's 
Department Stores, Inc. (``Kohl's''), Molson Coors Brewing Company, 
NARUC, PPL, Psoras, Mark A. Supin, SIFMA, U.S. Congressman Lee 
Terry, Tuesday Morning; and U.S. Congressman Zach Wamp.
    \178\ See, e.g., Davey Tree, Exxon Mobil Corporation (``Exxon 
Mobil''), Marriott, McDonald's, Pfizer Inc. (``Pfizer''), 
Plantronics, Inc. (``Plantronics''), Regions Financial Corp., and tw 
telecom.
    \179\ See, e.g., ABA Committee, American Insurance Association 
(``AIA''), AICPA, BankReg, Best Buy Co., Inc., CAQ, Cisco, Cymer 
Inc., Deloitte, EY, Fannie Mae, Graybar Electric Company, Inc., 
ICAEW, IMA, KPMG, National Association of Real Estate Investment 
Trusts, NARUC, Progress Energy, Inc., PwC, Reznick Group, P.C., 
TransCanada Corporation, and XenoPort.
    \180\ See, e.g., Association of the Bar of the City of New York, 
Community Health, CSX Corporation, and Plantronics.
---------------------------------------------------------------------------

    Accordingly, this aspect of the Work Plan explores the magnitude 
and logistics of changes that issuers would need to undertake to 
effectively incorporate IFRS into the financial reporting system for 
U.S. issuers, should the Commission determine in the future to 
incorporate IFRS into the financial reporting system for U.S. 
issuers in the following areas:\181\
---------------------------------------------------------------------------

    \181\ The human resource impact on issuers is discussed 
separately in section VI.
---------------------------------------------------------------------------

     Accounting systems, controls, and procedures;
     Contractual arrangements; and
     Corporate governance.
    The Work Plan will also consider the effect of such 
incorporation on the following:
     Accounting for litigation contingencies; and
     Smaller issuers versus larger issuers.

B. Accounting Systems, Controls, and Procedures

    U.S. issuers may be required to significantly modify their 
accounting systems, controls, and procedures, if the Commission 
incorporates IFRS into the financial reporting system. As stated in 
the Proposed Roadmap:

    ``Use of any new accounting standards requires changes to 
financial reporting systems and procedures to identify, collect, 
analyze and report financial information and the corresponding 
controls. Changing numerous accounting standards at the same time, 
regardless of the starting point, would require numerous changes in 
a company's policies and procedures and system of internal 
controls.''

    For example, commenters expressed the need for:
     A complete survey of accounting policies as a first 
step because IFRS explicitly requires that all similar transactions 
in the enterprise (including affiliates) be accounted for 
similarly;\182\
---------------------------------------------------------------------------

    \182\ See, e.g., Ameen.
---------------------------------------------------------------------------

     More detailed company policies, as IFRS is viewed as 
less developed than U.S. GAAP;\183\ and
---------------------------------------------------------------------------

    \183\ See, e.g., Air Products, Community Health, Darden, and 
Mead Westvaco.
---------------------------------------------------------------------------

     Changes to systems, including ledgers and related 
internal controls, and related testing of such changes,\184\ 
particularly to ensure effectiveness for reporting purposes under 
section 404 of the Sarbanes-Oxley Act.
---------------------------------------------------------------------------

    \184\ See, e.g., Ameen.
---------------------------------------------------------------------------

    Commenters noted that the burden of changes to accounting 
systems, controls, and procedures would be exacerbated in a number 
of ways. First, issuers may be required to maintain dual-accounting 
systems for a period of time (e.g., (1) for periods reported under 
existing U.S. GAAP after the opening balance sheet date under IFRS 
1, First-time Adoption of International Financial Reporting 
Standards, but before the initial filing under a system 
incorporating IFRS, (2) if the SEC were to require supplemental U.S. 
GAAP information for a period of time to aid in transition, (3) if 
such incorporation were effective in the financial statements of 
consolidated entities prior to those of the consolidated entities' 
stand-alone subsidiaries, and (4) if other regulators continued to 
require reporting based on U.S. GAAP). One commenter stated:

    ``Maintaining dual reporting presents U.S. issuers with a 
significant burden since all of the processes, controls, and checks 
must occur twice for each transaction. Indeed, it is likely that the 
Sarbanes Oxley control testing requirements could nearly double 
during the period of parallel reporting.'' \185\

    \185\ UTC.
---------------------------------------------------------------------------

    Second, changes to accounting systems, controls, and procedures 
require sufficient lead time. However, if IFRS continues to change 
at a rapid pace during this lead time, U.S. issuers will experience 
additional challenges in planning for incorporation of IFRS into the 
financial reporting system. As such, some commenters expressed the 
need for a ``stable platform'' for a period of time during which 
accounting standards do not change.\186\ However, a ``stable 
platform'' may constrain the standard setters' ability to address 
emerging issues.
---------------------------------------------------------------------------

    \186\ See, e.g., Eli Lilly, Exxon Mobil, EY, and SIFMA.
---------------------------------------------------------------------------

    Third, some commenters asserted that certain industries would be 
disproportionately impacted by incorporation of IFRS into the 
financial reporting system for U.S. issuers because of differences 
between existing U.S. GAAP and IFRS that are specific to their 
circumstances. One commenter stated that financial institutions will 
need sufficient time to prepare for conversion to IFRS, given the 
extent of systems changes and communications that will need to 
occur.\187\ Other commenters expressed concerns about specific 
differences between U.S. GAAP and IFRS for which they believed the 
accounting under IFRS would be onerous.\188\
---------------------------------------------------------------------------

    \187\ See ICAEW.
    \188\ See, e.g., Mead Westvaco, Plum Creek Timber Company, Inc., 
Potlatch Corporation, and Rayonier Inc. (who expressed concerns 
regarding the costs of complying with the requirement in 
International Accounting Standard 41, Agriculture, to fair value 
timberlands). See also, e.g., Hot Topic, J.C. Penney Company, Inc., 
Kohl's, and Tuesday Morning (who expressed concerns about the IFRS 
disallowance of the retail inventory method).

---------------------------------------------------------------------------

[[Page 9511]]

    The Staff will analyze for the Commission's benefit the effects 
on U.S. issuers' accounting systems, controls, and procedures, 
should the Commission determine in the future to incorporate IFRS 
into the financial reporting system for U.S. issuers. Specifically, 
the Staff will:
     Determine the extent of, logistics for, and estimated 
time necessary to undertake changes to issuer accounting systems, 
controls, and procedures to facilitate such incorporation.
     Consider the implications of a ``stable platform,'' 
including the length of time and means of addressing emerging 
issues.

C. Contractual Arrangements

    The Proposed Roadmap also noted that companies' contracts often, 
either explicitly or implicitly, require the use of U.S. GAAP or are 
based off of current U.S. GAAP reporting. For example, companies may 
have issued debt instruments which include financial covenants based 
on U.S. GAAP or require periodic reporting of financial statements 
prepared under U.S. GAAP. Similarly, lease contracts and employee 
compensation plans may be based on metrics computed using U.S. GAAP 
financial information.
    Commenters indicated that a move to IFRS for U.S. issuers may 
require contract renegotiation or the preparation of two sets of 
financial statements, depending on how IFRS is incorporated in the 
U.S. capital markets.\189\ In addition, performance under the 
existing agreements could be affected if the reported information 
changes. Accordingly, the Staff will analyze for the Commission's 
benefit the effects on contractual arrangements, should the 
Commission determine in the future to incorporate IFRS into the 
financial reporting system for U.S. issuers. Specifically, the Staff 
will:
---------------------------------------------------------------------------

    \189\ See, e.g., AIA, CCMC, Hot Topic, JP Morgan, Psoras, and 
Tuesday Morning.
---------------------------------------------------------------------------

     Assess the types and pervasiveness of contractual 
arrangements that would be affected by such incorporation and the 
manner in which they would be affected.
     Determine the costs, ability, plans, and estimated time 
required to address concerns regarding affected contractual 
arrangements.

D. Corporate Governance

    Incorporation of IFRS into the financial reporting system for 
U.S. issuers may affect an issuer's compliance with corporate 
governance requirements. For example, in 2003, as required by the 
Sarbanes-Oxley Act, the SEC adopted rules that require a registrant 
to disclose whether it has at least one ``audit committee financial 
expert'' (as defined) serving on its audit committee and, if so, the 
name of the expert and whether the expert is independent of 
management.\190\ Those rules also indicate the education and 
experience through which those attributes must have been acquired.
---------------------------------------------------------------------------

    \190\ See Disclosure Required by Sections 406 and 407 of the 
Sarbanes-Oxley Act of 2002, Release No. 33-8177 (January 23, 2003) 
[68 FR 5110 (January 31, 2003)].
---------------------------------------------------------------------------

    Listing rules for U.S. securities exchanges also have 
requirements regarding audit committee competence. One commenter 
explained:

    ``[R]ules of the NYSE, NASDAQ, and AMEX require members of the 
audit committee of each listed company to be financially literate 
and each listed company audit committee must have at least one 
member who has accounting or related financial management expertise. 
Many board members who currently meet the ``financial expertise'' 
qualifications are not likely to have had experience with IFRS or 
its adoption as they have been trained in U.S. GAAP. If a company 
adopts IFRS, its board is likely to need additional training in IFRS 
in order to meet the level of financial expertise necessary for them 
to carry out these functions and satisfy these requirements.'' \191\

    \191\ Metlife.
---------------------------------------------------------------------------

    Accordingly, incorporation of IFRS into the financial reporting 
system may result in challenges for U.S. issuers in identifying 
audit committee financial experts and in listing on securities 
exchanges, as well as, more broadly, compliance with other aspects 
of corporate governance. Further, similar to the potential effects 
on compliance with other regulatory requirements, changes in 
financial reporting could impact a company's compliance with certain 
quantitative listing standards. The Staff will analyze for the 
Commission's benefit the impact on compliance with corporate 
governance standards, should the Commission determine in the future 
to incorporate IFRS into the financial reporting system for U.S. 
issuers. Specifically, the Staff will:
     Determine the potential effects on corporate governance 
and related concerns of such incorporation.
     Determine possible approaches to address corporate 
governance concerns and the extent of, logistics for, and estimated 
time necessary to undertake these approaches.

E. Accounting for Litigation Contingencies

    Commenters expressed concerns regarding the treatment of 
litigation-related loss contingencies under IFRS. For example, the 
ABA Committee asserted that accounting for such contingencies under 
IFRS raises serious concerns by its use of a lower recognition 
threshold than U.S. GAAP and its requirements to make additional 
disclosures. Their concerns included ``avoidance of prejudice to 
companies and their shareholders in our highly litigious society'' 
and erosions of the protections of attorney-client privilege and 
work product. Other commenters expressed similar concerns, with one 
noting:

    ``[T]he loss contingency disclosures required under IFRS are 
similar to those proposed by the FASB in 2008. As these disclosures 
were rejected for use in the U.S. primarily due to objections from 
the legal community, it is likely that similar issues will arise if 
IFRS becomes mandatory.'' \192\
---------------------------------------------------------------------------

    \192\ Dominion. See also, e.g., FPL and Pfizer. The Staff notes 
that the FASB is in the process of re-deliberating loss contingency 
disclosure requirements. See also section IV.E regarding concerns 
related to the auditing of loss contingencies accounted for under 
IFRS.

    Incorporation of IFRS into the financial reporting system for 
U.S. issuers requires careful consideration of the impact of 
litigation contingency accounting and disclosure requirements under 
IFRS on issuers and investors. Accordingly, the Staff will analyze 
for the Commission's benefit the effects on accounting and 
disclosure requirements for litigation contingencies under IFRS in 
the U.S. legal environment, should the Commission determine in the 
future to incorporate IFRS into the financial reporting system for 
U.S. issuers. Specifically, the Staff will:
     Discuss with issuers, the legal profession, and 
investors concerns regarding accounting and disclosure requirements 
for litigation contingencies under IFRS.
     Determine possible approaches to address concerns 
regarding accounting and disclosure requirements for litigation 
contingencies under IFRS and the extent of, logistics for, and 
estimated time necessary to undertake these approaches.

F. Smaller Issuers Versus Larger Issuers

    Several commenters asserted that a move to IFRS would be 
particularly burdensome for smaller U.S. issuers. For example, one 
commenter included studies from two independent consultants 
indicating that, while recognizing potential cost savings for some 
large, multinational firms, a move to IFRS is likely to impose 
substantial transition costs, including disproportionate costs on 
smaller issuers.\193\ Conversely, one commenter stated that ``the 
impact is expected to be very small and the majority of the impact 
will occur in non-routine or one-off transactions which are 
typically subject to significant scrutiny in any case.'' \194\
---------------------------------------------------------------------------

    \193\ FAF. See also, e.g., Biotechnology Industry Organization, 
Business Roundtable, CCMC, CRIFR, and IMA.
    \194\ Xenoport.
---------------------------------------------------------------------------

    In light of the above comments, the Staff will analyze for the 
Commission's benefit the extent to which incorporation of IFRS into 
the financial reporting system for U.S. issuers would affect smaller 
issuers differently than larger issuers and the extent of, logistics 
for, and estimated time necessary to undertake any changes, should 
the Commission determine in the future to do so. Specifically, the 
Staff will:
     Determine the manner in which the impact of such 
incorporation varies based on issuer size.
     Determine possible approaches to mitigate concerns 
regarding any disproportionate effects on smaller issuers of such 
incorporation and the extent of, logistics for, and estimated time 
necessary to undertake these approaches.

VI. Human Capital Readiness

A. Introduction

    Should the Commission determine in the future to incorporate 
IFRS into the financial reporting system for U.S. issuers, 
transitional

[[Page 9512]]

considerations related to the readiness of all parties involved in 
the financial reporting process, including investors (see section 
III for further discussion), issuers, attorneys, auditors, 
regulators, and educators require evaluation to assess the magnitude 
and logistics of changes that would be necessary to effectively 
incorporate IFRS into the financial reporting system for U.S. 
issuers. Accordingly, this section explores considerations related 
to:
     Education and training; and
     Auditor capacity.

B. Education and Training

    In the Proposed Roadmap, the Commission noted that the education 
and ongoing training of most accountants in the United States are 
limited to or predominantly focused on the current provisions of 
U.S. GAAP. As a result, the Commission acknowledged that many 
parties likely would need comprehensive IFRS training, including:
     Investors, as discussed in section III;
     The personnel of issuers, including their accounting, 
internal audit, and investor relations departments, and their 
governing bodies, such as their audit committees and board of 
directors;
     Specialists, such as actuaries and valuation experts, 
as they often are engaged by management to assist in measuring 
certain assets and liabilities for financial reporting purposes;
     Attorneys, who will need to understand financial 
statements in order to, for example, advise on disclosures required 
under the securities laws and provide legal representations to 
external auditors;
     External auditors;
     Regulators, such as the Staff, PCAOB staff, and the 
staff of other regulatory bodies; \195\
---------------------------------------------------------------------------

    \195\ See, e.g., BankReg (noted that they ``collectively employ 
thousands of examination and policy support personnel that will need 
to be adequately trained in the use of IFRS if it is adopted before 
convergence is achieved'').
---------------------------------------------------------------------------

     State licensing bodies, professional associations, and 
industry groups, who would need to integrate IFRS into their 
training materials, publications, testing, and certification 
programs (including the Uniform CPA Examination); and
     Colleges and universities that would need to include 
IFRS in their curricula.
    In the Proposed Roadmap, the Commission observed that strategies 
taken by those participants in markets where issuers already report 
in accordance with IFRS might serve as examples of approaches to 
increasing education and awareness of IFRS.
    The Commission also expressed that the private sector may 
respond to any increased demand for IFRS education by making 
educational materials available.\196\ Since the Commission's 
issuance of the Concept Release in August 2007, several of the 
largest accounting firms in the United States have made more 
material available to the public about IFRS generally, as well as 
about the application of specific IFRS standards.\197\
---------------------------------------------------------------------------

    \196\ See Proposed Roadmap.
    \197\ These materials include publications (e.g., PwC's IFRS and 
US GAAP: similarities and differences; EY's US GAAP v. IFRS The 
basics: Oil and gas) and other IFRS-related education initiatives 
(e.g., the KPMG IFRS Institute; Deloitte's IFRS University 
Consortium; EY's Academic Resource Center; PwC's IFRS Video Learning 
Center).
---------------------------------------------------------------------------

    Commenters expressed mixed views in terms of the importance of 
this issue, as well as timing for improvements in this area. Some 
commenters expressed concerns about the challenges faced in training 
and educating both existing and future practitioners.\198\ For 
example, the nature of accounting education would require change, as 
professionals and students would not only need training in IFRS, but 
in utilizing judgment in the application of less prescriptive 
standards and in understanding the economic substance of 
transactions.\199\ Accordingly, commenters expressed the view that a 
move to IFRS for U.S. issuers would be costly for educators,\200\ 
particularly if a dual-reporting system (e.g., due to different 
systems for public versus private companies) evolved in the United 
States.\201\ Commenters also asserted that educators would not be 
ready in the near term \202\ and that work needs to begin 
immediately.\203\ As such, some commenters recommended that the 
Commission address how sufficient resources and incentives for 
training would be achieved.\204\
---------------------------------------------------------------------------

    \198\ See, e.g., CalPERS, CFA, Fund Stockowner Rights, ITAC, 
NASBA, NYCPAs, and Ohio CPAs.
    \199\ See, e.g., London Ctr Int'l Corp Gov Law and Shyam Sunder.
    \200\ See, e.g., AmerisourceBergen Corporation, Teresa P. 
Gordon, and Thomas N. Tyson.
    \201\ See, e.g., Travelers.
    \202\ See, e.g., American Accounting Association, Financial 
Accounting and Reporting Section, and Financial Reporting Policy 
Committee (pointed to surveys of educators indicating concerns over 
readiness).
    \203\ See, e.g., ING Insurance Americas.
    \204\ See, e.g., CalPERS and ICGN.
---------------------------------------------------------------------------

    Others, however, were of the view that educators, issuers, and 
other impacted parties would be prepared in time, particularly once 
a date for moving to IFRS were established.\205\ One commenter 
expressed that IFRS education and expertise will grow in the United 
States anyway--even if the United States does not move to IFRS--
because of the ongoing increased foreign investment in the United 
States.\206\
---------------------------------------------------------------------------

    \205\ See, e.g., ACCA, Alcoa, CAQ, Dell Inc., EY, and PwC.
    \206\ See Pepsi.
---------------------------------------------------------------------------

    The Staff recognizes that education and training efforts to 
facilitate incorporation of IFRS into the financial reporting system 
for U.S. issuers could be significant. Accordingly, the Staff will 
analyze for the Commission's benefit the sufficiency of the IFRS 
education and training infrastructure and the extent of, logistics 
for, and estimated time necessary to undertake changes, should the 
Commission determine in the future to do so. Specifically, the Staff 
will:
     Evaluate the current level of IFRS expertise and extent 
of IFRS education and training needs among constituents.
     Consider the extent of, logistics for, and estimated 
time to implement plans for future training among constituents.

C. Auditor Capacity

    Incorporation of IFRS into the financial reporting system for 
U.S. issuers could strain audit firm resources if sufficient 
training and time are not provided. The Proposed Roadmap noted that 
``[a]udit firms would need to consider elements of their systems of 
quality control, such as their practices related to hiring, 
assigning personnel to engagements, professional development and 
advancement activities.'' An increase in the demand for IFRS 
expertise may affect the availability of audit services, with 
consequences on audit quality, cost, and audit firm concentration.
    While some commenters expressed that moving to IFRS is likely to 
have little or no effect on the availability of audit services and 
audit quality,\207\ others expressed concerns about a likely 
reduction in these areas, along with an increase in both internal 
and external audit costs, due to IFRS being less comprehensive and 
requiring more application of judgment.\208\ For additional 
discussion regarding the impact of IFRS's comprehensiveness on its 
auditability, see section I.C.
---------------------------------------------------------------------------

    \207\ See, e.g., Deutsche Bank, UBS, and UTC.
    \208\ See, e.g., Davey Tree.
---------------------------------------------------------------------------

    Others commented that the consequences of a move to IFRS for 
U.S. issuers on audit firms may differ based on audit firm size. 
With respect to the large audit firms, commenters believed that a 
move to IFRS for U.S. issuers is likely to have little or no effect 
on the availability of audit services and audit quality.\209\ Two 
large audit-firm commenters noted that they currently audit foreign 
private issuers as well as subsidiaries of foreign multi-nationals 
that report under IFRS.\210\ Further, they anticipated leveraging 
personnel from other member firms in countries that have already 
moved to IFRS.
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    \209\ See, e.g., BDO, Deloitte, EY, and PwC.
    \210\ See Deloitte and PwC.
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    On the other hand, opinions were mixed on the impact of moving 
to IFRS on ``smaller'' audit firms. The Proposed Roadmap stated that 
the potential use of IFRS by U.S. issuers:

``[M]ay be particularly challenging for less globally-oriented audit 
firms, which typically may have fewer resources available through 
affiliated or network firms located in jurisdictions in which 
issuers already report in accordance with IFRS. This could be a 
further factor affecting concentration in the auditing profession.''

    One commenter expressed concern that current IFRS expertise is 
concentrated within the ``Big Four'' public accounting firms, which 
could allow for opportunistic business behaviors when dealing with 
other competitors and regulators.\211\ However, others commented 
that an SEC mandate to move to IFRS would not affect the competitive 
position of smaller firms.\212\
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    \211\ See ITAC.
    \212\ See, e.g., ACCA, Deloitte, EY, ICAEW (indicated that a 
move to IFRS did not have an identifiable impact on audit 
concentration in Europe), and PwC.
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    In light of these differing views, the Staff will analyze for 
the Commission's benefit potential auditor capacity constraints with 
respect to IFRS and their consequences,

[[Page 9513]]

should the Commission determine in the future to incorporate IFRS 
into the financial reporting system for U.S. issuers. Specifically, 
the Staff will:
     Analyze concerns regarding auditor capacity 
constraints, including the effect on audit quality, cost, and audit 
firm concentration and competitiveness.
     Determine possible approaches to mitigate these 
concerns and the extent of, logistics for, and estimated time 
necessary to undertake these approaches.

[FR Doc. 2010-4171 Filed 3-1-10; 8:45 am]
BILLING CODE 8011-01-P