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Corporation Finance Director Says SEC is Not Trying to Commandeer IFRS

The staff of the SEC, which has begun to review the financial statements of companies that have adopted international financial reporting standards ("IFRS"), is not trying to dictate interpretations of IFRS, according to John White, the director of the Division of Corporation Finance. White, noting that some issuers and advisers are uneasy about the staff's comments, emphasized that the Commission is not attempting to be the last word on IFRS in the international arena. White spoke at Practising Law Institute's conference on securities regulation in Europe and his remarks are posted on the SEC's Web site.

To date the staff has reviewed and commented on the filings of 85 foreign private issuers using IFRS as promulgated by the IASB, and adaptations of IFRS in certain jurisdictions. The SEC is looking at the filings as part of its regular review of corporate filings, White said, and the staff uses the same process for IFRS-based issuers as it does for all other filers.

He said the staff's initial comments generally seek additional information where the filing is not clear or where it appears that some information has been omitted. The staff also might ask that the disclosures required by IFRS be presented in a manner that is clearer to investors who rely on issuers' financial reporting.

The staff's initial comments do not attempt to change anyone's accounting, according to White. To the extent the correspondence with a company cannot resolve the staff's questions about the issuer's accounting, he said, it may be appropriate to take those questions up with the home country regulator.

White is aware that foreign issuers and their advisers are uncomfortable when their financial statements are subject to extensive comments from the SEC. He said the Commission also understands that there is an added hurdle for many European companies because the financial statements have been finalized by shareholder vote, and cannot be easily undone by management and the board of directors on their own. The staff is sensitive to this concern, he noted, but IFRS requires that companies handle material errors retrospectively, and the SEC expects companies filing financial statements under IFRS to comply with those accounting standards in their entirety.

Regarding the substance of the staff's review of IFRS-based filings, White referred to a recent summary of the staff's comments provided by SEC deputy chief accountant Julie Erhardt. She stated that the problems the staff has found fall into three major categories --omitted disclosure, disclosure that is hard to understand and "shallow" disclosure that does not provide any useful information to investors. White said that he is concerned by the surprising number of filings in which information required by IFRS has been omitted.

The joint work plan adopted last summer by the SEC and Committee of European Securities Regulators contemplated that the staff would be in contact with foreign regulators about IFRS financial statements. Because the SEC is at a relatively early point in its review of IFRS filings, White said, it has thus far had only limited filing-specific contacts with foreign regulators about IFRS financial statements. He expects more of the contacts to arise naturally in the coming months as the staff finishes up many more filings reviews.

2006 was the first year that many companies began to use IFRS, and the staff is just starting to gain more experience with the standards, White said. Currently, foreign private issuers must reconcile their financial statements to U.S. GAAP if those statements use IFRS or another home country GAAP in the first instance. He believes that the expanded use of IFRS and the staff's review of those filings is an important step in the roadmap to end the reconciliation requirement.

The continuing convergence efforts of the FASB and the IASB are another key step in the roadmap, he noted. It is not part of the roadmap, he emphasized, that IFRS be exactly the same as U.S. GAAP, nor is it part of the SEC's plan that it become the arbiter of IFRS. A careful review of the comments and correspondence with foreign private issuers using IFRS will bear that out, he said.

John Filar Atwood