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SEC Staff Issues Summary of Comments on IFRS-Based Filings

In its first round of reviews of filings by foreign private issuers containing financial statements based on IFRS, the SEC staff often sought additional information or requested enhanced disclosure in future filings, but asked companies' to amend their filings only in a limited number of comment letters. The Division of Corporation Finance staff recently issued a report summarizing the major areas on which it commented, and offering some general observations on the application of IFRS.

The staff noted that it has not yet assessed the application of any particular standard of IFRS, IFRS in its entirety, or the overall quality of disclosure in the filings. In addition, the staff has not yet reached any comprehensive conclusions about companies' overall compliance with, or consistency in application of, IFRS.

In 2006, the staff reviewed the annual reports of more than 100 foreign private issuers containing IFRS-based financial statements. It found that the majority of companies asserted compliance with a jurisdictional version of IFRS. Most also claimed compliance with IFRS as published by the IASB, but the staff found that most auditors opined on compliance with the jurisdictional version of IFRS, but not on the company's compliance with IFRS as published by the IASB.

The staff found a number of variations in the language companies and their auditors used to describe IFRS. The staff raised comments where the language appeared to be inconsistent with the explicit statement of compliance with IFRS as called for by IAS 1, Presentation of Financial Statements, and Instruction G to Form 20-F. The staff asked a number of companies to make the necessary assertion, or a clearer assertion, regarding compliance with IFRS as published by the IASB.

Companies based in the same jurisdiction and companies in the same industries sometimes used different income statement formats, the staff found. With respect to income statements, the staff asked many companies to rename income statement subtotals so it was clear what each subtotal represented, and to explain the accounting policies they followed in determining what items to exclude from the income statement subtotals, including what elements constituted operating income. 

The staff also asked some companies to disclose how they calculated additional voluntary per share measures and how they reconciled the measures to the income statement. While the staff often sought further explanation of the relevance of an item a company presented on the face of its income statement or in footnotes, it did not ask any company to remove any measure that the staff would consider a non-GAAP measure under U.S. GAAP. 

Some companies scattered IFRS-mandated disclosure on a topic in different locations in the filing, including locations outside the audited financial statements. In instances where required topical disclosure was missing, unclear or generic, the staff raised comments.

The staff asked a number of companies to provide additional information or disclosure about revenue recognition, especially where a company provided generic policy disclosure and did not provide disclosure specific to its circumstances. When a company did not address all material revenue-generating activities, the staff asked it to do so. In some instances, the staff asked questions about the scope and timing of revenue recognition

The staff also requested more information on intangible assets and goodwill, including the factors that led a company to recognize them in a business combination. Some companies were asked to clarify their policies for identifying and evaluating impairment, the circumstances resulting in recognized impairment, or the circumstances surrounding impairment reversals of long-lived assets including goodwill.

With respect to the presentation of statements of cash flows, the staff issued comments when a company used a starting point other than what IAS 7, Cash Flow Statements, permits. The staff also commented when a company inappropriately characterized items as cash equivalents or classified expenses of an operating nature, such as research or exploration expenses, as investing rather than operating cash flows.

The staff found that companies used a range of accounting treatments for common control mergers, recapitalizations, reorganizations, acquisitions of minority interests and similar transactions. The staff sought clarification and enhanced disclosure about the manner in which companies accounted for the transactions and the impact of the accounting treatment they selected. The staff asked some companies to support their conclusions and to provide further clarification in the notes to their financial statements when it was unclear why they did or did not consolidate a subsidiary or use the equity method of accounting.

When a standard or interpretation of IFRS does not address a matter, IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, requires companies to look to the most recent pronouncements of other standard-setting bodies, the staff noted. Where a company looked to other standard-setting bodies, the staff asked it to identify what standard-setting body pronouncements it relied upon. Consistent with IAS 8, the staff raised comments where a company indicated that it was relying on a standard-setting body pronouncement that appeared to be inconsistent with IFRS or the IASB framework.

John Filar Atwood