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SEC Approves IFRS Without GAAP Reconciliation

The SEC yesterday approved the acceptance of financial statements by foreign private issuers that are prepared in accordance with international financial reporting standards without reconciliation to U.S. GAAP. The acceptance of the IFRS without reconciliation will apply to financial statements in annual reports and registration statements for filings after fiscal years ending November 15, 2007. SEC Chairman Christopher Cox noted that a number of concerns that were raised during the comment process, including the funding and governance of the International Accounting Standards Board, are being addressed. Cox also announced two roundtables in December to focus on allowing U.S. companies to use either IFRS or U.S. GAAP.

The amendments to Forms 20-F, F-4 and S-4, to Regulation S-X rules 1-02, 3-10 and 4-01, and to rule 701 were adopted substantially as proposed. Corporation Finance Director John White said he believes the adoption of the amendments will support ongoing efforts toward acceptance of a single set of global accounting standards. The amendments protect investors by enhancing comparability, facilitating access to the global markets and increasing investment opportunities, he said. White also reported that company filings using IFRS in 2006 were responsive to the comments the staff provided in its review of the 2005 IFRS filings.

In order to avoid the reconciliation requirement, foreign private issuers must state, and the auditor must opine, that the financial statements are in conformity with IFRS as issued by the IASB. The rules provide a two-year transitional accommodation for IAS 39 which relates to hedging and accounting for financial instruments. Deputy Director Julie Erhardt explained that the rules permit the use of the IAS 39 carve-out during the two-year period, which does not comply with IFRS as issued by the IASB, since the EU's policy decision on that standard was made before the SEC adopted its roadmap for convergence.

The transition period provides issuers with a bridge back to IASB/IFRS without an undue penalty, Erhardt explained. The EU's IAS 39 is the only jurisdiction and provision that preceded the SEC's initiative. Chief Accountant Conrad Hewitt added that only seven paragraphs of IAS 39 and only a few companies are affected by the carve-out. The issue is on the FASB's and IASB's agenda, he added. Hewitt described the work on a global international agreement to improve the international standard setting process, of which the heads of the two standard setters have signaled their support.

Commissioner Paul Atkins asked whether the SEC's rulemaking would trigger any steps by the PCAOB. Erhardt advised that the PCAOB has reviewed the comment letters and has discussed the implications for Appendix K with its Standing Advisory Group. Appendix K requires policies and procedures for international auditing firms or their foreign associated firms to address the issuance of audit reports and internal inspection procedures. It appears that the PCAOB is actively considering the points that have been raised, according to Erhardt.

Commissioner Kathleen Casey inquired about the U.S. auditing profession's level of education on IFRS. Hewitt said the Big Six auditing firms have internal training programs and have been expanding their staffs to accommodate the swing toward the acceptance of IFRS internationally. Hewitt has spoken to a couple of universities and believes they will step up to the plate and offer classes on IFRS. The CPA examinations will eventually address IFRS as well, he predicted. White reminded the commissioners that fewer than 200 foreign private issuers are currently eligible to rely on the amendments.

Atkins also asked whether the staff has plans to address IFRS 7 with respect to a safe harbor for forward-looking statements, since it was not part of yesterday's rulemaking. White responded that there were no immediate plans to address the standard, but Atkins said the standard must be addressed.

The SEC yesterday also adopted rules to improve mutual fund disclosure and to provide regulatory relief for smaller public reporting companies.